UPDATE 1-Brazil considering legislation for special spending powers in emergency -source

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BRASILIA, Oct 7 (Reuters) - Brazil’ government is considering legislating for a national state of calamity and special spending powers to be triggered in the future if public finances are hit by an emergency event like war or a pandemic, an economy ministry source said on Wednesday.

The clause, to be included in the ‘Federative Pact’ constitutional amendment revamping the financing ties between federal and local governments, would allow Brasilia to turn on the fiscal taps in times of crisis without breaking its “spending cap” rule.

Confusion over how the government will fund a proposed new welfare program “Renda Cidada” next year for millions of Brazilian families has weighed heavily on local markets, deepened political divisions, and unnerved investors.

Government officials have repeatedly said the emergency spending and aid to low-income families triggered by the pandemic will end on Dec. 31, and that efforts to reduce the record deficit and debt begin in earnest next year.

“What is being studied is a future where there is a pandemic or a war, an emergency that puts pressure on the public finances. How will we react?,” the ministry source said.

“Inserting a ‘public calamity’ clause in the Federative Pact constitutional amendment -- it’s nothing more than taking what we have learned from this whole crisis. This is what we are looking at,” the source said.

The source said more details on Renda Cidada - which will respect the government’s key spending cap fiscal rule - are expected to be provided the week after local elections. The first round is slated for Nov. 15.

“If, after the elections, Congress can come up with something within the spending ceiling, it will be done. If not, it won’t,” the source said.

The government is also considering creating an investment fund to pay for social programs and infrastructure spending, the source said, adding it would be funded by proceeds from privatizations and asset sales.

The source said a transaction tax would help pay for payroll tax cuts and exemptions because it is the “least cruel” of all taxes and is widely supported by business, while easing the payroll tax burden on companies is essential to creating jobs and economic growth. (Reporting by Lisandra Paraguassu Writing by Jamie McGeever Editing by Chris Reese and David Gregorio)