Crisis in Brazil’s Congress Gives Lula $18.5 Billion in New Fiscal Headaches

(Bloomberg) — Tensions between President Luiz Inacio Lula da Silva’s administration and Brazil’s Congress are threatening to deal significant setbacks to the government’s efforts to shore up public accounts.

Lower house Speaker Arthur Lira cut ties with Minister of Institutional Relations Alexandre Padilha earlier this month, the latest tumultuous chapter in their often-troubled relationship. But it is the Senate that may deal the biggest blow to Finance Minister Fernando Haddad’s efforts to hit the government’s fiscal targets.

Lawmakers are this week set to weigh legislation that could have an impact of at least 96.3 billion reais ($18.5 billion) between 2024 and 2026, at a time when Haddad is already under pressure after softening the government’s 2025 fiscal goal last week.

Lula’s government is also worried that a worsening fiscal scenario may keep the central bank from continuing to cut interest rates, concerns that caused the president to call an emergency cabinet meeting Friday in an attempt to stave off crisis.

Here’s what to watch in Brazil’s Congress this week:

Judicial Salaries

The Senate will begin discussions on a proposed constitutional amendment that would grant a 5% salary increase to judges and prosecutors across Brazil. The plan would have a fiscal impact of 42 billion reais per year, according to Senator Jaques Wagner, the government’s leader in the chamber.

“Brazilian society cannot accept this. It breaks the country and the states. It’s fiscal irresponsibility,” representative Jose Guimaraes, the government leader in the lower house, said in an interview after the meeting with Lula.

Budget Vetoes

Both chambers are scheduled to hold votes that could override Lula’s vetoes of items included in the 2024 budget. Lawmakers are on Wednesday expected to overturn his veto of 5.6 billion reais in so-called parliamentary budget amendments, which authorize public funds that they can allocate to projects in their home states.

Tax Benefit for Events

Lula’s government has attempted to end a tax benefit for Brazil’s events industry that was created to mitigate the pandemic’s effects on the sector, as part of Haddad’s ongoing efforts to boost revenues.

But legislators have decided to keep the program with a gradual phase out. The current version of the plan will cost 15 billion reais over three years, according to the office of lawmaker Renata Abreu, who will present a draft proposal that is set to receive a vote this week.

Unlike other proposals, the government is willing to agree to that plan, Guimaraes said.

Municipal Social Security Contributions

The administration and Congress are also in the middle of a tug-of-war over social security contributions from municipal governments. A bill has been proposed to end the dispute, but a lack of consensus around it could cost the government 33.7 billion reais by 2026, according to local website Poder360.

It would have an impact of 10.5 billion reais this year, the website reported.

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