Brazil pushes spending curbs in bill before Congress as debt concerns mount, sources say

BRASILIA, Aug 12 - Brazil's finance and planning ministries have moved to advance spending-control mechanisms through a bill before Congress on an unrelated matter, said three sources with direct knowledge of the proposal.

The move, first reported by local newspaper Valor Economico, comes as investors question President Luiz Inacio Lula da Silva's willingness to pursue a more forceful fiscal adjustment amid rapidly rising public debt.

The proposed changes, if approved by lawmakers, are expected to generate about 10 billion reais ($1.94 billion) in savings next year, one of the sources said, describing them as "important triggers" aimed at containing the growth of mandatory spending, widely viewed as a key vulnerability of Lula's leftist administration.

Lula, who is seeking reelection in October, does not explicitly address the need for a more ambitious fiscal adjustment in his campaign platform for the next four years.

Under the proposal, if the government's revenue and spending report preceding the annual budget bill projects a primary deficit, spending mandates created by ordinary legislation would be capped in the following fiscal year.

Because the latest fiscal report projected a 52 billion reais primary deficit this year, the measures would already apply to next year's budget if approved by lawmakers.

That means programs tied to non-constitutional rules could not grow faster than the real spending limit under Lula's fiscal framework, which allows annual increases of 0.6% to 2.5%.

The government also proposes excluding oil revenue transferred to the Social Fund from the calculation of mandatory health spending, preventing windfall oil revenue from automatically boosting some expenditures tied to net current revenue.

The triggers would remain in effect until the government posts an annual primary surplus.

The government inserted the changes into a bill that approves offsetting tax breaks adopted to cushion the impact of higher oil prices with additional government revenue generated by the commodity's rally, legislation the administration is lobbying Congress to approve in the coming days. REUTERS