IPS-English ECONOMY- BRAZIL: Tightening the Belt in Election Year Date: Mon, 07 Jan 2008 15:29:12 -0800 Fabiana Frayssinet RIO DE JANEIRO, Jan 7 (IPS) - Local and regional elections are due in Brazil this year, just when President Luiz Inácio Lula da Silva is being forced to increase taxes and cut spending. His challenge is to maintain his political footing and avoid losing votes. The problem began in December, with what some analysts regard as his worst political defeat yet. Congress refused to renew the ”cheque tax” (Provisional Contribution on Financial Movements, CPMF), depriving the treasury of 22.8 billion dollars a year that were essential for balancing its accounts. Finance Minister Guido Mantega had promised not to increase other taxes to compensate for the lost revenue, but last week he backtracked and raised taxes as well as announcing austerity measures in public spending. A further 0.38 percent is to be levied on financial operations -- which increases the cost of bank loans -- and on bank net profits. The government says this will bring in about 5.7 billion dollars. The other measure announced is budget cuts for the legislative and judicial branches and ministries, with the aim of saving some 11.5 billion dollars. Apparently, the amount available for ministries to spend on social projects could be affected. Analysts say that the measures taken limit the possibilities for political negotiations in Congress, for instance for the passage of the 2008 national budget, which is due to be debated in February after the parliamentary recess. Spokespersons for the opposition, including Senator Arthur Virgilio of the Brazilian Social Democracy Party (PSDB), which is the party of former president Fernando Henrique Cardoso (1995-2003), threatened to sabotage approval of the annual budget. The goal, according to Virgilio, would be to force the government to abandon its tax package. The opposition states that these measures could be avoided by cutting unnecessary spending and combating corruption. The opposition says that the government failed to keep its word when it increased taxes after having promised not to at the end of 2007. ”We consider that the 'cheque tax' was not approved because Brazilian society wants the government to understand that it wants tax cuts, not increases,” economist Joao Paulo dos Reis Velloso told IPS. ”Lula is being insensitive,” he added, pointing out that taxes represent 37 percent of gross domestic product (GDP) in Brazil, a higher proportion than in the United States, even though ”we are a middle-income, not a high-income, country.” Velloso, the head of the Brazilian Capital Market Institute (IBMEC), said that ”consumers will end up paying” for the tax on financial operations. The government said the 0.38 percent increase will not be applied to mortgages, but will affect loans for the purchase of cars, household appliances and products incorporating information technology, which middle and lower-income consumers have become accustomed to taking out in the past few years. Velloso pointed out that credit is already expensive in Brazil, which has some of the world's highest interest rates. For instance, the annual interest on a car loan is about 30 percent, he said. In the economist's view, the loss of revenue due to the discontinuation of the ”cheque tax” could have been compensated for by cutting bureaucracy. ”Brazil is the only country to have 36 ministries,” he said. The government issued reassurances that social spending will not be cut, and that programmes like the ”bolsa familia”, which provides financial aid to 11 million poor families on condition that their children stay in school and are vaccinated, will be allocated more resources, not less. Eustaquio Reis, a researcher at the state Institute for Applied Economics Research (IPEA), said this promise would be honoured. However, he said that the government has ”less freedom of movement to carry out programmes of fundamental national interest in a year when local municipal elections are to be held in October.” Otherwise, ”it might have achieved better political results,” although the situation is ”not really tragic” for the authorities, he said. According to Reis, the government will be able to compensate for the lost income from the ”cheque tax” with the ”spiral increase in revenue” due to economic growth. Tax income increased significantly in 2007, and could rise again this year if the economy continues to expand as expected. The Lula administration announced GDP growth of more than five percent for 2007. Reis also says that increasing the tax on financial operations will make it possible to sustain social programmes like the ”bolsa familia”. The government announced that benefits will be extended to at-risk young people aged 15 to 17. The opposition is threatening to call on the Electoral Court to review this decision, claiming that it is ”electioneering.” ”The political battle is commencing, in what will be a tough election year,” said Reis, referring to the possible court proceedings and the threats by the opposition to boycott approval of the budget. Reis admitted that hiking the cost of credit ”at a time when the trend is to reduce interest rates” would have a negative impact on the economy, but insisted nevertheless that it would ”not be drastic.” ***** + CHALLENGES 2007-2008: Brazil Seeks Formula for Continued Growth (http://ipsnews.net/news.asp?idnews=40661) + LATIN AMERICA: And Now For Some More Ambitious Anti-Poverty Goals (http://ipsnews.net/news.asp?idnews=40088 ) + CHALLENGES 2006-2007: Growth and Redistribution, Lula's Big Tasks (http://ipsnews.net/news.asp?idnews=36047) + More IPS News on Economy, Trade and Finance (http://www.ipsnews.net/economy.asp) (END/IPS/LA IF IP PR/TRASP-VD-SW/FF/DM/08) = 01080225 ORP003 NNNN