Flavio Bolsonaro Would Cap Brazil’s Debt at 65% of GDP, Adviser Says — BigGo Finance

Brazilian Senator Flavio Bolsonaro would introduce a constitutional ceiling on public debt if elected president in October, automatically triggering a spending freeze whenever gross debt exceeds a predetermined threshold, according to a senior campaign adviser.

Adolfo Sachsida, a lawyer and economist who joined the campaign’s economic team last week, outlined the proposal in a video posted on X on Wednesday. “We will approve a ceiling for public debt. If debt is too high, a spending cap is triggered, putting the fiscal trajectory on a sustainable path,” he said.

The senator, eldest son of former President Jair Bolsonaro, is the leading challenger to President Luiz Inacio Lula da Silva in the October 4 election. A runoff would be held on October 25 if no candidate secures a majority.

Sachsida previously served as mining and energy minister and economic policy secretary during the elder Bolsonaro’s presidency. His proposal echoes a position he articulated on Substack before joining the campaign: a constitutional amendment under which a spending cap “similar to the one adopted in Brazil in the recent past” would take effect whenever gross public debt surpassed 65% of gross domestic product, effectively halting real growth in public expenditure.

Brazil’s debt ratio was last below that threshold in November 2015. The following year, then-President Michel Temer approved a constitutional spending cap limiting federal expenditure growth to the prior year’s inflation rate. That rule remained in place until Lula replaced it with a new fiscal framework in 2023, though it had already been weakened through a series of exceptions.

The current framework combines primary balance targets with limits allowing real expenditure growth of 0.6% to 2.5% annually, though officials have recently floated reducing the upper bound to 1.5%.

Gross public debt, the government’s primary gauge of fiscal solvency, now stands at 81.9% of GDP, up more than 10 percentage points since Lula began his most recent term in 2023.

Competing prescriptions on rates

The debt-ceiling proposal comes as the two leading presidential campaigns offer sharply different remedies for Brazil’s elevated long-term interest rates, which have driven up financing costs for both the state and the private sector.

Jose Sergio Gabrielli, chief coordinator of Lula’s re-election platform, proposed in an interview with Folha de S.Paulo that the Treasury buy back government bonds to curb long-term yields, citing similar operations recently conducted by the U.S. Treasury. He also criticized a Folha editorial that called for urgent federal spending cuts, saying it portrayed Brazil as being “on the brink of chaos.”

Sachsida dismissed Gabrielli’s buyback idea as an artificial and “mediocre” attempt to suppress borrowing costs. “Technically, this means injecting liquidity into the economy … and once that happens, inflation rises. When inflation rises, interest rates will have to rise as well,” he said in the X post.

Brazil currently pays roughly 7.5% in real interest on government bonds maturing in 2045, underscoring the premium investors demand amid doubts about the country’s ability to control rapid growth in mandatory spending. The interest bill has been the main driver of rising gross debt.

Although the Treasury carried out a large-scale bond buyback in March following the U.S.-Israeli conflict with Iran, such operations are rarely used by the debt manager. Treasury officials have said publicly that interventions in the secondary market to address high volatility follow a sequence of reducing auction supply, shrinking offer sizes, canceling auctions and, only as a last resort, conducting buybacks or other liquidity operations.

Analysts are skeptical either candidate will be able to rein in Brazil’s public finances, though market reactions to polls suggest investors favor the Bolsonaro program.

Reuters reported earlier this month that the senator’s campaign was preparing a new fiscal framework that would impose stricter spending constraints as debt rises, potentially reducing real spending growth to zero.

The campaign did not immediately respond to requests for comment on the debt-ceiling proposal or the specific threshold that would activate the mechanism.