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Brazil's interim President Michel Temer gestures near Brazil's Finance minister Henrique Meirelles during a meeting with leaders of the Chamber of Deputies and Federal Senate, at the Planalto Palace in Brasilia, Brazil June 15, 2016. REUTERS/Ueslei Marcelino

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By Alonso Soto and Maria Carolina Marcello

BRASILIA (Reuters) - Brazil's interim President Michel Temer proposed on Wednesday a constitutional amendment to limit public spending growth for up to 20 years, one of the most far-reaching fiscal reforms in decades designed to curb a runaway rise in public debt.

Brazil's government, including the legislative and judiciary branches, will be obliged to limit annual spending growth to the inflation rate of the prior year if the flagship reform is approved in Congress, according to a Finance Ministry statement.

The move signalled a victory for economic hardliners in the cabinet, led by Finance Minister Henrique Meirelles, who overcame calls from a faction pushing for a shorter cap.

Meirelles told a news conference a decisive move was necessary to restore investor confidence and the period would be long enough to have an impact on public debt levels.

Brazil posted a fiscal deficit of more than 10 percent of gross domestic product last year as its economy slid into the worst recession in decades. The rapid deterioration of public accounts has cost the country its coveted investment-grade credit ratings.

Meirelles said the spending cap could be relaxed after 10 years, by which time the government hopes Brazil's public debt situation will have improved.

Federal institutions that do not comply with the spending cap will be barred from hiring new employees, Meirelles added.

The leader of Temer's ruling coalition in the lower house, Andre Moura, told Reuters the constitutional amendment was well-received by Congressional leaders and would be presented to the lower house in 60 days.

He voiced confidence that it would be approved by legislators this year. The amendment requires three-fifths approval from the legislature.

A source close to the discussions, which went on until early on Wednesday, told Reuters Temer was considering a shorter time limit for the spending ceiling, until the end of the next presidential term at the start of 2023.

Temer rejected the idea of making the ceiling permanent to facilitate the approval of the constitutional amendment, seen as unpopular with ordinary Brazilians.

(Writing by Silvio Cascione; Editing by Daniel Flynn, Lisa Von Ahn and David Gregorio)

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