Elections over, Brazil tackles unpopular spending reforms

BRASILIA (Reuters) - Brazilian President Michel Temer’s government introduced to Congress on Tuesday a landmark constitutional amendment to cap public spending, seeking to press ahead with unpopular reforms in the wake of last weekend’s municipal elections.

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

Temer’s new center-right government hopes the proposal, which would limit growth in spending to the rate of inflation for up to 20 years, will clear a Congressional committee this week and be put to a vote in the lower house by next week.

The amendment is designed to curb a budget deficit equivalent to 10 percent of gross domestic product last year. Hopes for its passage have made Brazilian assets among the best performing in the world this year despite an economy submerged in a two-year recession.

In a concession to ease its passage, the government announced on Monday that a cap on health and education expenditure would not go into effect until 2018, rather than next year.

Leftist opponents have demanded more time to debate a measure they say violates the spirit of Brazil’s 1988 constitution, which made generous provisions for social spending. They plan to seek a court injunction to block the amendment.

Backers warn that Latin America’s largest nation, which is wrestling with a sprawling corruption scandal, could follow Greece’s path to financial meltdown if spending is not controlled. Temer said on Monday that public debt, which ended last year at a level equivalent to two-thirds of economic output, would reach 100 percent of GDP by 2024 without the measure.

“If this change is not adopted, fiscal collapse and the insolvency of public accounts are inevitable,” lawmaker Darcisio Perondi said in his report to the committee studying the measure. “Brazil could repeat the tragedy of Greece.”

Perondi said the previous government of Dilma Rousseff, who was removed from office in August for breaking budget laws, left an onerous legacy of overdrawn accounts, and he called on the lawmakers who impeached her to back the cap.

The conclusion of municipal elections in most cities across Brazil last weekend allows Temer’s ruling Brazilian Democratic Movement Party (PMDB) and its coalition allies a freer hand to back the measure. A small number of cities face a second-round runoff this month.

But resistance from Rousseff’s Workers Party and its allies, as well as division within Temer’s own coalition, point to a difficult path for a proposal that requires two approvals in each chamber of Congress by a three-fifths majority.

“We will seek an injunction because this violates the Constitution and the right of five future governments to decide their economic policies,” said opposition leader Jandira Feghali of the Communist Party of Brazil.

Temer, 75, who was sworn in to serve the remainder of Rousseff’s term through 2018, had vowed to put Brazil back on its tracks and investors like his promises of fiscal discipline.

But a poll published on Tuesday showed Temer has failed to convince Brazilians that his government is any better than Rousseff’s. The survey by pollster Ibope showed that Temer’s approval ratings remain low and some 68 percent of Brazilians do not trust him.

The lower House is also expected to vote on Tuesday on a bill that changes the rules for the exploration of Brazil’s vast offshore oil reserves in the costly subsalt layer, aimed at boosting private investment in the oil industry.

The proposal removes the obligation for scandal-plagued, debt-ridden state oil company Petrobras to be the only operator of these oil fields and have a minimum 30 percent stake in their development.

Writing by Anthony Boadle; Editing by Leslie Adler