Brazil recently approved a Constitutional Amendment that cut 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 ceiling 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 of the growth of expenses tied 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 the 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 have considered the adjustments made so far insufficient to achieve a fiscal balance. That’s one of the reasons behind the historic devaluation of the Brazilian currency, 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 uncertainty is believed to have reached Brazil to stay for a while.
Devaluation of the Brazilian real poses a challenge for the economy, as it influences the prices of imported products as well as food and fuel.
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