government delays package announcement

The Luiz Inácio Lula da Silva (PT) government has counted on the help of the news and social media to postpone the announcement of the spending cut, necessary to balance the budget for 2025 and subsequent years.

Even before the explosions in front of the Federal Supreme Court (STF), on Wednesday (13), the repercussion of the proposed amendment to the Constitution (PEC) to reduce the 6×1 working day had already contributed to diverting attention from the issue.

“A lot of things contributed to the spending cuts going out of focus”, says political scientist João Lucas Moreira Pires. “The presidential election in the United States, COP29 [Conferência das Nações Unidas sobre Mudanças Climáticas, no Azerbaijão]the 6×1 journey and even the explosion in the STF. The issue of cuts ended up being on the back burner.”

Thus, the government has managed to gain time to manage the “hot potato” it has on its hands. The matter faced resistance from the affected departments, PT supporters and the president himself, who needed to be convinced of the urgency of the adjustment.

“The government is having immense difficulty defining this spending review,” says Sérgio Praça, political scientist and professor at Fundação Getulio Vargas (FGV Cpdoc). “The explosion of the STF and the 6×1 day play in your favor, yes, because they take away attention.”

Haddad: no “time” to announce spending cuts

For more than two weeks, the government has been expected to hammer out measures to give credibility to the fiscal framework. Last Wednesday, Minister Fernando Haddad, of Finance, said that the package is ready, but that there is no expected release date.

“I don’t know if there is enough time,” the minister told journalists at the entrance to the Treasury’s headquarters building.

The presidential team is focused on Lula’s agendas and bilateral meetings during his participation in the G20 Summit, in Rio de Janeiro, next week (18th and 19th). And, next Wednesday (20), the Black Consciousness holiday, Lula will be busy with the state visit of the President of China, Xi Jinping. The meeting is watched with attention, as Brazil and China share geopolitical interests via Brics ( group of emerging countries) and rehearsing approaches to infrastructure projects. Before traveling to Brasília, the Chinese president will be in Rio de Janeiro the day before, at the G20 meeting.

Financial market has reflected uncertainties

Haddad’s initial expectation was that the spending package would be finalized on the 5th. While the proposal has not been announced, the financial market has reflected the uncertain scenario. The Ibovespa (stock exchange index, B3) fell approximately 1.6% in November. The dollar reached R$5.86 at the beginning of the month. The delay continues to be priced.

“Financial assets continue to deteriorate, the interest rate curve is higher, the stock market is falling and the real is devaluing”, says Alex Agostini, chief economist at Austin Ratings. “The market doesn’t pay attention, it adjusts risk premiums to the extent that there is no clearer definition.”

For Sílvio Campos Neto, economist at the Tendências consultancy, when the measures are confirmed with the implementation of restrictions on the growth of expenses, the discomfort will be alleviated, but without a reversal of expectations.

“There will persist a reading of doubts, of skepticism about how the economy will be managed in these last two years of office”, he says. “But at least in the short term, I might be able to contain this escalation of nervousness a little.”

For Moreira Pires, “the market knows that the package will be released by December”, because the government has no option. But he believes that the cut value should be around the floor of the market’s initial projections (around R$30 billion) and not the ceiling (R$50 billion).

“If the announcement does not happen, inflation that exceeds five points will not be a surprise”, says the political scientist. Today the median market forecast is that the IPCA will close the year at 4.62%.

For Agostini, the delay does not reflect “complacency” on the part of the government, but the complexity of constructing the agreements. “It is not a trivial thing to do in a government, which is to cut spending. The conversation and agreements are being built”, he says. “The government is talking to the three Powers to try to achieve a robust and credible package, or it will continue with investor doubts. Several hypotheses have been floated, but there is still little discussion.”

Inclusion of military personnel in the package generates new tension

The last point of impasse came to light last week, with the inclusion of the Defense portfolio in the package. The federal government, according to reports that became public, proposed reducing benefits for relatives of military personnel and changes to the career pension system.

For analysts, it was an effort by Planalto to signal that the cut would reach the so-called “top floor”, and not just social benefits, preserving Lula’s popularity.

According to a report by the Federal Audit Court (TCU) published in June, the per capita deficit in military pensions is 17 times greater than that of the INSS. In the Armed Forces system, the negative balance between collection and expenditure is equivalent to R$159 thousand per beneficiary, compared to R$9.4 thousand in the General Pension Regime.

“The biggest difficulty, without a doubt, will be including the military”, says Sérgio Praça. “The government lies when it says that, throughout the year, it agreed anything with this category. Reviewing spending, especially social security, will be extremely important for the country, but the chances of this happening now, in my opinion, are small.”

On Wednesday, Haddad met in the morning with the commanders of the Armed Forces and the Minister of Defense, José Múcio Monteiro. It was decided that the technical teams from the two ministries will meet to make calculations and detail the adjustment measures.

In the afternoon, President Lula was with Múcio and the commanders of the three Forces at a ceremony to sign the promotion of general officers of the Navy, Army and Air Force, which takes place every year. But the topic was not addressed.

Cutting spending on social portfolios remains on the agenda

According to government interlocutors, other initiatives in the areas of Social Security, Social Development, Labor and Employment, Health and Education remain on the agenda. These last two must include the constitutional floors in the fiscal framework, which foresees maximum expenditure growth of 2.5% per year.

The ministers in these areas had expressed opposition to the idea. Wellington Dias, from Social Development, ruled out changes to Bolsa Família and the Continuous Payment Benefit (BPC).

Luiz Marinho, from the Labor and Employment department, criticized the possible reduction in unemployment insurance and the Minister of Social Security, Carlos Lupi, threatened to resign if the department had cuts. Nísia Trindade, from Health, and Camilo Santana, from Education, also resisted possible changes to the constitutional floors of their areas.

Haddad signaled that an agreement has already been reached. “The ministers were subjected to this idea, they reacted in various ways, but everyone understood the need for us to have sustainability in the coming years. If it’s up to me, this architecture should be long-term in Brazil,” he said.

Regardless of when the announcement takes place, the president’s interlocutors say that the word “cut” should be avoided, and replaced by the term “adjustments”.