Brazil’s Lula Learns the Lesson of Not Planning Ahead

Brazil Balbina's hydroelectric plant

Towards the end of 2007 one of President Luiz Inácio Lula da Silva’s senior
advisers said the government had no Plan B to fall back on should Congress fail
to prolong the CPMF tax on financial transactions. This was an understandable
position to take since very few people at that time thought that would happen.

However, it became gradually clearer as the deadline approached that the government was in danger but since it had no Plan B it was swept away by the vote. The result is that Lula now finds himself facing more problems than he could have imagined only a couple of months ago when life looked rosy thanks to a dynamic economy.


Now he has to contend with running the country with 40 billion Brazilian reais (around US$ 18 billion) less than he budgeted for. To do so, he said the government would have to cut expenditure to the bone by 20 billion reais and raise taxes in other areas. Not surprisingly this message has not been well received by the politicians and employees in the public sector nor by individuals and companies in the private sector.      


When the CPMF tax bill was rejected by the Congress the opposition parties and business lobbies behind the campaign were ecstatic. They felt they had shown the country that a well-organized operation had forced the government to accept that its tax-and-spend days were over. At first it looked as though the government had accepted that point and Lula accepted defeat graciously.


However, the opposition’s pleasure did not last long and the finance minister, Guido Mantega, reversed course and announced that two other taxes – the IOF, also levied on financial transactions, and the CSLL, on corporate earnings – would be increased through a presidential decree. 


This outraged the opposition which claimed it was unconstitutional and immoral as it broke the principle of no taxation without representation and said Congress should vote on the matter. The DEMs (ex-PFL) which led the main opposition have appealed to the Supreme Court to have the decree overturned. They intend leveraging the success of the previous campaign and lead another struggle across the country.


It is doubtful that any second such campaign would be as successful since the IOF does not apply to every single financial transaction as was the case with the CPMF and so will not be as widely unpopular. The IOF is a more general tax unlike the CPMF which was supposed to be a temporary tax to provide revenues for the public health service.


Instead it was increased and used for other purposes. This was one of the reasons for the strong opposition to it in all sectors. However, there is no doubt that Lula will have a tough time getting his budget through Congress not just in the face of resistance from its political opponents but also from within the governing alliance as ministries and departments scramble to save their own pet projects.


Another force of opposition will come from the public employee unions. The government has said the only pay increase this year will be in the minimum wage and all others will be frozen as part of its cost-cutting package.


The public employees not only include manual and skilled workers, the armed forces, bureaucrats in ministries and the Central Bank but also the judiciary which is always ready to scream at any infringement of its privileges. (Judges are entitled to two months holiday a year and have all kinds of cushy job protection and pension schemes, for example.)


The administration has handled this matter ineptly. The economic team announced the decision to increase the taxes without informing the leaders of the government’s own allies. It tried to say that only banks, which have been making huge profits in recent years, would be affected and they could afford it.


Not only was this faulty reasoning, as everyone knows the banks will just pass on any increase to their clients, but it turned out that other sectors will also be affected. The government also broke pledges to provide resources for Congressmen’s amendments within the budget and a promise to give a wage increase to the military.


As if that were not enough, the specter of energy rationing has raised its head again as the lack of rain in many regions has reduced the water level of reservoirs at hydroelectric power plants. This raises fears that there might not be enough energy to meet the growing demands raised by Brazil’s booming economy.


A row broke out within the administration after a senior official at the national system operator refused to rule out the possibility of rationing this year. Lula called an emergency meeting and said he would not tolerate any kind of power rationing.


Should this occur then it would be a major embarrassment as Lula and his Workers Party (PT) were vehement critics of the period of rationing during the Fernando Henrique Cardoso administration in 2001.


Whereas the CPMF defeat was initially unexpected, there has been nothing unexpected about the power crisis. This is an issue which has never been off the agenda yet once again the country faces the possibility of rationing.


Brazilians are not known as great planners and organizers. This is not necessarily a criticism because they are great at improvising and reacting to negative events but it is surely time that Lula realized that running a government means more than shouting demands at ministers and making speeches to supporters.


Despite the setback Cardoso faced, he at least set up a highly efficient task force which imposed practical measures and the problem was overcome within 10 months. Lula, for his, part is traveling to Cuba at the time of writing where the question of energy rationing will presumably be out of his mind.


John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at jf@celt.com.br.


© John Fitzpatrick 2008

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