Brazil’s Budget Spending Limit Amendment to Cut into Defense Spending

by Bill Ostrove, International Military Markets Analyst, Forecast International.

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On December 13, Brazil’s Senate approved a constitutional amendment, effective December 15, 2016, that will cap growth of government spending. This law will have a direct effect on defense spending, limiting it for at least the next 10 years.  However, with Brazil’s large defense budget (number 10 in the world), the market in that country will continue to be strong.

Starting with the 2017 budget, Brazilian federal spending will be allowed to increase no higher than the inflation rate for the previous year. – The estimated 2016 inflation rate, according to the International Monetary Fund (IMF), is 9 percent. – The cap will remain in effect for 20 years, though after 10 years, Brazil’s president will be allowed to review the law and recommend changes.

Spending on education and health care will be exempt from the limit in 2017. However, starting in 2018, caps will apply to those areas as well. There is an amendment to the bill in Brazil’s congress that would waive education and health care spending from the requirements of the law indefinitely, but it is not expected to pass.

The law is part of Brazilian President Michel Temer’s efforts to rein in government spending. Spending has been out of control in recent years. Deficits have grown from 1.8 percent of GDP in 2011 to 8.3 percent as of October 2016. The spending cap will essentially freeze spending in real terms for at least 10 years, and possibly for up to 20 years.

With the impeachment of Dilma Rousseff earlier this year, Brazil came under the leadership of the center-right Brazilian Democratic Movement Party, with Temer as president. He is working to reduce government debt and high inflation, jumpstart the economy, and make Brazil a more business-friendly country. The passage of the spending cap represents a major victory for President Temer and his allies.

Many in the country oppose the law. It is seen as onerous by those who favor social programs in Brazil, where  a significant portion of the population still lives in poverty. Others feel that since Temer is president as a result of the impeachment of his predecessor, he lacks the mandate that an elected president would have. He should therefore act as a placeholder, these people believe, rather than implement ambitious changes to Brazil’s government and economy.

The law will have an effect on defense spending. For at least 10 years, spending will increase, but only at the rate of inflation. Nonetheless, with the tenth highest defense budget in the world, Brazil will continue to represent a strong military market. Brasilia is in the midst of purchasing advanced fighter jets and armored vehicles and is developing nuclear submarines. These programs will likely continue. However, there will be little room for further expansion.


The Forecast International International Military Markets series examines the military capabilities, equipment requirements, and force structures inventories of 140 countries, with corresponding coverage of the political and economic trends shaping the defense market outlook for individual countries and regions.Forecast FI Logo

Sources:

http://www.wsj.com/articles/brazils-senate-passes-constitutional-amendment-to-cap-public-spending-1481647351

http://www.reuters.com/article/us-brazil-politics-idUSKBN142203