The Ministry of Finance plans to announce structural spending containment measures after the second round of the municipal elections, scheduled for 27 October. According to members of Minister Fernando Haddad’s team, the intention is to proceed with the agenda led by the Secretariat for Monitoring and Evaluation of Public Policies of the Ministry of Planning, including adjustments to the rules for salary bonuses, unemployment insurance, and the Continuous Cash Benefit (BPC).
This Content Is Only For Subscribers
To unlock this content, subscribe to INTERLIRA Reports.
Resuming Investments
These measures are deemed necessary to ensure the country regains investment-grade status by the end of President Lula’s (PT) term in 2026. Haddad’s ministry aims to persuade President Lula and Congress of the need for this agenda while seeking to shield the measures from potential criticism. This message is also important for the market, as achieving investment-grade status could improve the flow of international investments into Brazil.
Concerns in the Financial Market
Recently, the financial market expressed discomfort over the news of the government’s plans to increase the tax exemption threshold for Income Tax without first implementing concrete measures to curb the rising mandatory expenses, such as INSS benefits. The possibility of adopting a minimum tax for millionaires also caused stress in the market. Investors are concerned that the government seems focused on increasing revenues while neglecting structural spending cuts.
Income Tax Exemption
The economic team is exploring ways to implement Lula’s campaign promise to exempt those earning up to R$ 5,000 from Income Tax. Last week, Minister Fernando Haddad mentioned that Lula is evaluating four compensation scenarios proposed by the Ministry of Finance, one of which includes minimum taxation for millionaires.
Spending Cut Proposals
Studies are underway to unlink the BPC from the minimum wage or adjust the age requirement for accessing the benefit. The BPC is paid to low-income elderly individuals (aged 65 and above) and people with disabilities who have contributed little or not at all to the social security system. Currently, the benefit equals one minimum wage, which is R$ 1,412. Another idea is to change the criteria for accessing the salary bonus, which currently benefits workers with formal employment earning up to two minimum wages (R$ 2,824).The proposal is to consider family per capita income for a fairer distribution. There is also an assessment of the overlap between unemployment insurance and the FGTS severance payment, in cases of formal employee layoffs.
Credit Rating Upgrade
Progress on the spending containment agenda is considered crucial for securing the country’s investment-grade credit rating. Earlier this month, the credit rating agency Moody’s upgraded Brazil’s credit rating from Ba2 to Ba1, with a positive outlook, placing the country just one step away from investment-grade status.
Analysis:
The government chose the post-election period to announce its spending cut proposals, a planned political move. The spending cut measures, which include adjustments to the Continuous Benefit Payment (BPC) and the salary bonus, are unpopular and, therefore, avoided before the election to minimize electoral impact. In addition, Congress tends to be empty during this period, which makes in-depth discussions on sensitive issues such as tax reforms unfeasible.
Another determining factor for this timing is the expected progress of the Tax Reform after the elections. The government seeks to prevent the debate on spending cuts from interfering or becoming confused with the reform, which already requires intense political negotiation. Keeping the two issues separate is essential to avoid overloading Congress and maximize the chances of success on both fronts.
By postponing the cuts to the post-election period, the government is also trying to create a window of opportunity to approve unpopular economic measures without compromising the negotiation of the Tax Reform, which is seen as crucial for the country’s long-term fiscal restructuring. This approach reflects the need to balance political and economic priorities, avoiding clashes between different agendas that could hinder their approval.