The spending cap will apply to the federal spending in Brazil starting with the 2017 budget. Specifically, it will not allow spending to increase higher than inflation the previous year. The International Monetary Fund (IMF) projects 9 percent inflation in Brazil in 2016. The cap will remain in effect for 20 years, however, after 10 years, Brazil's president will be allowed to review the law and make changes as necessary.
Education spending and health care spending will not be subject to the limit in 2017. However, caps will begin to apply to those areas as well starting in 2018. 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 President Michel Temer's efforts to rein in government spending in Brazil. Spending has been out of control lately. 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 all government agencies for at least 10 years, and possibly up to 20 years.
With the impeachment of Dilma Rousseff, Brazil is now led by the center-right Brazilian Democratic Movement Party. Temer is working to reduce government debts and make Brazil a friendlier place to do business in. He hopes to jumpstart Brazil's struggling economy and reduce high inflation. The success of the spending cap represents a major victory for President Temer and his allies.
However, many in the country oppose the law. It is seen as onerous by those who favor social programs in Brazil, which still has a significant portion of its population living in poverty. Many others feel that since Temer is the president because his predecessor was impeached, he does not have the mandate that an elected president would have. He should therefore act as a placeholder, rather than implement ambitious changes to Brazil's government and economy.
Whichever side of the debate one is on, the law will have an effect on defense spending. Spending will increase, but only at the rate of inflation, for at least 10 years. With the tenth highest defense budget in the world, Brazil will continue to represent a strong market for military acquisitions. 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 future growth or expansion.
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