Brazil’s Congress Gives Final Approval to Lula’s Fiscal Plan

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(Bloomberg) -- Brazil’s lower house of congress approved new fiscal rules on Tuesday, finalizing legislation meant to shore up public finances and assuage market concerns about President Luiz Inacio Lula da Silva’s spending plans.

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Lawmakers voted 379-64 in favor of the fiscal plan, which will be sent to Lula for his signature.

The bill’s passage will pave the way for Lula’s administration to align its 2024 budget plan with the new rules. It also contributed to local currency gains: the real strengthened 0.8% to 4.89 per dollar amid a broad rally triggered by a drop in Treasury yields.

The lower house slightly toughened the version approved by the Senate in June, removing a provision that would have allowed the government to spend an additional 40 billion reais ($8.1 billion). Congressional leaders, however, also reached a deal to allow the government to restore that spending through the annual budget process.

The rules allow the government to boost spending by a range of 0.6% to 2.5% above the inflation rate, limited to 70% of revenue growth.

The fiscal framework, a major priority for Finance Minister Fernando Haddad and Lula’s economic team, will replace a so-called spending cap that had been in place to limit expenditures.

Investors skeptical of the leftist government’s commitment to fiscal austerity largely welcomed Haddad’s design of the plan, and its initial passage earlier this year.

The lower house maintained Senate amendments that exempted funds for education and the Federal District from the framework.

--With assistance from Josue Leonel.

(Updates with market reaction in third paragraph.)

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