Brazil to break 2021 spending cap by $5.5bn: IFI budgetary watchdog

BRASILIA: Brazil's government is on course to break its most important budgetary rule this year, the so-called "spending ceiling," by 31.9 billion reais ($5.5 bln), the Independent Fiscal Institute (IFI) watchdog said on Monday.

The government and many economists warn that preserving the cap, which limits public spending growth to the previous year's rate of inflation, is critical to showing Brazil's commitment to reducing its record budget deficit and public debt.

Otherwise, Brazil faces a spiral of rising interest rates and inflation, exchange rate weakness, investment drying up and the economy sliding into recession, they say.

But the IFI, a bipartisan Senate office that aims at transparency in government accounts, said that its baseline analysis of the 2021 budget recently approved by Congress shows that mandatory spending will exceed the cap by 31.9 billion reais.

"This simulation indicates that in order to preserve the ceiling, discretionary spending over the course of the year will have to be cut by 31.9 billion reais," the IFI said in its report, adding that discretionary spending this year should be capped at 107.2 billion reais instead of 139.1 billion.

Some 95% of Brazil's near 1.5 trillion reais annual federal budget is accounted for by mandatory spending such as salaries and running of the public sector machine, leaving very little room for maneuver.

Fiscal fears have weighed heavily on Brazilian markets. The real is one of the worst-performing currencies in the world, down 10% against the dollar this year, and interest rate spreads and risk premiums have risen sharply, in some cases to record levels.

In congressional testimony last week, Economy Minister Paulo Guedes criticized the IFI and its executive director Felipe Salto over the accuracy of their forecasts.