Brazil recently approved a Constitutional Amendment that cuts government spending. The amendment makes changes to mandatory revenues with the aim of improving the federal government’s fiscal balance.
Among the changes are those that allow adjustments to the salary cap for public servants, the rules for granting the Continuous Cash Benefit (BPC), the salary bonus, the policy for adjusting the minimum wage, rules with limits for granting and expanding tax benefits, and the limitation on the growth of expenses linked to the fiscal framework.
The spending cuts package approved by Congress represents only the “first wave” of the government’s fiscal adjustment measures, according to Finance Minister Fernando Haddad on Friday. He stated that the review of expenses will be ongoing, so Brazilians should expect more cuts in 2025.
However, financial markets received the news with pessimism and considered the adjustments made so far insufficient to achieve fiscal balance. This is one of the reasons behind the historic devaluation of the Brazilian currency, the real, in December.
The negative reaction also reflects a growing perception that the government faces considerable challenges in maintaining fiscal balance in a scenario of high interest rates and spending restraint, as it is believed that uncertainty has come to Brazil to stay for a while.
The devaluation of the Brazilian real represents a challenge for the economy, as it influences the prices of imported products, as well as food and fuel.