By Paulo Trevisani

BRASÍLIA -- Brazil's Congress on Tuesday gave its final approval to a bill softening debt-repayment conditions for cash-strapped states to the federal government, while removing some austerity measures the central government sought to impose.

The bill now goes to President Michel Temer, who must decide whether to sign the bill or veto it. His office had no immediate comment on his intentions.

The bill has been criticized by some economists, who say Brazil won't achieve sustainable economic growth unless public finances are cleaned up.

"State governments never adjusted their finances" according to José Carlos de Oliveira, an economist at University of Brasília, who said the deal rewards profligate spending. "States are in a chaotic situation because they were irresponsible."

In their last session before a month-long recess, lawmakers voted 296 to 12 to provide debt relief for states including Rio de Janeiro and Rio Grande do Sul, which are struggling to pay salaries and other daily expenses.

If President Temer signs the bill, Brazil's 27 states would be eligible to get 20 more years to pay down their debt to the federal government, with reduced payments until 2018 and lower interest rates. In exchange, for two years they would have to cap their annual spending growth at the previous year's inflation rate.

The finance ministry didn't immediately have an estimate of how much the deal would cost the central government, which is struggling with its own fiscal difficulties. The ministry, which will still have the last word on who gets the relief, said in a note it will ensure only states that offer a reliable fiscal-adjustment plan will benefit.

Brazil's budget deficit stood at 8.8% of gross domestic product in October, and gross debt was at 70.3% of GDP, according to the most recent data available. The worsening fiscal conditions led major credit-rating firms to strip Brazil from its investment grade last year, and economists say it will take years to see any meaningful improvement.

State governments have historically relied on the national treasury to cover regional budget holes. That habit has resulted in fiscal crises at both the federal and the state level in the past, usually ending with the federal government footing a good chunk of the bill.

Write to Paulo Trevisani at paulo.trevisani@wsj.com

(END) Dow Jones Newswires

December 20, 2016 16:48 ET (21:48 GMT)

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