(Bloomberg) -- After a marathon week of late night votes, Brazil’s Senate approved a weakened version of a government spending cut package meant to ease investor fears about the country’s deteriorating fiscal situation.
Senators passed the last of the three most important pieces of the fiscal plan Friday, delivering on President Luiz Inacio Lula da Silva’s efforts to push the package through both houses of Congress before the end of this year.
But lawmakers watered down key provisions of each piece of legislation, making changes that dent the plan’s attempts to shore up public accounts at a time when market angst over Brazil’s deficits is weighing on the currency and other assets.
Finance Minister Fernando Haddad told reporters before the final vote that the lower house had reduced the impact of the 70 billion-real ($11.5 billion) plan by only 1 billion reais, far less than the government feared it might.
But XP Inc. forecast a much larger reduction of 8 billion reais from the changes, reducing a savings estimate that was already smaller than the government’s to 44.3 billion reais over the next two years. It sees an even more “significant decrease” in long term savings, from 294.2 billion reais in the government’s proposal to 232.2 billion reais.
“The result only reinforced the view that this was a timid package of changes, which did not deal with the most important issues in the federal budget,” XP said in a report published Friday.
Senators backed legislation containing alterations to the so-called continuous payment benefit, a social program that provides aid to low-income and elderly Brazilians with disabilities. The rapporteur of that bill in the lower house tweaked the bill in an attempt to ensure needy families are not left uncovered.
On Thursday night, senators approved a weaker version of a bill that prohibits the expansion of tax benefits if public finances are worsening, and limits increased spending for civil servants. The proposal also overturns a measure reinstating a vehicle tax and barred the government from blocking the use of public funds earmarked by legislators for local projects. It has already been approved by the lower house.
Both houses also approved a proposed constitutional amendment that placed caps on so-called super salaries for public workers. But it included looser limits on loopholes that make it possible to exceed the current ceiling of 44,000 reais than Lula initially proposed.
Tax Exemptions
Another piece of the package that makes changes to the military pension system will only be considered in 2025.
Before the lights went out, congress also gave a final vote to approve a project that is not part of the tax package, but should generate more than 16 billion reais in 2025, according to the government. The bill postpones the date from which banks can deduct losses on non-performing loans in tax calculations.
The government’s plan to exempt salaries of up to 5,000 reais from income taxes, which dampened investor sentiment and helped spark a currency selloff after it was unveiled alongside the plan in late November, will also only go to Congress next year, Haddad said.
Brazil is running an annual budget gap of 10% — far wider than the ones seen during the leftist Lula’s first administration.
The fiscal concerns sent the Brazilian real to record lows against the dollar earlier in the week. It has weakened roughly 20% this year and ranks as the world’s worst-performing major currencies.
The central bank has repeatedly intervened in currency markets to stem the slide. On Thursday alone it sold $8 billion in back-to-back spot auctions, its largest daily sale since at least 1999, according to data compiled by Bloomberg.
In total, the central bank has spent about $17 billion in spot sales so far.
(Updates to add approval to a bill that is not part of the fiscal plan in 11th paragraph)
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