Brazil Ministers Renew Push to Sell Lula on Spending Cuts

(Bloomberg) -- Brazil’s government will unveil “as many measures as possible” to cut spending this year, Planning and Budget Minister Simone Tebet said Tuesday, continuing a push to soothe investor fears over the country’s fiscal outlook.

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Tebet offered few specifics about plans under consideration inside President Luiz Inacio Lula da Silva’s administration, but said it is weighing more than 30 measures and that a single proposal could generate savings of 20 billion reais ($3.5 billion).

But while vowing that the government would hit its fiscal goals in each of the next three years, Tebet also acknowledged that convincing Lula of the need to curb spending remains a major challenge.

“Now the important thing is for the measures to reach President Lula, and for him to give the OK,” Tebet told reporters in Brasilia after meeting with Finance Minister Fernando Haddad. “We have some debates that are off limits for President Lula.”

Mounting fiscal concerns have weighed on Brazilian assets as the country’s deficit has swelled, turning the real into one of the world’s worst-performing emerging market currencies this year. Lula reignited those fears last week when he called for expanded income tax exemptions for poorer workers, causing the real to slip while swap rates — an indication of investor sentiment toward monetary policy — surged.

A brief rebound sparked by reports that the government was developing spending reduction measures quickly erased itself early Tuesday, as investors digested the plans and global factors caused a broad weakening of emerging market currencies.

“There seems to be some market skepticism about the spending-cutting agenda,” said Rafael Ihara, chief economist at Meraki Capital.

The economic team led by Tebet and Haddad has compiled a laundry list of proposed ways to cut spending, including potential changes to social benefit programs that could deliver more substantive reductions than Lula agreed to earlier this year, according to people with knowledge of the situation who requested anonymity to discuss internal matters.

Still, structural reforms to key sources of mandatory expenses like Brazil’s vast public pension system remain off the table, Tebet said. She added that a second package of structural measures would follow the initial proposals to reduce spending that the government plans to detail after Brazil’s municipal elections at the end of this month.

Tebet declined to say how much the government was targeting in savings, a sign that it is still far from clear how much spending Lula may ultimately agree to cut.

Haddad’s current list includes proposals to limit access to benefits provided to out-of-work fishermen and as part of a social program for elderly Brazilians with disabilities known as BPC. One suggestion is to increase the minimum age of BPC eligibility from 65 to 67, while also delinking the growth of benefit payments from inflation, the people familiar said.

He has sought to convince Lula by arguing that the government will need to cut expenditures if it wants to deliver on the president’s campaign promise to exempt workers with salaries of up to 5,000 reais from income taxes, one of the people said.

Haddad has also pushed to limit public sector salaries and reduce spending within the military, proposals Lula is more likely to embrace, according to the people. But neither would produce nearly enough for Haddad to reach his goal of eliminating the primary fiscal deficit, which excludes interest payments.

Limiting salaries for public workers, for example, would save about 5 billion reais, according to one of the people. Haddad needs more than 166 billion reais ($29.3 billion) in additional funds to zero the primary deficit next year, according to the government’s budget bill.

--With assistance from Barbara Nascimento and Andre Loureiro Dias.

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