Brazil looks to curb spending after local elections, sources say

By Marcela Ayres and Bernardo Caram

BRASILIA (Reuters) - The Brazilian government is preparing to roll out measures to curb mandatory spending after a second round of municipal elections at the end of the month, two Finance Ministry officials told Reuters.

President Luiz Inacio Lula da Silva has focused largely on restoring the country's fiscal balance with more tax revenue since he took office last year.

However, the sources say his government is now looking at spending controls to hit budget targets and stabilize gross debt below 80% of gross domestic product (GDP).

Investors and private economists have been skeptical of Lula's ability to deliver on budget promises, with interest rates rising in Brazil and the leftist president wary of belt-tightening as recent polls show his popularity under pressure.

Lula reiterated in a Friday radio interview that he aims to expand an income tax exemption for poor Brazilians, vowing to fulfill that election promise by the end of his term in 2026.

That exemption has garnered attention after newspaper Folha de S. Paulo reported that the government could raise taxes on millionaires to offset its estimated 35 billion reais fiscal impact.

However, one of the sources said the government's economic team sees the introduction of spending controls as more urgent. A second source from the ministry said the containment of mandatory expenses is intended to strengthen Brazil's fiscal framework, creating room for discretionary spending.

The rapid expansion of mandatory expenses such as public salaries and pensions is squeezing out investments and other programs due to a spending cap imposed under the new framework.

After starting to control expenses by cleaning up public registries and tackling fraud in social programs, the government is now preparing initiatives that will require congressional approval, the first source said.

The initial package, focused on specific expenditures, will likely be followed by a second, "tougher" set of more structural proposals, the source added, without giving details.

Since last month, government officials have said the rules governing the so-called BPC program are under scrutiny. That benefit - Brazil's second-largest social program - is aimed at seniors over 65 and people with disabilities whose per capita household income is often less than a quarter of the minimum wage.

The 2025 budget bill allocates 112.9 billion reais for the program, an increase of 12.7% from this year.

($1 = 5.61 reais)

(Reporting by Marcela Ayres and Bernardo Caram; Editing by Brad Haynes and Hugh Lawson)