The government becomes more dependent on Arthur Lira after the far-right advances in the Chamber of Deputies.

BRASILIA (Reuters) - The progress of Finance Minister Fernando Haddad's economic agenda this year will depend even more on the pace set by the Speaker of the House, Arthur Lira (PP-AL), sources in the government and Congress told Reuters, following the election of a Bolsonaro-aligned congresswoman to head the House's important Constitution and Justice Committee (CCJ).

After weeks of deadlock and a defeat for the government of President Luiz Inácio Lula da Silva, congresswoman Caroline de Toni (PL-SC), a staunch ally of former President Jair Bolsonaro, was elected president of the CCJ (Committee on Constitution, Justice and Citizenship) on Wednesday. This committee, which in 2023 was chaired by Rui Falcão (PT-SP), is the body through which all bills arriving at the House must be processed according to the rules.

A source from the Ministry of Finance admitted, with concern, that there are flaws in the government's political coordination, citing the case of the election for the leadership of the CCJ (Constitution and Justice Committee) and other committees in the Chamber of Deputies, and assessed that this opens the door for the emergence of controversial bills in Congress.

That same week, the source highlighted, a Senate committee approved, in a final vote—allowing the bill to go directly to the Chamber of Deputies without going through the Senate plenary—a proposal that provides for tax exemptions of 4 billion reais for companies in the fertilizer sector, without any objection from government supporters.

Other issues are being monitored to prevent similar problems, the source said. 

In this scenario, at least in the Chamber of Deputies, the dependence on Lira's actions to advance government proposals will be even greater with an opposition-leaning Constitution and Justice Committee, sources from the government and the Chamber stated. In 2023, Lira already dictated the pace of approvals for the new fiscal framework, the tax reform, and the Provisional Measure on subsidies, for example, in complicated negotiations with the government.

BILLION-DOLLAR CONCERN

In an effort to eliminate the primary deficit by 2024, Haddad's biggest concern at the moment is finding a solution to move forward with proposals to reinstate payroll taxes for 17 sectors of the economy and to renegotiate the Emergency Program for the Recovery of the Events Sector (Perse).

Initially, the government tried to end the payroll tax exemption and the Perse program through a provisional measure, but, faced with resistance from Congress, the Executive backed down and will debate the issue through bills -- the one on reintroducing the tax is already in the Chamber of Deputies, and the program for events should be sent soon, with the Treasury agreeing to maintain benefits in a more focused way.

The Finance Ministry argued that the revenue loss from the Perse program should be limited to 8 billion reais in 2024, a lower level than in previous years, but admits that the impact could be greater when the proposal goes through parliament. The tax loss from the exemption this year is at least 12 billion reais.

The Finance Ministry source said the government will have to accept a "middle ground" on both issues to approve the measures, which should force the ministry to propose new compensatory measures and likely open new political frictions with Congress. The source also stated that they consider it unlikely that income tax reform will advance this year and that they are more confident in the approval of Haddad's microeconomic agenda, which would be less controversial.

In general, the bills regarding tax re-implementation, the Perse program, and the other eight proposals that are part of the microeconomic agenda, such as the one that foresees a new regime to assist financial institutions and improvements to the Bankruptcy Law rules, will have to go through the Chamber's Constitution and Justice Committee, as will the regulation of the tax reform on consumption. It is in this context that the Speaker of the Chamber becomes involved.

Two sources close to Lira said he is committed to advancing Haddad's agenda, also considering the Perse negotiations and the tax re-implementation as priorities at the moment. On Tuesday, the Finance Minister met with the Speaker of the House and party leaders to ask for support for the agenda.

One source said that the CCJ (Committee on Constitution, Justice and Citizenship) could try to disrupt the government's agenda, but there is a limit. According to her, if, for example, the committee tries to prevent the voting on any project at any time, the government can appeal to Lira to take it directly to a vote in the plenary after the approval of a request for urgency.

This procedure has been adopted by Lira since the Bolsonaro administration, consequently reducing the power of the committees. In the plenary session, it is up to the Speaker of the House to appoint the rapporteur for the proposal.

The source also highlighted that if Lira has to choose between a social agenda and an economic one, he will prioritize the latter.

"It's clear that he won't approve everything that comes from the Treasury, but whatever is good for the economy will pass," she said, adding that Lira is committed to a zero deficit but also expects the government to make an effort to control public spending.

This source also warned that, despite the good intentions of the Speaker of the House, there is little time to advance the economic agenda in a year of municipal elections, which traditionally slow down the work of Congress. This source expects greater effort from the political coordination to try to expedite the votes by June, otherwise the agenda may be postponed until after the October elections.

Another source close to Lira highlighted that the CCJ (Committee on Constitution, Justice and Citizenship) will not hinder the Executive's agenda because anything considered a priority should be processed under an expedited procedure, which reduces processing times. However, the source stressed that this will make the government even more dependent on the centrist bloc and the Speaker of the House, who is in his last year in office and focused on securing his successor.

IRRELEVANT

According to government congressman Lindbergh Farias (PT-RJ), one of the deputy leaders of the majority, the CCJ (Constitution and Justice Committee) has lost relevance to the economic agenda since last year, and all negotiations have been conducted in plenary sessions with Lira and the party leaders.

"The committees are empty. Last year, Haddad approved all the important measures without going through the CCJ," said the congressman, who, unlike in 2023, decided this year not to participate in the committee.

Just like last year, the government will have to resort to tactics such as releasing parliamentary amendments and outstanding payments to advance negotiations, according to a source at the Treasury. In 2023, Lula broke the annual record for releasing amendments compared to the Bolsonaro administration. This year, due to the elections, there are restrictions on the payment of these funds.

The Minister of Institutional Relations, Alexandre Padilha, downplayed concerns about the election of a radical Bolsonaro supporter to the CCJ (Constitution and Justice Committee). "If last year we knew how to handle the composition of the committees well... we will also know how to handle the Chamber very well this year; I don't think it will bring difficulties for voting on the government's priority agendas," he said in an interview with CNN Brasil.

The government also saw Nikolas Ferreira (PL-MG) elected as president of the Education Committee, another radical Bolsonaro supporter who was the most voted federal deputy in the country in 2022.

The election of Nikolas and Caroline de Toni to the committees follows the principle that parties with larger representation have the right to choose first which committees they wish to chair. A source from the presidential palace, however, said that the Liberal Party broke a verbal agreement that it would not nominate radical figures to lead the committees.

Contacted for comment, Caroline de Toni did not immediately respond. In her speech on Wednesday after being elected, she adopted a moderate tone and said she would act in a balanced way. 

"I will approach this institutional position with great responsibility, managing with transparency and balance, listening to all political groups, and respecting the principle of proportionality that governs all the rules of the Chamber of Deputies, which should be reflected in the committee's agenda," she stated, adding that she will seek to prioritize matters of morality in the CCJ, issues from her electoral platform.