This was announced on Wednesday by Brazil‘s Finance Minister, Fernando Haddad cuts in public spending this will allow the Government to save 70,000 million reais (11,800 million dollars/11,160 million euros) over the next two years.
In a nod to the middle class, Haddad also confirmed a income tax exemption for those earning up to 5,000 reais ($840) per montha measure that generated nervousness in the Sao Paulo stock market this Wednesday and brought the dollar to historic highs.
According to the minister, part of the cost savings will come from: a reform of the military pension systemwith the establishment of a minimum age for accessing the reserve and limits for the transfer of this type of pension. “The measures combat privileges that are incompatible with the principle of equality. We will correct the excesses and ensure that all officials are subject to the constitutional cap,” Haddad said in a statement to the national network in which he announced the main lines of the tax package , awaited for weeks by the financial market.
It also proposes changes in the rules for the payment of the wage bonus, an annual benefit granted to workers under a series of conditions, and in the distribution of resources available to parliamentarians to deal with their electoral fiefdoms. He also guaranteed that the minimum wage increase “will continue to outpace inflation, sustainably, but within the scope of the new fiscal rule.” “Faced with the external scenario, with conflicts and trade wars, we must take even more care of our home. This is why we are taking the necessary measures to protect our economy”, he justified. In his opinion, these initiatives “consolidate the government’s commitment to the fiscal sustainability of the country”.
Haddad responded to the cuts with income tax exemption, an election promise of President Luiz Inácio Lula da Silva, whose term expires in January 2027. Currently, the official exemption amount is up to 2,259.20 reais ($380). The National Association of Federal Treasury Auditors estimates that expanding this limit will benefit approximately 35 million taxpayers.
That ad caused serious turbulence on the Brazilian financial market. The Sao Paulo stock exchange lost 1.7% today and the dollar reached an all-time record (5.91 reais). Financial operators fear that the measure could make it difficult to control the public deficit, which is currently close to 10% of the country’s gross domestic product (GDP), and make the announced spending containment useless.
However, to compensate for this possible decline in revenue, Haddad indicated that those who earn more than 50,000 reais ($8,400) a month “will pay a little more” of income tax.
Despite the high fiscal deficit, the Brazilian economy will grow above 3% this year, according to forecasts by the government, the market and some international organizations. Furthermore, the country lives with one of the lowest unemployment rates in the last two decades (6.4%).
Despite good macroeconomic data, Lula’s popularity is at its lowest level (35.5%) since he came to power in January 2023, according to a poll released this month by the National Transport Confederation.
What are the expected effects of Brazil’s public spending cuts on social services?
Interview between Time.news Editor and Economic Expert
Editor: Good afternoon, and welcome to Time.news. Today, we’re diving into the recent announcement from Brazil’s Finance Minister, Fernando Haddad, regarding drastic cuts in public spending and tax reforms. Joining us is Dr. Maria Silva, an economic expert specializing in Latin American markets. Thank you for being with us, Dr. Silva.
Dr. Silva: Thank you for having me. It’s great to discuss these significant developments in Brazil.
Editor: Let’s get right into it. Haddad announced cuts in public spending aimed at saving 70 billion reais over the next two years. What are the potential implications of such an extensive spending cut on the Brazilian economy?
Dr. Silva: While the intention is to stabilize the economy and ensure fiscal sustainability, such large-scale cuts can have mixed outcomes. On one hand, it’s essential for improving the government’s financial health, especially in uncertain global economic conditions. On the other hand, reducing public spending could lead to a decrease in services that many rely on, particularly in education and healthcare, which might hurt the middle and lower-income groups the most.
Editor: Speaking of the middle class, Haddad introduced an income tax exemption for those earning up to 5,000 reais a month. How do you see this move affecting consumer behavior and the overall economy?
Dr. Silva: This exemption is a strategic nod to the middle class and could potentially increase disposable income for many Brazilians. By allowing those earning below this threshold to keep more of their income, consumption might rise, which is crucial for economic growth. However, in the short term, it has caused some turbulence in the stock market and strengthened the dollar, indicating investor apprehension about the government’s fiscal direction.
Editor: Yes, that nervousness was palpable in the Sao Paulo stock market following the announcement. Haddad also mentioned reforms to the military pension system. Can you elaborate on why this is seen as a necessary reform?
Dr. Silva: Absolutely. The military pension system in Brazil has long been viewed as outdated and unequal. Establishing a minimum age for receiving benefits and capping transfers can correct disparities. These reforms aim to ensure that all public servants contribute equally, reflecting a fairer pension system in line with broader fiscal rules. It’s about aligning privileges with principles of equality, which is essential for social cohesion.
Editor: Haddad’s proposals also include changes to wage bonuses and resource distribution for parliamentarians. How critical are these reforms for long-term fiscal sustainability?
Dr. Silva: They are very critical. Adjusting the wage bonus system can help streamline government spending and ensure that benefits are more equitable across the workforce. As for the resource distribution to parliamentarians, re-evaluating how these funds are allocated can minimize inefficiencies and prevent misuse of government funds. Both measures are about accountability in the use of public resources, and they will be crucial if Brazil is to maintain fiscal health without compromising social programs.
Editor: Haddad emphasized the need for Brazil to “take care of our home,” especially in light of external economic challenges. In your opinion, how well do you think these reforms position Brazil to face global uncertainties, such as trade wars?
Dr. Silva: These reforms could significantly bolster Brazil’s resilience against external shocks. By focusing on domestic fiscal health and sustainable practices, the country can create a buffer against volatility. However, it is essential for the government to communicate these changes effectively and ensure that the population understands the long-term vision. Success will ultimately hinge on not just the measures themselves but also on public confidence in the government’s ability to implement them effectively.
Editor: Dr. Silva, your insights are invaluable. It seems clear that while the proposed reforms have the potential to strengthen Brazil’s economy, the path forward will require careful management and transparent communication. Thank you for joining us today.
Dr. Silva: Thank you for the opportunity to discuss these important issues. Looking forward to seeing how this unfolds!
Editor: That’s all for today’s interview. Stay tuned to Time.news for further developments on Brazil’s economic reforms.