MercoPress. South Atlantic News Agency

Temer wins first Congressional battle with milestone bill to cap public spending

Temer hopes the proposal, which would limit growth in spending to the rate of inflation for up to 20 years, will eventually clear the two Houses

A Congressional committee in Brazil approved on Thursday a constitutional amendment that would limit public spending to the rate of inflation for 20 years, handing President Michel Temer an initial victory in his plan to plug a widening deficit, which if continued at the current rate could lead to fiscal collapse and public accounts insolvency, “a repeat of the Greek tragedy”.

 The lower house committee voted 23-7 to pass the proposal, which will be put to a vote in the full chamber early next week. Its approval requires two votes in the plenary of the lower house and two more in the Senate, needing a three-fifths majority in each chamber.

Temer's government is seeking to press ahead with unpopular reforms in the wake of last weekend's municipal elections.

The amendment is designed to curb a budget deficit equivalent to 10% of GDP. Hopes for its passage have made Brazilian assets among the best performing in the world this year despite an economy submerged in a two-year recession.

In a concession to ease its passage, the government announced on Monday that a cap on health and education expenditure would not go into effect until 2018, rather than next year. Leftist opponents have demanded more time to debate a measure they say violates the spirit of Brazil's 1988 constitution, which made generous provisions for social spending. They plan to seek a court injunction to block the amendment.

Backers warn that Latin America's largest nation, which is wrestling with a sprawling corruption scandal, could follow Greece's path to financial meltdown if spending is not controlled. Temer said this week that public debt, which ended last year at a level equivalent to two-thirds of economic output, would reach 100% of GDP by 2024 without the measure.

“If this change is not adopted, fiscal collapse and the insolvency of public accounts are inevitable,” lawmaker Darcisio Perondi said in his report to the committee studying the measure. “Brazil could repeat the tragedy of Greece.” Perondi said the previous government of Dilma Rousseff, who was removed from office in August for breaking budget laws, left an onerous legacy of overdrawn accounts

The conclusion of municipal elections in most cities across Brazil last weekend allows Temer's ruling Brazilian Democratic Movement Party (PMDB) and its coalition allies a freer hand to back the measure. A small number of cities face a second-round runoff this month.