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Brazil's economy has been in free fall, a casualty of years of economic mismanagement and the vast corruption scandal that has engulfed the country's political and business establishment – and which now threatens to bring down the second president in as many years.Against this background, Brazil's National Congress, seeking to regain market confidence, approved an unprecedented constitutional amendment last December that imposes a ceiling on noninterest government expenditures, indexed to the previous year's inflation rate, for a period of at least 10 years. As long as it holds, the spending cap ensures that the size of the government (excluding interest payments) will shrink as a share of national income in every year that the economy experiences real growth. Similarly, Brazil is telling markets it will shrink the government (as long as the economy is growing).The cap will likely become even more politically controversial once Brazil recovers, as it will.Brazil's spending cap does not look like a sustainable solution.
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