August 10, 2016 / 1:40 PM / 3 years ago

Brazil's lower house waters down states' austerity measures

BRASILIA, Aug 10 (Reuters) - Brazil’s lower house of Congress early on Wednesday approved a watered-down version of a bill that imposed spending limits on cash-strapped states in exchange for hefty debt relief.

The lower house voted 282-140 to approve the main text of the bill after the government bowed to pressure from lawmakers and governors and removed tougher limits on states’ spending on employees.

The legislation faces further discussion and possible modifications in the lower house on Wednesday before being sent to the Senate for its consideration.

The watering down of the bill could raise further doubts about President Michel Temer’s commitment to austerity as the conservative leader races to regain the confidence of investors in an economy mired its worst recession in decades.

The government removed from the bill a two year-ban on wage hikes in states and tougher limits on current spending included in the separate fiscal responsibility law.

Finance Minister Henrique Meirelles late on Monday insisted the wage freeze was a non-negotiable condition for the debt relief package that will cost the federal government 50 billion reais ($15.99 billion) over the next three years.

As it stands now, the bill would give the states a six-month grace period on debt to the federal government, followed by a year-and-a- half of reduced payments. In exchange, states will limit spending growth to the rate of inflation of the previous year.

Heavy current spending is largely blamed for the fiscal crisis of states, now struggling to pay the wages of doctors, police and teachers.

To ease market concerns, the government will work on a new legislation to amend the fiscal responsibility law that limits states’ current expenditures to less than 60 percent of their net revenues.

Separately, Temer has also submitted a constitutional amendment to cap federal expenditures in an attempt to halt a surge in the country’s public debt, expected to reach 80 percent of the gross domestic product this year.

Brazil’s budget deficit has ballooned to around 10 percent of the GDP from nearly 3 percent in 2013. The country lost its hard-won investment credit rating in 2015, when the recession began.

The most dramatic example of the states’ fiscal chaos is that of Rio de Janeiro, which received 3 billion reais in emergency aid from the federal government to pay for security for the Olympics. ($1 = 3.1263 Brazilian reais) (Reporting by Alonso Soto Editing by W Simon)

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