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Brazil lawmakers approve spending cap in victory for Temer

BRASILIA (Reuters) - A congressional committee in Brazil approved a constitutional amendment on Thursday that would limit public spending increases for 20 years, handing President Michel Temer an initial victory in his plan to plug a widening deficit.

Brazil's President Michel Temer attends an economics and politics forum in Sao Paulo, Brazil, September 30, 2016. REUTERS/Paulo Whitaker

The lower house committee voted 23-7 to pass the proposal, which will be put to a vote in the full chamber early next week. Its approval requires two votes in the plenary of the lower house and two more in the Senate, needing a three-fifths majority in each.

The unprecedented amendment, which limits the growth of federal spending to the rate of inflation of the previous year, is aimed at gradually closing a yawning budget gap that topped 10 percent of gross domestic product (GDP) last year.

It is the first of a series of austerity measures to assuage market concerns that the once-booming economy, which was stripped of its investment grade rating last year, could be hurtling towards a debt crisis.

The cap would mark a sea change for public finances in a country where governments have long spent more than they earned.

In an interview with Reuters before the vote, Finance Minister Henrique Meirelles said the approval of the ceiling in the committee would be a “important step to implement the fiscal adjustment.”

The cap proposes penalties for branches of the federal government that surpass the spending ceiling, including freezes in wage increases and new hires.

Analysts say a further reform to slash the cost of an overburdened pension system is crucial to bring the deficit under control, in addition to measures to curb spending and increase revenues.

Temer, who took over the presidency on an interim basis in May when president Dilma Rousseff was impeached, has vowed to balance Brazil’s overdrawn accounts. His government has stepped up its reform efforts since Rousseff was formally dismissed in August, launching a campaign this week to convince Brazilians of the need to tighten belts.

Temer has warned that pension system’s deficit will hit 100 billion real ($31 billion) this year and could reach 150 billion by end-2017.

“At some point a retired person will knock on the government’s door and there won’t be money to pay their pension,” he said in a TV interview on Wednesday. He said the government would not tax its way out of the fiscal crunch.

The spending cap is expected to win approval in Congress, but the measure has fanned a heated debate about austerity in a country battered by a two-year recession, high inflation and rising unemployment.

“The government says this will help the war on unemployment, but this is war on the unemployed because their health services will decline and there will be less money for education,” said Alessandro Molon of the left-of-center Rede party.

Thursday’s committee meeting was disrupted by teachers who protested that the amendment would reduce spending for education. They were removed by security guards.

Temer’s government and allies are confident the amendment has enough support to clear a first vote in the lower house on Monday or Tuesday and win full approval by Congress before year-end.

Additional reporting by Anthony Boadle and Alonso Soto; Editing by Daniel Flynn and Grant McCool