Bolsonaro campaign drafts new debt-linked fiscal rule to replace Brazil framework

Key facts

• Senator Flavio Bolsonaro's presidential campaign is drafting a new fiscal framework to replace Brazil's current budget rules.
• The proposed framework would impose tighter spending caps tied to debt levels, potentially freezing real spending growth.
• Brazil's gross public debt has risen to 81.9% of GDP, exceeding the 80% threshold that could trigger spending freezes under the new rules.
• The proposal could be submitted to Congress as a constitutional amendment.
• Bolsonaro's team is also preparing spending cuts and tax break reviews to achieve a fiscal adjustment of 1.5% of GDP.

Senator Flavio Bolsonaro's presidential campaign is developing a new fiscal framework intended to replace Brazil's current budget rules, aiming to impose tighter spending caps as the nation's debt rises. The proposal, if enacted, could effectively freeze real federal spending growth.

Brazil's gross public debt has increased to 81.9% of its gross domestic product as of June, a level that has prompted economists to call for fiscal adjustments. The draft framework, according to sources familiar with the matter, would link spending growth to revenue growth and public debt levels, with higher debt necessitating tighter spending caps.

Under discussion is a provision that could freeze federal spending in real terms when government debt surpasses 80% of GDP. Spending growth would be limited to 50% of revenue growth when debt is between 75% and 80% of GDP, and 70% when debt falls below 75% of GDP. This framework would supersede President Lula da Silva's existing rules, which allow for annual real spending growth between 0.6% and 2.5% and cap it at 70% of revenue growth.

Bolsonaro's team is also reportedly preparing spending cuts and a review of tax breaks to achieve a fiscal adjustment equivalent to 1.5% of GDP, aiming to bolster investor confidence and lower interest rates. The campaign stated its government platform, due by August 15, will detail its economic proposals, emphasizing fiscal discipline and efficiency for stronger economic growth.