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Brazil Minimum-Wage Fight May Derail Austerity Drive

Brazil's President Dilma Rousseff
Brazil's President Dilma Rousseff. Photographer: Vanderlei Almeida/AFP/Getty Images

Brazilian unions remain at odds with President Dilma Rousseff over the country’s minimum wage after labor leaders met with her finance minister today to push for a bigger raise than the government has endorsed.

The country’s monthly minimum wage rose 62 percent in real terms under Rousseff’s predecessor, former metalworker Luiz Inacio Lula da Silva, and she favors lifting it an additional 6.8 percent this year to 545 reais ($327) using a formula set by the unions and Lula in 2006. Finance Minister Guido Mantega, after meeting with labor leaders today in Sao Paulo, said the government “won’t budge” in the face of demands by unions for a boost to 580 reais.

If Rousseff yields, it could derail her plans to curb spending needed to cool inflation running at a two-year high and bring down the second-highest real interest rates in the Group of 20. Under the formula, which is tied to inflation plus economic growth of two years prior, spending is already set to increase 10 billion reais this year because pension benefits are indexed to the wage. A bigger headache waits in 2012 when the wage adjustment may boost spending by 20 billion reais.

“This is a bomb that Dilma prefers not to disarm now,” said Christopher Garman, director for Latin America at Eurasia Group, a Washington-based political risk group. “She may pay a high price for keeping the agreement brokered by Lula. It will make it harder to achieve fiscal austerity later in her term.”

No Lula

Rousseff, who took office Jan. 1, may lack the skills that allowed her mentor Lula, a former union leader, to thrive in negotiations with workers and Congress, Garman said in a telephone interview. Her secretary general, Gilberto Carvalho, will meet with Brazil’s six biggest union federations today in Sao Paulo to discuss a deal on salaries this year and next.

“We don’t believe in the need to contain spending,” Paulo Pereira da Silva, a congressman from Sao Paulo state and head of Forca Sindical, the country’s No. 2 labor federation, said in a phone interview. “That’s what the market wants.”

Congress is expected to vote on the wage increase by March.

If Rousseff offers a higher increase now in return for a lower raise next year, the unions won’t agree, said Pereira, whose Workers’ Democratic Party is a member of the government’s six-party coalition in the lower house.

Under current rules, Brazil’s recession in 2009 during the global financial crisis should help keep wage increases in check this year. The INPC price index used to adjust the wage rose 6.47 percent last year, while the economy shrank 0.2 percent in 2009.

Growth Easing

With growth in Latin America’s biggest economy easing from last year’s estimated 7.3 percent, and inflation accelerating to 6.04 percent in the year through mid-January, workers will have difficulty matching the real wage gains of recent years, Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, said in a note to clients Feb. 3.

A higher wage may fuel inflation. Average workers’ salaries last year jumped 3.8 percent in real terms as unemployment fell to a record low 5.3 percent, according to the national statistics agency.

Rousseff, in a speech at the opening session of Congress Feb. 2, told lawmakers she is committed to “maintaining a macro-economic policy compatible with fiscal balance, a firm control of inflation and rigorous use of public money.”

While promising to continue Lula’s policy of granting workers’ wage increases above inflation, she said stable rules needed to be put in place so that the salary gains are “compatible with the state’s financial capacity.”

Contain Spending

Rousseff, 63, has pledged to contain spending, and her economic team is working on a proposal to cut this year’s budget, in a bid to lower interest rates. The government must increase spending by 286.4 million reais for every one-real increase in the minimum wage, according to the Budget Ministry.

Policy makers last month raised the benchmark rate for the first time since July to 11.25 percent. The central bank will boost the overnight rate by at least an additional 50 basis points, or 0.5 percent, at its March meeting, Bloomberg estimates based on interest rate-futures show.

Central government outlays accelerated in 2009 to help Brazil recover from the financial crisis, and sped up again in 2010 in the run-up to Rousseff’s election, Treasury figures show. Expenditures in 2010 jumped 22.4 percent to 700 billion reais after rising 14.9 percent in 2009.

The country’s budget surplus before interest payments, the so-called primary surplus, reached 2.8 percent of gross domestic product last year, falling short of the government’s 3.1 percent target.

Wage Concessions

The need to reduce spending will limit Rousseff’s ability to make wage concessions, said Rafael Cortez, a political scientist at Tendencias Consultoria Integrada.

“Besides cuts in spending, the government will need to deliver a primary budget surplus equal to 3 percent of GDP,” Cortez said in a telephone interview from Sao Paulo. “That doesn’t leave room for a minimum wage much higher than 545 reais.”

The squeeze on resources is being compounded by Rousseff’s pledge to invest 955 billion reais over the next four years to modernize the country’s airports, improve roads and carry out infrastructure improvements ahead of hosting the 2014 World Cup and 2016 Olympics.

Boosting the minimum wage has a ripple effect throughout the budget because it’s used to annually adjust pension payments and some welfare benefits. Garman estimates that almost 80 percent of the increase in current expenditures under Lula was tied to the minimum wage. Rousseff needs to create a new formula in order to make annual increases more sustainable, he said.

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