Flash Note 15/09/2015. Brazil - Finally, a coherent response from
government
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Brazil's government announced a number of impressive spending cuts
and tax increases totaling 65 billion reais ($16.9 billion) in order to close a
budget deficit that led to a downgrade of the country's credit rating last week.
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The biggest item was the revival of the unpopular CPMF (tax on
financial transactions) that will raise 32 billion reais next year if it passes a
Congress opposed to new taxation.
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The drastic cuts also affect to general subsidies (in agriculture,
infrastructure investments, government salaries and bonuses, as well as
public health and low-cost housing programs).
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The government already reduced tax subsidies for the chemical
industry, cut refunds to exporters of manufactured goods and raised the
capital gains tax to up to 30 percent.
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The party's flagship conditional cash-transfer program for poor
families called Bolsa Familia was not touched by the cuts.
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The latest round of fiscal measures are meant to bridge a shortfall of 30
billion reais in next year's budget that President Dilma Rousseff sent to
Congress last month and reach a budget surplus of 0.7 percent of GDP before
interest payments.
•
The fiscal savings look good on paper but they must first to pass the
Congress without being diluted, something that have to be seen first.
•
The decision to replace Mercadante with other person outside the PT
(Dilma’s party) could facilitate the extension of bridges with the PMDB’s
lawmakers in Congress, giving more chances that these much needed measures
are approved. However, the speaker of the lower house, Eduardo Cunha
(member of the PMDB) , said Rousseff's administration lacked the support
needed in Congress to approve the reinstatement of the CPMF tax.
•
The recent downgrade (by S&P) appeared to strengthen Levy's position
(the Chicago boy, who is in favor of deficit-cuttin austerity measures). Recently,
his push for deeper spending cuts to improve Brazil's finances and avoid a loss
of investment grade faced resistance in the cabinet and Congress. Levy said the
CPMF tax would be levied for at least four years and revenues would go to fund
Brazil's pension system. He said the tax was temporary, a bridge to see Brazil
through the fiscal crisis until bigger reforms can be made to the country's costly
pension and social security systems.
•
The banking lobby Febraban backed the return of the CPMF tax, but said
it should be temporary.
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Brazil's benchmark Bovespa stock index rose 1.9 percent on expectation
of the cuts, the biggest daily gain in six sessions. The BRL currency rallied 1.7
percent on media reports of the cuts to be announced, its largest single-day
gain in more than a month.
Regards
(Source: Reuters)
Àlex Fusté Mozo
Chief Economist
Andbank