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Unions Lula Loved Test Brazil Austerity Plan With Strike Threat

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Feb. 8 (Bloomberg) -- Brazilian President Dilma Rousseff, whose Workers’ Party rose to power because of ties to the labor movement, is being tested by public employees threatening to strike for higher pay.

Civil servants won eight years of wage increases above inflation under former President Luiz Inacio Lula da Silva. They now believe Rousseff has become a “hostage” of the global financial crisis during her first year in office, denying raises to keep spending down, said Pedro Armengol, public sector coordinator of CUT, Brazil’s biggest labor confederation.

“If by March we don’t have a real negotiation, with numbers on the table, workers will use their fighting tools to pressure the government,” Armengol said in a telephone interview from Brasilia. “It could come to a general strike.”

Rousseff, 64, is trying to curb spending that her mentor Lula inflated so the central bank can continue the cycle of interest-rate cuts it began in August to shield Brazil from Europe’s debt crisis. The task is being complicated by calls for spending from her coalition in Congress and 140 billion reais ($80 billion) in infrastructure investments that Brazil needs to host the 2014 World Cup and 2016 Olympics.

Total federal public wages rose 2 percent above last year’s inflation rate, which was 6.5 percent. The average annual increase for public servants during Lula’s second term was around 7 percent in real terms, according to Tendencias Consultoria Integrada, an economic research firm in Sao Paulo.

Major Raise

Federal employees last won a major raise in 2008, during Lula’s second term, when he granted them 35 billion reais to be spread over five years, according to the Planning Ministry. This year, public workers and retirees are asking for 40 billion reais, about 22 percent of personnel costs last year.

If Rousseff yields to pressure, it could put at risk fiscal targets already strained by slowing economic growth, said Braulio Borges, chief economist of LCA Consultores. Brazil this year is seeking to boost to 139.8 billion reais its budget surplus before interest payments for the federal, state and local governments, the equivalent of 3.1 percent of gross domestic product.

“To meet the primary surplus target, she has to hold down civil service expenses,” said Borges in a telephone interview from Sao Paulo. “It’s a fight that’s worth pursuing.”

Rousseff’s Secretary General Gilberto Carvalho, who is responsible for negotiations with the public employee unions, declined to comment when contacted by Bloomberg News.

Stalled Economy

Latin America’s biggest economy contracted in the third quarter for the first time in more than two years. To boost growth that Rousseff hopes will reach 4.5 percent this year -- above the 3.3 percent forecast by analysts -- the government is lowering interest rates, cutting taxes and loosening lending requirements.

Brazil’s benchmark Bovespa stock index has risen 16 percent this year, after an 18 percent plunge in 2011, while the real has rallied 8.2 percent. The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries has fallen 22 basis points this year to 203, according to JPMorgan Chase & Co.

The payroll for Brazil’s 1.4 million active and retired civil servants consumed 22 percent of the federal government’s net revenue last year. That compares with 5.8 percent it spent modernizing roads, ports and other infrastructure that it needs to make the economy more competitive.

Heavy Tax Burden

With the minimum wages used to calculate pension payments set to rise 14 percent this year -- more than double last year’s 6.5 percent inflation -- the room for more spending is limited, said Tendencias economist Felipe Salto. He estimates Brazil’s tax burden in 2011 at 34 percent of GDP, one of the highest among emerging markets, making it “very difficult” for the government to increase taxes to fund more spending.

As part of her bid to trim 60 billion reais in spending last year from the 2.3 trillion reais budget, Rousseff froze federal hiring and shelved Lula’s plans to buy a fleet of fighter jets. She’s also fired seven ministers amid allegations of corruption, moves that sparked criticism from coalition parties that grew accustomed under Lula to using control of ministries to award contracts to allies.

Rousseff plans to announce another round of belt tightening this month. She’s also pushing Congress to pass legislation that would replace the state-run pension system for federal employees with a privately-managed one, a move that would gradually eliminate a shortfall responsible for a third of Brazil’s 94 billion reais public deficit last year.

Cold Shoulder

The last time public servants carried out a general strike was in 2001, at the end of President Fernando Henrique Cardoso’s second term. The work stoppage lasted 45 days before unions began returning to work.

Paulo Pereira da Silva, head of Forca Sindical, the second-biggest union umbrella group in the country, said that Rousseff has turned a cold shoulder to the labor movement.

While Lula, during his two terms as president, talked to the union leader “almost every day,” Rousseff has met with him briefly just twice since she was elected in October 2010, Silva said.

“It’s hard not to get along with someone who negotiates like Lula,” said Silva, who is also a lower house lawmaker for a party belonging to Rousseff’s coalition. “We had a direct link.”

Calling in Lula

Unlike Lula, 66, who grew up in poverty and helped found the Workers’ Party in the 1980s as head of the metalworkers’ unions near Sao Paulo, Rousseff didn’t join the PT until the eve of his election in 2002. An economist by training, she’s a lover of opera and French literature.

“Dilma is new in the party, without Lula’s history, leadership and emotional appeal,” said Rogerio Schmitt, a political analyst for consulting firm Eyes on Future in Sao Paulo. “Lula could actually be the exception, not the rule, regarding general strikes, since he’s the only one who managed to avoid them.”

Unions have become more combative since Rousseff took office. A monthlong strike last year by postal workers forced consumers to wait in long lines to pay undelivered utility bills. Bank workers, teachers and metal workers have also walked off the job in the past year to demand higher wages.

Still, a general strike now would damage the PT’s standing with union campaign contributors heading into October’s municipal elections more than the president’s, said Leonardo Barreto, a political scientist at the University of Brasilia. Rousseff has a 59 percent approval rating, the highest of any president after the first year in office since direct elections resumed in 1989, according to a Jan. 22 survey by Sao Paulo-based polling firm Datafolha.

If a strike does appear imminent, Rousseff also has an ace up her sleeve: Lula.

“Defusing the bomb is something he would gladly do,” said Schmitt.

To contact the reporters on this story: Maria Luiza Rabello in Brasilia Newsroom at; Carla Simoes in Brasilia Newsroom at

To contact the editor responsible for this story: Joshua Goodman at

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