Brazil - BRAZZIL - President Cardoso's Bittersweet Reelection - Brazilian Politics - October 1998


Brazzil
October 1998
Politics

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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.

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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