Brazil’s lower house will approve a new economic law, sent to the Senate By Reuters

BRASILIA (Reuters) – Brazil’s lower house on Wednesday approved a new budget bill, a major victory for President Luiz Inacio Lula da Silva’s administration as it tries to balance public accounts and reduce debt growth.

Lawmakers in the chamber voted 372-108 to pass a major bill late Tuesday that is supposed to replace Brazil’s current fiscal deficit, which has been slashed several times in recent years to allow the government to spend more.

Federal lawmakers rejected all amendments that would change the main text of the bill, and now the proposal will be sent and voted on in the Senate.

Markets took a big hit, with Brazil’s real strengthening around 0.7% against the dollar and interest rate futures falling on Wednesday.

“The actual law is stronger than previously stated,” said Banco Original’s Chief Economist Marco Caruso. “The 372 votes were also good because the markets would start thinking that it will be easier to accept the taxes”.

Under the new economic rules, government spending will not be allowed to rise by 70% of any increase in income, with the growth of spending between 0.6% and 2.5% per year above inflation.

If the goals are not met, the growth rate will increase by 50% of the growth rate as a penalty.

“It was an important victory for the country,” the Minister of Institutional Relations, Alexandre Padilha, said after the vote, where Lula’s left-wing administration managed to get support from right-wing parties to pass the decision.

“This level will allow for sustainable growth including social and economic responsibility,” he added.

The government hopes that the new fiscal law will allow it to wipe out the country’s primary interest rate by 2024, before meeting the initial deficit of 0.5% of GDP in 2025 and 1% of GDP in 2026.

Finance Minister Fernando Haddad also celebrated the legal limit, noting that the government must seek “properties” for future projects, including the long-awaited tax reform that is expected to be voted on by Congress later this year.

The rules will replace a fixed interest rate on spending that limits the growth of spending to last year’s rate of inflation.

“Giving a keynote was a very important thing,” said Felipe Salto, chief economist at broker Warren Rena. “The plan has the necessary resources to avoid a financial crisis.”

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