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The Washington Post
The Washington Post Temer Gets First Win Structural reforms including a limit on government spending are more important than one-time budget cuts for putting Brazil's fiscal accounts in order
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Brazil’s Acting President Michel Temer enjoyed his first victory in Congress on Wednesday when legislators approved his request to change this year’s budget target.

Lawmakers in a joint session of Congress supported government legislation that allows it to post a budget gap before interest payments of 170.5 billion reais ($47.7 billion) in 2016, rather than a primary surplus as proposed by the previous administration. The Senate and lower house voted following a marathon session that ran well past midnight. The voting tally wasn’t recorded.

The Brazilian real gained 0.3 percent to 3.56 per dollar early on Wednesday as analysts welcomed the result but warned that Temer’s real test will be the approval of more controversial measures in coming weeks.

“Changing the fiscal target wasn’t a controversial matter as no one wants a government shutdown,” Ricardo Ribeiro, a political analyst with MCM Consultores Associados, said in an interview.

Investors use Brazil’s primary budget result to gauge the country’s fiscal health and its ability to service debt. The country last year lost its investment-grade status after the three major rating companies expressed growing concern over government finances. Had lawmakers rejected the administration’s request, it would have been forced to drastically cut spending and shut down many government services in order to meet the original target of a primary surplus.

Wednesday’s win is an important signal that Temer can garner support for legislation in a Congress that until recently was stuck in gridlock amid a political crisis. He now faces the challenge of sustaining that support as he asks lawmakers to pass unpopular fiscal-austerity measures that are designed to shrink the near-record budget deficit.

“There’s a feeling that the government does have a coalition and passed this first test in the legislative process,” said Rafael Cortez, political analyst at Tendencias Consultoria Integrada. “The hope is that it can hold on to that to approve the economic measures.”

Temer, 75, took over Brazil’s top job less than two weeks ago on promises to unify a country that grew increasingly polarized during his predecessor Dilma Rousseff’s impeachment battle. While her supporters still denounce Temer as the architect of a coup against her government, his administration enjoys the support from many legislators who until a few months ago were loyal to Rousseff.

“Temer has averted conflict with parties that could become part of his allied base,” said Thiago Vidal, a political analyst at Brazilian consulting firm Prospectiva. “The result of today’s vote was widely expected.”

The acting president is betting he can pick up additional political capital if he manages to put the recession-battered economy back on track. To achieve that goal, Temer said on Tuesday he’ll ask Congress to limit subsidies and approve a cap on government spending. He also suggested he could shut down Brazil’s sovereign wealth fund and improve corporate governance at public pension funds and state-run companies.

Structural reforms including a limit on government spending are more important than one-time budget cuts for putting Brazil’s fiscal accounts in order, Finance Minister Henrique Meirelles said Tuesday. The spending ceiling will be adjusted according to inflation from the previous year, with expenditure requirements for health and education subject to that limit, he added.

Two of the measures announced Tuesday — scrapping the country’s sovereign wealth fund and asking development bank BNDES to repay its Treasury debt — could be implemented by executive decision, and both would help reduce the public debt.

Yet the spending cap entails amending the constitution. To achieve that, the government would need support from at least three-fifths of Congress. Members of Temer’s political party say they’re confident they have enough votes even after Romero Juca — who was spearheading efforts to pass the measures in Congress — was forced to leave Temer’s Cabinet this week and return to his previous job as senator.

“While Juca’s departure was a setback, everything suggests the Senator will remain a key leader coordinating Temer’s reform agenda in Congress,” analysts at political consulting firm Eurasia Group wrote in a research note on Tuesday. “Temer’s reform agenda will advance.”

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