Brazil mulls time limit on spending ceiling: sources

By Alonso Soto

BRASILIA (Reuters) – Brazil is considering making a proposed spending cap temporary rather than permanent, two government sources said on Tuesday, in what could indicate interim President Michel Temer is revising one of his main plans to reduce debt.

Finance Minister Henrique Meirelles told Reuters on June 2 that the government would implement a permanent spending cap, via a constitutional amendment, to plug a massive budget deficit in a country struggling to regain investors’ confidence.

The sources said, however, that to facilitate congressional approval, the government was discussing putting a time limit on the ceiling that would tie annual primary expenditures’ growth to the previous year’s inflation rate. Primary expenditures exclude spending on interest payments.

“The government continues to discuss the amendment… the finance ministry proposal should not be the final one,” said one official who is familiar with the matter. Temer is expected to unveil the final proposal to lawmakers on Wednesday.

The official, who asked for anonymity because he is not allowed to speak publicly, said the ministry is proposing setting a time limit of 20 years that could be changed after six years.

Temer’s chief of staff, Eliseu Padilha, wants a shorter time limit and was to meet with other officials later on Tuesday to settle the issue, said another government official briefed on the matter.

“Freeze spending for the next four presidential mandates with a population that will grow by 30 million by then is not reasonable,” said Fernando Montero, chief economist with Tullett Prebon in Sao Paulo. “What the market will look at is the consistency of the adjustment in economic and political terms.”

A time limit may be seen as a setback for Meirelles, a former Wall Street banker widely respected by investors, who was expected to have absolute control over economic policy.

A spokeswoman for the Finance Ministry said it would comment on the spending ceiling only after the proposal’s details are made public.

Local media on Tuesday said the government could seek a time limit of as little as eight years or tie the spending cap to a reduction in the country’s debt burden.

The constitutional amendment requires three-fifths approval from the legislature.

The government has also extended talks with union leaders for a pension reform, which is seen as key to rebalance fiscal accounts. A formal pension reform proposal may not be sent to Congress before July, Padilha said on Monday.

Two other government officials have told Reuters the pension reform proposal would only be submitted to Congress should the Senate convict suspended President Dilma Rousseff in coming months of breaking budgetary laws and remove her from office.

Rousseff was suspended from office in mid-May, clearing the way for Temer, the vice-president, to become interim president.

(Additional reporting by Silvio Cascione Editing by W Simon and Dan Grebler)