Brazil’s national currency, the Brazilian real, dropped to an all-time low on Friday morning as the spending cut plans announced by the administration of radical leftist President Luiz Inácio Lula da Silva failed to calm growing market doubts.
Brazilian Finance Minister Fernando Haddad announced a spending cut package this week that the government aims to implement to reduce its spending by some 70 billion reais ($11.67 billion) over the next two years, imposing limits to minimum salary growth and capping high salaries, among other measures.
The Brazilian government, after months of significantly higher government spending, claimed that the plan would ultimately save 327 billion reals ($54.5 billion) by 2030.
In addition, the package calls for changes on taxation that, if implemented, would grant tax exemptions for individuals who earn up to 5,000 Brazilian reals (roughly $834) but at the same time raise taxes for people with incomes above 50,000 reais (roughly $8,340).
According to Haddad, the measure would not have a fiscal impact and would not increase government spending “because those who earn more than 50,000 [reals] per month will pay a little more.”
Local economists and analysts criticized the government’s spending cut plans, deeming them “below expectations.” Markets reacted negatively to the finance minister’s announcement, leading to the Brazilian currency reaching its lowest value since May 2020 at the time of the Wuhan coronavirus pandemic. By market closing hours on Thursday, the real dropped to a rate of 5.99 per United States dollar.
By Friday — November’s last trading session day — the real dropped below the six-per U.S. dollar threshold and ultimately reached 6.11 per dollar. The Brazilian newspaper O Globo reported that the exchange rate slightly receded and hovered around 5.99 per U.S. dollar around noon local time after the head of the Brazilian Senate, Rodrigo Pacheco, and the head of the Brazilian Chamber of Deputies, Arthur Lira, publicly commented on the executive’s fiscal plans.
Both lawmakers reportedly stressed the importance of the spending cuts and the “non-negotiable” importance of fiscal responsibility, suggesting that Congress would expeditiously address the spending cut proposals. In contrast, both indicated that the tax changes proposed by the Brazilian government would find a “difficult path” in Congress and should be postponed until 2025.
“The issue of income tax exemption, although it is everyone’s wish, is not on the agenda for now and can only happen if [and only if] we have the fiscal conditions for it,” Pacheco said. “If we don’t, it won’t happen. But this is a discussion for the future, which will depend a lot on Brazil’s ability to grow and generate wealth without increasing taxes.”
“Any other government initiative that involves waiving revenue will only be tackled next year, and after careful and above all realistic analysis of its sources of funding and effective impact on public accounts,” Lira stressed. “One thing at a time. Fiscal responsibility is non-negotiable.”
Following fierce criticism of the spending cut package, Finance Minister Haddad stated at an event on Friday morning that the controversial proposal is not a “grand finale” and asserted that the Brazilian government may try to introduce other fiscal measures. The “evolution of spending will be constantly monitored,” he promised.
“This set of measures is not the grand finale of what we need to do. In three months’ time, you may be back on a spreadsheet discussing the evolution of Social Security or the evolution of the BPC [Continuous Benefit Payment program]. Laws may have to be sent to Congress,” Haddad said.
“If there is any problem with the calculation, we will go back to the spreadsheet, to Congress and to the President of the Republic with the demand that we deem correct,” he continued.
Christian K. Caruzo is a Venezuelan writer and documents life under socialism. You can follow him on Twitter here.
