The administration of Brazil's President Luiz Inácio Lula da Silva has suffered a major defeat over a key financial transactions tax which accounts for US$ 20 billion in annual revenue. The bill fell four votes short of at least 49 needed in the Senate to renew the tax, known as the CPMF, for four more years.
The failure to renew the tax, which expires on December 31st, could have implications for important anti-poverty programs in the country like the Bolsa Família (Family Voucher) and is also a significant blow for Lula.
As a constitutional measure, the renewal of the tax until 2011 needed the support of at least 49 of 81 senators. However, only 45 senators voted in favor.
The longstanding tax, which was created in 1993 with a different name (IPMF – Temporary Tax on Financial Transactions) represented about 10% of the government's revenue. However, the CPMF (Temporary Contribution on Financial Transactions), which involved a charge (0.38%) on all financial transaction such as bank withdrawals, was unpopular among many sections of Brazilian society.
Critics said the tax was meant to be a temporary measure to subsidize health care but the revenue was used for other things and it required poorer sections to pay as much as the better off.
Ministers conceded that Brazil needed to lower its tax burden, but argued that removing such a major source of revenue that was vital to maintain many social policies was not the way to reach this objective.
The tax extension had already passed in Brazil's lower house of Congress, but senators who opposed the bill argued that the CPMF has elevated the nation's tax burden as government spending rose faster than economic growth.
They also said the tax hurts the poor and isn't needed anymore because the government's overall tax receipts have increased sharply as Brazil enjoys a sustained economic boom.
The government spends about 45% of CPMF revenues on anti-poverty efforts, 40 percent goes to health care and about 15 percent is used to help cover social security benefits, the Finance Ministry said.
The food program distributes US$ 379 million a month to 45 million of Brazil's 185 million citizens so they can buy food, the government says. The main requirement is that families pledge to keep their children and get them vaccinations.
Lula da Silva's administration could try to cut spending from the 2008 budget to make up the CPMF shortfall, or seek to have other taxes raised to reduce the deficit.
Jose Múcio, Lula's primary liaison with Congress, said the administration hasn't decided yet how it will find money to fund social programs and health care for the needy but "must look for new ways to make sure these Brazilians aren't left out."
Dilma Rousseff, the president's chief of staff, called an emergency meeting of top ministers at the presidential palace to plot strategy on how to make up the budget shortfall.
The defeat came despite the election a short time earlier of a government ally, Garibaldi Alves, as the new president of the Senate. His predecessor, Renan Calheiros, also a supporter of President Lula, had to resign over a long-running corruption scandal.
However, with local elections due the next year, it seems opposition parties were not in the mood for compromise over tax. The defeat has also exposed the government's inability to manage a key part of its own agenda.