Brazil: Pandemic and the Two-Speed Fiscal Regime

Manuellita Hermes

Manuellita Hermes

The pandemic that is plaguing the world has had an impact on several fields, forming the contours of a true global crisis, which requires actions at the international, regional and national levels.

Brazil is one of the most unequal countries in the world, and this becomes even more evident during the pandemic. The isolation measures that were put in place, besides the increasing divides identified in society since the last presidential elections, compromise labor activities, which in turn compromise the income for many Brazilians, especially informal and self-employed workers. As a consequence, the country faces challenge on different fronts, such as political, social, economic and fiscal ones.

To deal with the pandemic, it is up to the State to use the available resources not only to fund emergency prevention and combat policies (health care), but also to mitigate the negative effects of the population's loss of income, the closing of trade, the reduction of consumption and tax collection, and the so-called deceleration of the economy (social welfare).

Within the framework of the Organization of American States, on April 10 this year, the Inter-American Commission on Human Rights adopted Resolution No. 1/2020 – Pandemic and Human Rights in the Americas. Its operative part indicates the necessity to mobilize available resources to the greatest extent possible to prevent and combat the pandemic, including the suspension of external debt and international economic sanctions.

But, how to react quickly in the spreading scenario of COVID-19 (Coronavirus Disease 2019) within the limits imposed by the budgetary framework of international, regional and internal systems, as is the case in Brazil, with constitutional and legal rules that provide for a circumscribed performance, without much discretion? How to promote the necessary public policies without resorting to the country's external indebtedness? That is: how to obtain internally the liquidity capable of strengthening health systems to handle the outbreak of the novel coronavirus, to mitigate the harmful consequences on the economy, and to protect the most vulnerable individuals during the so called state of public calamity declared in Brazil effective until December 31, 2020 (as declared by Legislative Decree N. 06, of March 2020)?

Using the power of constitutional amendment

On April 1st, 2020, the day before the enactment of a federal statute on social protection measures (Law N. 13,982, 2 April 2020), an amendment to the Constitution was proposed at the National Congress, in order to institute an extraordinary fiscal, financial and procurement regime to deal with the national public calamity resulting from this international pandemic, and other provisions: the so-called “War Budget”.

After passing regularly in the Chamber of Deputies and in the Federal Senate, with rapid voting in two rounds through virtual or remote deliberative sessions in both Houses, it was finally approved, under the Amendment to the Constitution N. 106/2020. It was published on May 8, 2020, the effective date, which will be automatically revoked on the same date the state of public calamity is terminated by the National Congress.

The Brazilian “War Budget”

The Amendment to the Constitution N. 106/2020 determined the adoption of an extraordinary fiscal, financial and procurement regime, in order to meet the emergency measures necessary to fight the COVID-19 pandemic.  Regarding the fiscal and financial aspects, the subject matter of this paper, the following provisions are worth mentioning:

a)   as long as they do not involve permanent expenses, legislative proposals and acts of the Executive Branch are exempt from observing legal limits regarding the creation, expansion or improvement of government action that entails an increase in expenses and the granting or expansion of an incentive or tax benefit that results in a waiver of revenue;

b)   legal entities with debts to the social security system may enter into contract with the Government and receive tax or credit benefits or incentives from it;

c)    it will be possible to conduct credit operations that exceed the amount of capital expenditures; and

d)   the Brazilian Central Bank, during the national public calamity and with limited validity and effects to the period of its duration, is authorized to buy and sell securities issued by the National Treasury in the local and international secondary markets. It is also authorized to buy assets in national secondary markets within the scope of the financial, stock and payment markets, subject to certain conditions and with preference to the acquisition of securities issued by micro and small and medium-sized companies.

Regarding control, the 2 April 2020 law provides that the Ministry of Economy shall publish, every thirty (30) days, a report with the values and the cost of credit operations conducted while the national public calamity remains in place. Moreover, it prescribes that the Brazilian Central Bank shall publish daily transactions conducted individually, with all the corresponding details, including the financial and economic conditions of the operations, such as agreed interest rates, amounts involved and terms. Finally, it provides that the President of the Brazilian Central Bank shall report to the National Congress, every thirty (30) days, all operations that have been conducted.

From a constitutional change to economic and social changes

The Constitution was changed to adopt a fast and flexible budget, capable of funding the health and social priorities brought about by the pandemic. An exceptional normative framework has been established.

Thus, on the one hand, Brazil is currently under an extraordinary and temporary constitutional regime of financial law, which was specifically established to face the COVID-19 crisis, in order to mitigate the negative effects on people's livelihoods and the economy. On the other hand, there are permanent, regular rules, which remain applicable with respect to any other expenses. That is why it may be called a two-speed fiscal regime.

It is worth mentioning – especially considering that corruption is another pandemic that has plagued the world, with a flat curve in many countries, but with recurring peaks in Brazil – that mechanisms for control, responsibility, assessment, proportionality and transparency are keywords for good governance of the desired socioeconomic recovery under the umbrella of the Amendment to the Constitution N. 106/2020, which, I repeat, is temporary.

Brazil requires measures that are able to mitigate the economic-financial impact caused by this health crisis on Brazilian society, with the promotion of policies aimed at reducing economic and social vulnerabilities.

Looking forward to a new period of expansion

There is no doubt that this real war against the coronavirus will require a state coordination system, in a country where current economic policy is marked by a liberal narrative, which was embraced by a right-wing populist program. Keynesian lessons are also of paramount importance. They instigate a review of economic policies in times of crisis like the one experienced now, as shown in the following excerpt from his work The Economic Consequences of the Peace: "All that is now open to us is to redirect, so far as lies in our power, the fundamental economic tendencies which underlie the events of the hour, so that they promote the re-establishment of prosperity and order, instead of leading us deeper into misfortune".

My hope, then, is that the hand of the State may be present in the lives of Brazilians with the implementation of social policies for the timely redistribution of resources to support a dignified and healthy standard of living for individuals in our society.

Manuellita Hermes is a law clerk to the Brazilian Federal Supreme Court, having served as a Federal State Attorney. She is a Ph.D. Candidate in Law and Judicial Remedies: Civil Law, Comparative Law, Roman Law (Università degli Studi di Roma Tor Vergata). She also holds a Master in Contemporary Legal Systems (Università degli Studi di Roma Tor Vergata) and has specialized in Constitutional Justice (Università di Pisa) and in State Law (Universidade Federal da Bahia).

Suggested Citation: Manuellita Hermes, ‘Brazil: Pandemic and the Two-Speed Fiscal Regime’  IACL-AIDC Blog (25 June 2020) https://