The Brazilian government announced on Tuesday tax cuts and other stimulus measures worth about 65 billion reais (US$ 35 billion) to protect the country’s struggling industry from what she said were “predatory” trade practices by rich nations.
As part of a package of incentives to boost growth, the government will eliminate 12.1 billion reais in payroll taxes through 2013 for employers in industries hardest hit by a surge in imports. State development bank BNDES will also expand subsidized lending, backed by a 45 billion reais injection from the Treasury.
Finance Minister Guido Mantega also pledged to take more measures to weaken the currency, which has rallied 47% since 2005 against the US dollar.
Brazil has been struggling to cope with the currency rally, which has nearly halved the country’s trade surplus from a record 47.8 billion in May 2007. To try and reverse that trend, worsened as rich nations see their currencies weaken with interest rates near zero, Rousseff has already slapped higher tariffs on imports, raised taxes on foreign investment inflows and taken steps to boost consumption.
“We won’t hesitate to do whatever needs to be done, within our laws, to defend our companies, jobs, and growth,” Rousseff told business leaders at the presidential palace in Brazilian capital Brasília. “The government won’t abandon Brazil’s industry.”
The package of incentives, which also includes measures to boost government purchases of locally-made goods and tougher enforcement of trade rules, were announced after a report showed that industrial production rose more than economists expected in February.
Output rose 1.3% in February, but fell 3.9% from a year ago, the national statistics agency said on Tuesday in Rio do Janeiro.
The elimination of a 20% payroll tax, a longstanding demand of Brazilian employers, will go into effect in July for 15 industries including manufacturers of airplanes, computers, car parts and capital goods, Mantega said.
The measures will cost an estimated 4.9 billion Reais in lost tax revenue from this year – 7.2 billion reais in 2013 – and will be partially compensated by a 1% to 2% tax levied on company revenues and higher taxes on imports, Mantega said.
Tax breaks to attract investment to Brazil’s car industry, which had to compete against a 30% surge in auto imports last year, will also be implemented. Carmakers including Daimler AG’s Mercedes-Benz and General Motors Co are among manufacturers that have ordered mandatory worker furloughs in Brazil this year as assembly lines are idled by growth that slowed to 2.7% last year, from 7.5% in 2010.
“It’s not protectionism,” Mantega said during a 56-page presentation to announce the measures, the second phase of the “Bigger Brazil” industrial policy the government announced last year. “But we can’t remain inert while other nations practice hidden protectionism.”
The real was the world’s best performing major currency in the first two months of the year, prompting the government to raise taxes on foreign loans and bonds. Since the beginning of March the currency slid 5.9%, the biggest devaluation amid major currencies.
Over the past year, the Brazilian government has slapped higher tariffs on imports such as shoes, chemicals and textiles, and cracked down on customs fraud. Under pressure from automakers, Rousseff renegotiated a trade deal last month with Mexico that capped car imports for three years.
Tuesday’s production report shows that industry may be recovering after output fell 1.5% in January. Eighteen of 27 sectors monitored by the statistics agency expanded output in February, led by a 13.1% surge in auto production during the month. Assembly of capital goods, a barometer of investment, rose 5.7% after plunging 16.1% in January.
“Whatever the comparison with the international market, Brazilian goods are expensive,” said Paulo Godoy, head of the Brazilian Association of Infrastructure and Basic Industries. Brazilian producer are hurt by the currency, inadequate infrastructure and red tape, he said.
Still, the central bank sees the economy expanding only 3.5% this year and analysts surveyed by the bank see growth of only 3.2%. The government is targeting growth of 4.5%, Mantega reiterated on Tuesday.