Levy Pitches Budget Cuts and Tax Hikes to End Brazil Deficit

  • Government plans to cut $6.8 billion in spending next year
  • Minister pitches revival of tax on banking transactions

Can Rousseff and Levy Hang On to Power in Brazil?

Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades.

The government will reduce expenditures by 26 billion reais ($6.8 billion) next year in large part by capping salaries of civil servants and trimming social programs, Levy said Monday. Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions.

“We know this effort to cut spending will only take us so far, so as would happen in any country in the world in a moment of reduced economic activity and tax income, you have to seek out other resources,” Levy told reporters. “We’re trying to find that balance.”

Joaquim Levy

Joaquim Levy, Brazil's finance minister.

Photographer: Simon Dawson/Bloomberg

The government wants to post a budget surplus next year rather than a deficit as previously forecast. Standard & Poor’s cited the 2016 gap as a key reason for cutting Brazil’s sovereign-debt rating to junk last week.

"We should thank S&P for this" fiscal-austerity proposal, said Joao Paulo Peixoto, a political science professor at the University of Brasilia. "This is only happening because of the pressure from the downgrade."

Cutting Back

The government plans to save 20.6 billion reais in spending by cutting back on programs that provide sanitation, housing, technical training and broadband. The government will save 7 billion reais by delaying wage increases for some civil servants.

The levy on banking transactions entails reviving a tax known as CPMF that expired in 2007, albeit at a lower rate of 0.2 percent this time, Levy said. Brazil’s banking federation showed some support for CPMF in a statement, as long as it’s a temporary measure that declines over time as the minister proposed.

The government in August scrapped plans to reintroduce CPMF after congressional leaders expressed opposition. Lower house leader Eduardo Cunha, a critic of the government, on Monday said that while some of Levy’s proposals would win approval in Congress, the banking tax probably wouldn’t.

"It’s a controversial issue," he said about the tax. "It’s unlikely to pass through Congress because support for the government is weak."

Political Crisis

Another element of Levy’s pitch that risks congressional resistance would require lawmakers to redirect funds they receive for health and infrastructure projects to programs prioritized by the government.

President Dilma Rousseff is struggling to defuse an economic and political crisis that has prompted a selloff of Brazilian assets this year. The real, which plunged to a 12-year low the day after the S&P downgrade, appreciated 1.5 percent to 3.8154 per U.S. dollar Monday on news of her minister’s spending plan.

The government will target a budget surplus that excludes interest payments of 34.4 billion reais in 2016, which is equal to 0.7 percent of gross domestic product, Levy said. That would entail combined savings and extra revenue of about 65 billion reais.

The projected surplus offers a stark contrast to the government’s Aug. 31 estimate that Brazil would post a primary deficit equal to 0.5 percent of GDP next year. The forecast caused the real to plunge and fueled speculation the minister’s failure to shore up fiscal accounts would force him out of the government.

Impeachment Threat

Since then, calls to impeach Rousseff have gained traction as a growing number of Brazilians question her ability to end the recession. Consulting firm Eurasia Group wrote in a report Monday that the political and economic woes were increasing the odds that Rousseff wouldn’t finish her term.

Yet some signs are emerging that Rousseff is gaining support to stay in office. The leader of the biggest party in Congress on Monday said its relationship with the government has improved and that only a minority of its members support impeachment.

Cristiano Noronha, vice president at political research company Arko Advice, said Levy’s proposal could help Rousseff by at least delaying another credit downgrade. S&P’s outlook on Brazil is negative while Moody’s Investors Service ranks Brazil at its lowest investment grade.

Monday’s budget pitch "gives the government a bit of breathing room,” Noronha said.

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