Rousseff Cuts Income Tax and Raises Handouts Before Brazil Vote

Brazil’s President Dilma Rousseff will cut income taxes and raise cash handouts to the poor as her popularity slides ahead of elections in October.

“We will continue making whatever changes are necessary to improve the lives of Brazilians, especially the poor and the middle class,” she said in a televised address yesterday.

Rousseff said she signed a decree to alter the income tax table to raise take-home pay and boosted by 10 percent the value of cash transfers in the Bolsa Familia social welfare program to help keep its 36 million beneficiaries above the poverty line. The Finance Ministry’s press office declined to comment when asked for details on the measures.

Rousseff’s support among voters is falling six months before elections as growth slows and above-target inflation accelerates. Her narrowing lead in polls against potential opposition candidates prompted 20 lawmakers from her coalition to urge former President Luiz Inacio Lula da Silva to replace her as candidate for the ruling Workers’ Party.

“We never expected her to stand idly by,” said Joao Augusto Castro de Neves, senior Latin America analyst with political risk consulting firm Eurasia Group, said by phone. “The fact that she’s in the government and steering the political machinery gives her room to react. That’s what we’re starting to see.”

Rousseff’s Support

Rousseff’s support fell to 37 percent from 44 percent in February in an April 20-25 survey that pitted her against Aecio Neves and Eduardo Campos. Support for the senator and former governor increased 4.6 percentage points to 22 percent and 1.9 percentage points to 12 percent respectively, according to the MDA poll commissioned by the National Transport Confederation. The survey has a 2.2 percentage point margin of error.

Lula in an interview with bloggers published last month said Brazil could be in a better economic situation and urged Rousseff to present clear plans to speed growth. Gross domestic product expanded 2 percent annually during her first three years in office, the slowest average pace for a Brazilian president since Fernando Collor, who resigned in 1992 amid corruption allegations.

“In recent years, Brazil has proven it is possible and necessary to maintain stability while ensuring wages and employment,” Rousseff said in the speech commemorating Labor Day, which is celebrated today in Brazil.

Fiscal Targets

Altering the income tax table may make it harder for Rousseff to meet fiscal goals, according to Andre Perfeito, chief economist at Gradual Investimentos.

Brazil posted a primary surplus of 1.75 percent of GDP in the year through March, shy of this year’s target of 1.9 percent, the central bank said yesterday in a report. The surplus excludes payments on interest.

“Cutting taxes is good for the economy, but we have to see how it will change government revenue,” Perfeito said by phone from Sao Paulo. “Cutting income taxes to the middle class, especially the poorest one, is a good thing, not bad. But I’m worried about the fiscal situation above all.”

A near-record low unemployment rate of 5 percent, expanded social welfare programs and increased spending on public housing have helped Rousseff keep the lead in the presidential race. Her policies also have stoked inflation that has a 40 percent chance of breaching the 6.5 percent upper limit of policy makers’ target range, according to the central bank.

Consumer Prices

Consumer prices rose at an annual average rate of 6.08 percent from 2011 to 2013, outpacing the 5.37 percent of the preceding three years and the 4.5 percent mid-point of policy makers’ target. The central bank has responded by raising the benchmark interest rate in nine straight meetings to 11 percent.

Brazil’s government will contain inflation that has accelerated in large part because of temporary factors, Rousseff said.

“Inflation will remain rigorously under control,” she said. “In some periods of the year, I know there have been localized price increases, especially food. While these increases are nuisances to families, they are temporary and in most cases caused by climatic factors.”

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