Brazil Treasury secretary admits to pressure to relax spending rule

BRASILIA, Aug 14 (Reuters) - Brazil’s government should resist calls to relax spending cap rules to avoid a sharp deterioration in public finances, Treasury Secretary Mansueto Almeida said on Wednesday.

Relaxing tight budget discipline would only deepen and extend the central government’s primary budget deficits, which would be especially dangerous if the benign outlook for interest rates were to change, Almeida said.

With discretionary spending being cut to the bone thanks to the ceiling constraints, Almeida said more constraints should be placed on compulsory spending instead.

“For the first time some very close friends are suggesting changes to the spending ceiling. Some say it’s too harsh and is making the public sector unworkable, so the rule has to be more flexible,” he said at an Economy Ministry seminar in Brasilia.

Brazil’s spending ceiling rule caps public spending growth at the rate of inflation of the previous year. Public spending in Brazil as a share of Gross Domestic Product, especially on social security and pensions, is extremely high.

Mansueto said any relaxation of the rules without a tax increase would only push public finances deeper into the red. And no one in Brazil wants higher taxes, he said.

Brazil’s gross debt stands at 78.7% of GDP, near all-time highs reached earlier this year. The central bank’s benchmark Selic interest rate is at a record low 6.00% and is likely to be cut further against a backdrop of weak economic growth and inflation, economists estimate.

“The problem is, we don’t know how long the current bonanza of very low interest rates will last,” Almeida said.

Almeida also warned that proposals for restructuring the fiscal relationship between Brazil’s central and local governments must be analyzed and drawn up carefully.

In particular, transfers to states and municipalities should not be used for civil service salary increases, which he said would further damage states’ fragile budget positions.

Waldery Rodrigues, special secretary to the Economy Ministry, said at the same event that the “federative pact” will be the government’s economic reform priority in the second half of 2019.

The new rules will give states and municipalities more control and flexibility over their budgets, and revamp how funds are distributed from central government to the regions, which ministers argue will lead to more efficient use of resources and ultimately help revive the sluggish economy.

$1 = 4.02 reais Reporting by Marcela Ayres Writing by Jamie McGeever; Editing by Richard Chang