Brazil's Guedes says spending cap needs adjustments

© Reuters. FILE PHOTO: Brazil's Economy Minister Paulo Guedes speaks during a news conference at the Planalto Palace in Brasilia, Brazil June 6, 2022. REUTERS/Adriano Machado

RIO DE JANEIRO (Reuters) -Brazilian Economy Minister Paulo Guedes on Wednesday said the constitutional spending cap needs to be adjusted in reference to a constitutional rule that the government has circumvented to make extraordinary expenditures since 2019.

"There are cases in which the cap, despite being a symbol of austerity, visibly doesn't work," he said during an event in Rio de Janeiro.

The minister stressed that under the rule, the government could not distribute resources raised with the privatization of state-owned companies to the poor - a plan that is part of President Jair Bolsonaro's reelection effort.

"Obviously, this type of adjustment (on the spending cap) has to be done, but the philosophy of containing the federal government (growth) we maintain," said Guedes.

The government bypassed the country's main fiscal rule to pay states and municipalities proceeds from oil auctions and to make extraordinary spending to face the pandemic.

This year, Congress passed a new exception to the cap to increase cash handouts to poor families ahead of the presidential elections in October because the war in Ukraine had generated extraordinary inflationary effects.

After submitting the 2023 budget law to Congress reducing a popular pharmacy program, Guedes stated that it would remain unchanged.

According to the minister, a presidential message will be sent to Congress providing resources for the program. The same message will keep aid of 600 reais a month under the welfare program Auxilio Brasil.

The government had reduced monthly cash handouts to 400 reais in the 2023 budget bill because keeping the current level would require breaking the spending cap rule, and there is no legal provision for this so far.

Earlier on Wednesday, Guedes said Bolsonaro, who trails leftist former President Luiz Inacio Lula da Silva in opinion polls, would decrease public spending if reelected. Expenditures would fall to 15% or 16% of GDP from a previous forecast of 18% for the end of this year.