Pressure mounts on Brazilian government over subsidies

(Bloomberg) — Brazil’s economic team is facing mounting pressure from political advisers to President Jair Bolsonaro to find room to hand out fuel and energy subsidies as inflation erodes purchasing power ahead of October elections.

The team is fighting both fiscal and electoral constraints to get the help, said three people with knowledge of the matter, who asked not to be named because the discussions are not public.

The first hurdle is Brazil’s spending cap rule, which limits public spending growth to the previous year’s inflation rate and leaves no room for new subsidies. In addition, the country’s electoral law does not allow such help in an election year except in case of calamity or emergency, which the Ministry of Economy does not consider to be the case, one of the people said.

Policymakers are facing rising inflation expectations after consumer prices soared more than 12% annually in early April. Major Wall Street banks now see rising more than 9% this year, well above the 3.5% target. In addition to rising fuel, energy and food costs, civil servants are demanding higher salaries to compensate for the loss of purchasing power.

The call for more aid gained momentum after state oil giant Petroleo Brasileiro SA raised domestic diesel prices on Monday, just days after Bolsonaro criticized the company for «abusive» profits.

Economy Minister Paulo Guedes has dismissed the mounting pressure, saying the federal government has already reduced the burden of high fuel prices on consumers by reducing PIS/Cofins taxes on diesel. The ministry has partly blamed governors, who did not do the same with changes to the so-called ICMS state taxes.

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energy prices

The president’s allies are also pushing for a plan to subsidize electricity bills with profits from the delayed sale of Eletrobras, two other people with knowledge of the matter said.

The giant power company has been included in the government’s privatization efforts for years, but the operation is becoming more politically challenging as elections near.

If it manages to unblock the sale, the government could demand that some of the money be paid upfront, some 30 billion reais ($5.8 billion), which would be used to subsidize electricity bills. In exchange for advancing part of the payment, the new Eletrobras operators would get more time to pay the government for the right to operate the company’s hydroelectric dams, the people said.

The discussion comes just days before Brazil’s audit court is due to vote on the rules for the sale, putting the operation at risk, the people said, adding that any change now would affect Brazil’s power sector. .

original note:

Brazil Government at Odds on Subsidies as Pressure for Aid Rises

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