Bolsonaro's new social program defies austerity drive in Brazil

President Jair Bolsonaro wants the initiative called Renda Brasil, or Brazil Income, to replace emergency aid provided by the government during the pandemic, including monthly stipends to informal workers that will expire by the end of the year. While the plan has been under discussion for weeks, it is now becoming clear that it may force the government to abandon a spending cap rule that investors consider as the country's last line of defense against runaway budget gaps.

Guedes is trying to find the billions of dollars needed to launch Renda Brasil by redirecting funds from existing social programs without creating new expenditures -- a strategy that requires congressional approval. If he fails, Bolsonaro and several cabinet members will want him to loosen the purse strings, according to two government officials with knowledge of the matter.

That would force the government to rethink the spending cap, a law approved in 2016 that freezes public expenditures for two decades. While many nations plan to spend their way out of recession, Guedes says Brazil can't afford another year of record fiscal deficit without eroding investor confidence, which could lead to higher financing costs and credit rating downgrades.

But Guedes is becoming isolated in his defense of the spending cap, said the officials, who requested anonymity because they aren't authorized to comment publicly.

Even Bolsonaro's public displays of support for Guedes' fiscal plans have been erratic.

On Wednesday, he pledged to uphold the spending cap in a joint statement with lower house Speaker Rodrigo Maia and Senate President Davi Alcolumbre. On the following night, however, Bolsonaro said there was a discussion within the government about breaching the ceiling, describing it as a "healthy fight." Early on Friday, he seemed to backtrack, writing in a social media post that fiscal responsibility and the the spending cap rule continue to guide his government.

Behind the scenes, the minister is increasingly left on his own when it comes to austerity, said Deputy Pedro Paulo, who coordinates a congressional group on minimum income proposals. In an interview, Paulo said he sees a chance the government will bypass the spending cap rule to extend emergency aid until Renda Brasil is ready to be launched.

The economy ministry declined to comment.

Bolsonaro, who assumed power pledging to cut debt, saw how billions of dollars in emergency aid helped support his popularity during the pandemic. His approval rating jumped to the highest level since the start of his term, according to a Datafolha poll published Friday. In particular, he made inroads into impoverished regions such as the country's northeast that had traditionally been a bastion for his leftist political adversaries.

That's prompted market concern that the president may be inclined to abandon austerity ahead of his re-election campaign in 2022.

To be sure, members of Bolsonaro's inner circle including Citizenship Minister Onyx Lorenzoni say there's no connection between the 2022 elections and plans to expand social programs. The government estimates that some 26 million people living in vulnerable conditions would benefit from Renda Brasil, according to Lorenzoni.

"Bolsonaro didn't need these votes to be elected in 2018, but he was always concerned about the most vulnerable and invisible Brazilians who didn't appear in any government register," he said in an interview. "Hunger, misery and unemployment have killed more people in Latin America than any epidemic."

Meanwhile, Brazil's fiscal situation is already deteriorating even ahead of Renda Brasil's launch. The country posted a record budget deficit for the third straight month in June as expenditures more than doubled.

Put together, the risk of breaking the ceiling next year is high, said Felipe Salto, director of the Senate's fiscal studies center, known as IFI. There's space for 75 billion reais in discretionary spending in next year's budget, but policy makers need at least 89.9 billion reais, according to IFI calculations.

"I find it very difficult to be able to create a program of relevant magnitude without breaching the ceiling," Salto said in an interview.