(Bloomberg) -- Brazil’s Finance Minister Fernando Haddad has won over one of the government’s biggest critics of spending cuts, moving closer to approving an austerity plan designed to assuage investor concerns about the country’s fiscal outlook.
Haddad met with Rui Costa, President Luiz Inacio Lula da Silva’s chief of staff, to discuss spending cut proposals Tuesday evening, according to people with knowledge of the matter. They have both agreed on the measures that will be submitted to Lula and that are expected to be announced shortly after he grants his approval, the people said, requesting anonymity because the discussion isn’t public.
An agreement with Costa removes a key obstacle to Haddad’s plan as the chief of staff is a close Lula ally who has expressed concern about the impact of spending cuts on the president’s popularity, one of the people said.
While Costa’s office declined to comment on the story, the chief of staff said in a social media post on Wednesday that Lula will “make the necessary adjustments to keep the country growing, ensuring investment and keeping expenses within fiscal rules.”
Speaking to journalists in Brasilia, Haddad said there’s growing consensus in the government about the need to strengthen Brazil’s fiscal framework. Mandatory expenses, he added, also need to obey fiscal rules.
“The dynamics of mandatory spending have to fit within the fiscal framework,” Haddad said Wednesday, adding that the government needed to ensure the “medium and long-term sustainability” of the rules.
The Brazilian real trimmed losses after his comments, one day after closing at its weakest level in more than three and a half years. The real, which was down 0.2% to 5.7728 per dollar in early afternoon trading, has been one of the worst-performing major currencies this year as fiscal concerns erode investors’ confidence in Latin America’s largest economy.
Brazilian stocks edged higher while medium- and long-end swap rates fell in the wake of Haddad’s comments.
“Markets are anxious about this package to control spending,” said Anna Reis, chief economist with Gap Asset Management. “Haddad’s comments were positive because they suggest there will be a proposal to make sure mandatory spending is within fiscal rules.”
Lula’s administration is considering capping the growth of some government initiatives. The country’s fiscal framework allows spending to increase 2.5% over inflation, but several programs are above that limit.
Brazil’s budget board, which includes the ministers of finance, planning, management and the chief of staff’s office, still needs to discuss the measures. Some proposals will also require congressional approval, meaning the government will need to negotiate with lawmakers.
Planning Minister Simone Tebet told reporters Wednesday that she expects the government to present measures in November, but that those requiring approval in Congress may only be voted on next year.
Haddad is pushing to hit his target of eliminating Brazil’s primary fiscal deficit, which excludes interest payments, in 2025. The minister’s efforts to shore up public accounts have so far focused heavily on increasing tax revenues, but mounting market skepticism over his ability to deliver on his fiscal pledges has ramped up demands for spending cuts.
“There is no more room to increase the tax burden,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “It is high time to stop the talk and step into action. Lack of fiscal discipline and deteriorating debt dynamics are a growing source of investor concern. There is plenty of room to cut.”
--With assistance from Beatriz Reis, Simone Iglesias and Leda Alvim.
(Updates with Haddad comments and additional context from sixth paragraph.)
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