Bolsonaro campaign drafts debt-linked fiscal rule to replace Brazil framework, sources say

BRASILIA, Aug 11 - Senator Flavio Bolsonaro's presidential campaign is preparing a new fiscal framework to replace Brazil's current budget rules, imposing tighter spending caps as debt rises that could reduce real spending growth to zero, two sources familiar with the matter told Reuters.

The senator, who is the eldest son of far-right former President Jair Bolsonaro, is the leading right-wing challenger to leftist President Luiz Inacio Lula da Silva in the October election.

Brazil's gross public debt climbed to 81.9% of gross domestic product in June, compared to 71.4% when Lula took office in January 2023, leading many economists to flag the need for a painful fiscal adjustment by the next government.

Under Bolsonaro's draft proposal, spending growth would remain below revenue growth, while varying according to public debt levels. The higher the debt burden, the tighter the cap on spending growth, said the sources on condition of anonymity.

Depending on the final design, the rule could effectively freeze federal spending in real terms in the next administration. The exact parameters of the proposal are still being drafted, the sources said.

The proposal, floated by Bolsonaro advisers in private meetings with investors, could be sent to Congress as a constitutional amendment during a potential government transition later this year, sources said.

The framework would replace Lula's fiscal rules, which currently cap real spending growth at between 0.6% and 2.5% annually and limit it to no more than 70% of revenue growth.

In response to a Reuters request for comment, the Bolsonaro campaign said its government platform would be released by August 15, the deadline set by electoral law, and would detail its economic proposals.

His proposals will aim to strengthen fiscal discipline, improve public-sector efficiency and create conditions for stronger economic growth, the campaign added.

One source said the proposal, still under discussion, could freeze federal spending in real terms whenever gross government debt exceeds 80% of GDP, a threshold that has already been breached. Spending growth would be limited to 50% of revenue growth when debt stands between 75% and 80% of GDP, rising to 70% of revenue growth when debt falls below 75% of GDP, the source added.

The framework would also include a primary balance target and a spending cap, a mechanism already present under Lula's current rules, although the precise levels have yet to be determined.

Alongside the overhaul, Bolsonaro's team is preparing spending cuts and a review of tax breaks aimed at delivering a fiscal adjustment equivalent to 1.5% of GDP, said the two sources. The goal is to boost investor confidence, lower long-term interest rates and generate additional fiscal gains, one of them added. REUTERS