UPDATE 1-Brazil Treasury warns spending cap is under threat, urges budget rethink

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BRASILIA, March 30 (Reuters) – Brazil’s Treasury on Tuesday warned that the 2021 federal budget approved by Congress threatens one of the government’s key pillars of fiscal stability, and urged the estimates for mandatory spending be brought up to a more “realistic” level.

“The underestimation of mandatory spending in the budget causes problems for the ceiling because such spending will have to be compensated for by cuts in parliamentary amendments or discretionary spending,” the Treasury said.

“Mandatory expenditures should be brought (up) to a realistic value,” it said, adding that Brazil continues to face a “very challenging year both for the health of the population and the health of the public finances.”

The Treasury’s comments echo warnings a day earlier from the Independent Fiscal Institute (IFI) watchdog that the government is on course to break its spending cap by 39 billion reais ($6.8 billion) this year.

Some 95% of Brazil’s near 1.5 trillion reais annual federal budget is accounted for by mandatory spending on things, such as salaries and public sector services, leaving very little room for maneuver to respect the spending ceiling.

The spending cap stipulates that growth in public spending cannot exceed the previous year’s rate of inflation. But public finances are stretched like never before due to the COVID-19 crisis, and the government is under pressure to spend more to cushion the impact of the deadly second wave.

Earlier on Tuesday, Economy Minister Paulo Guedes said that expenses to fight the COVID-19 pandemic may not necessarily have to meet the spending cap rule.

Treasury’s warnings accompanied figures that showed the government’s budget deficit excluding interest payments in February was 21.2 billion reais ($3.7 billion). That was less than the 26.5 billion reais shortfall economists in a Reuters poll had forecast and down 22% in real terms from a year ago.

Net revenue was 95.3 billion reais, up nearly 10% in nominal terms from a year earlier, Treasury said, while spending totaled 116.5 billion reais, up 2.3% in real terms from a year ago.

The accumulated primary deficit in the 12 months through February was 776.8 billion reais, worth 9.9% of gross domestic product, Treasury said.

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