Brazil Lower House Deals $39 Billion Blow to Fiscal Austerity

Two bills approved by Brazils lower house of congress this week opened the way for more money transfers to states and municipalities which will cost the government almost 200 billion reais ($39 billion).

The constitutional amendment that makes the basic education fund known as Fundeb permanent has an impact of more than 190 billion reais in the budget over the next decade, according to Economy Ministry estimates. The bill, which was approved by the lower house on Tuesday, also orders the government to gradually increase the contributions to the fund to 23%, from a current 10%. It has yet to be analyzed by Senate.

While Fundebs resources are excluded from the spending cap, the expense has an impact on the fiscal gap. The ministry expects Brazil to close the year with a record deficit of 787.5 billion reais amid the coronavirus crisis.

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The Economy Ministry tried to use part of Fundeb‘s resources to help finance a new social program, but the idea was rejected by lawmakers. Speaking to supporters on Wednesday, President Jair Bolsonaro said that Fundeb’s approval was a “mutual agreement” and that he considered it a win for the government.

On Wednesday, lawmakers also approved extending the transfer of funds from the federal government to local administrations for four months. The original bill provided for a transfer of 16 billion reais until the end of July as a way to compensate for losses caused by the economic crisis brought on by the pandemic. The federal government has already transferred almost 10 billion reais, and now has until November to push out the rest of the money.

While the extension didn‘t automatically add new spending, it gives a longer time-line for states to pressure for more transfers as the effects of the Covid-19 outbreak ripple through Latin America’s largest economy. A suggested aid of 4 billion reais was scrapped from now, but will be discussed in the coming weeks. The new timeline also still has to be approved by the Senate.

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Amid pressure to boost aid to local governments, the Economy Ministry released a study showing that between March and June, it provided more than 15 billion reais in aid to states in money transfers and suspension of debt payments. The figure is well above the 7 billion reais the ministry estimates they lost in revenue from the same time last year.

The Economy Ministry didnt respond to a request for comment.