Dubious Landslide

Dubious
    Landslide

Since President Fernando Henrique Cardoso’s re-election, his
economic team has been working on a fiscal package with tough measures. The government’s
intention is to turn the $9.7 billion deficit projected for 1999 into a $13.7 billion
surplus at the federal government level alone. But the future seems grim. Is recession
next? Some experts think so.
By Marta Alvim

On October 4, Brazilian voters re-elected President Fernando Henrique Cardoso (FHC) by
a landslide, handing him a vote of confidence in spite of news that, after the election,
tough economic measures would ensue as an attempt to rescue Brazil from the ongoing global
market chaos.

Cardoso, the first Brazilian President to run for re-election in Brazil’s history, won
the first round with 53% of the votes, while his main opponent, Luis Inácio Lula da
Silva, trailed with 32%. However, FHC’s triumph was bittersweet to say the least. Apart
from the millions of blank and null votes cast by a frustrated electorate, several of
Cardoso’s important allies were also defeated in key state gubernatorial elections.

Moreover, the President’s margin of victory in Brazil’s major capitals and cities was
much narrower than what had been predicted by the country’s polling institutes as well as
by his own advisors. The message sent by the voters was clear: they are neither happy with
the current economic situation nor in favor of austerity; if they voted for the victorious
candidate, it was mainly due to a lack of a better choice.

Since Cardoso’s re-election, his economic team has been working on a fiscal package,
aiming to save some $23.5 billion in 1999 alone by means of spending cuts and tax
increases. The austerity plan is a condition imposed by the International Monetary Fund
(IMF) and other international lending agencies if Brazil is to be bailed out of its
financial woes by emergency loans from those institutions. What remains to be seen,
though, is whether Congress will approve the tough measures, and whether state governors
will back them up as well.

Under Brazil’s constitution, governors have broad independence on financial matters,
such as taxing and spending. Moreover, they exercise a great deal of influence over local
congressional delegations, who are key to the approval of the austerity plan. Since House
representatives are elected by proportional representation, the defeat of FHC’s allies in
powerful states, such as Rio de Janeiro, Minas Gerais and Rio Grande do Sul, will
certainly be troublesome for the President, especially when the time comes to pass the
reform of the ailing social security system, the proposed tax hikes and the comprehensive
spending cuts.

On the other hand, FHC’s losses in key states may somehow be offset by the victory of
São Paulo governor Mário Covas, a long-time friend and supporter of Cardoso who is
credited with rescuing the state from an imminent bankruptcy during his first term as São
Paulo’s governor. Brazil’s richest state, São Paulo accounts for 70 out of the 513
congressional seats.

According to Finance Minister Pedro Malan, the government’s goal is to turn the $9.7
billion deficit projected for 1999 into a $13.7 billion surplus at the federal government
level alone. States and municipalities will have to post a $3 billion surplus, the same
performance being expected from all state-owned enterprises. That would represent a
primary budget surplus (excluding debt costs) of 2.6% of gross domestic product (GDP) in
1999. For 2000 and 2001, Minister Malan forecasts a surplus of 2.8% and 3% of GDP
respectively.

If those goals are achieved, the government expects that the current interest rates of
45% a year will be reduced to an average of 21.89% next year, with further reductions in
the following two years, when they would reach 16.88% in 2000, and 13.37% in 2001.
Subsequently, the public deficit, which has reached 7.5% of GDP would drop to 4% of GDP in
1999, to 2.5% in 2000, and to 2% of GDP in 2001.

Since the proposed $7.3 billion in budget cuts will not be sufficient to balance
Brazil’s accounts, the new package has also established an increase on the financial
transactions tax—also known as the "check tax" (CPMF)—which would
boost revenues by approximately $6 billion a year. In addition, the fiscal package plans
to raise public servants’ contributions to social security, a measure that will likely be
met with fierce resistance by Congress.

While it is unfair that all these years public workers have contributed less to social
security than their private sector counterparts, critics of the tax hikes argue that the
problem is not how much the government collects in taxes, but how that money is spent. A
case in point is that the much-boasted fiscal plan unveiled by the Brazilian government in
the wake of the Asian crisis a year ago has turned into a big fiasco. Instead of the
plan’s projected $16.7 billion rise in revenues, the public deficit has jumped from 4.8%
of GDP in 1997 to 7.5% this year, largely because states and municipalities continued to
spend indiscriminately, taking advantage of the revenue brought in by the privatization of
state-owned companies. 

Overall, international analysts agree that the austerity plan announced by the
Brazilian government is sensible, and its implementation will determine whether the
expected $30 billion in emergency loans from the IMF and other agencies will be approved
or not. It’s in the hands of Brazil’s capricious Congress to approve the established
measures and the fundamental fiscal reforms without any further delays.

However. no matter how the package is handled, Brazil still faces a grim year ahead.
According to the experts, GDP growth for next year is expected to shrink to approximately
1%, while more pessimistic forecasts see the economy falling into recession.

Marta Alvim is a Brazilian journalist, freelance translator and
interpreter. You can reach her at mltdalvim@yahoo.com
 

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