The government is preparing an expanded welfare program next year, a person with knowledge of the plans told Reuters, with part of the plan accounted for outside of a constitutional spending cap, which investors have used as an indicator of fiscal discipline.
The newspaper O Estado de S.Paulo reported that the social assistance program could cost around R $ 90 billion (about $ 16 billion), and a third of it was accounted for outside the spending limit. A columnist for O Globo reported that 50 billion reais would be counted outside the limit.
The reports stoked fears that the far-right president, Jair BolsonaroHe would loosen fiscal controls and increase spending to regain his dwindling popularity before a run for reelection. The Economy Ministry did not immediately respond to a request for comment.
Under this scenario, the benchmark stock market index, the Bovespa fell almost 3.5% and the real lost 1.3% to almost 5.60 per dollar, testing a six-month low, which forced the intervention of the Central Bank to avoid a further fall of the currency.
The Central Bank sold 500 million dollars in a cash auction after a week of increasing currency swap sales that have failed to prop up the real, which is down about 7% against the dollar so far this year. Investors in the currency have been spooked by political risks, a fragile economic recovery and the prospect of rising interest rates in wealthier economies.
Brazil’s Central Bank itself has already raised interest rates by 4.25 percentage points this year to combat inflation that is soaring in the double digits and signaled increases of 100 basis points in upcoming meetings, while emphasizing the need to continued fiscal discipline.
However, the Government faces increasing political pressure to spend more, as the economic recovery slows down, unemployment remains close to 14% and poverty is skyrocketing.
In an interview published Monday night by the news magazine Veja, Arthur Lira, president of the lower house of Congress, defended a new social spending outside the spending limit. Lira assured Veja that the terrible impact of the COVID-19 pandemic in Brazil, which has the second highest number of deaths from the virus after the United States, meant that fiscal responsibility could not be prioritized over the urgent needs of the most vulnerable. .
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