Brazil Details Austerity Plan (fwd)

[Robert Weissman <rob@essential.org>]

Brazil Details Austerity Plan
Package of Tax Hikes, Spending Cuts Wins IMF
Endorsement

By Anthony Faiola
Washington Post Foreign Service
Thursday, October 29, 1998; Page A42 

BUENOS AIRES, Oct. 28The Brazilian government today disclosed
full details of its long-anticipated three-year, $84 billion fiscal 
austerity
package, winning praise from the International Monetary Fund and the
Clinton administration. But the plan to save the country from economic
collapse was criticized by some private economists, who said it relies too
heavily on tax increases and will be difficult to implement.

The package of tax hikes, spending cuts and fiscal reforms is central to
Brazil's quest for a loan of about $30 billion from the IMF and other
international lenders, approval of which is seen as critical to restoring
international confidence in the country. The plan would cut $20 billion from
the public deficit in 1999 in line with targets agreed to by the IMF, which 
is
anxious to keep the global financial crisis from hitting Brazil lest it 
spread to
the rest of Latin America and beyond.

In a statement issued today in Washington, the IMF said the main elements
of the plan "represent important progress in the implementation of Brazil's
stabilization and reform program, which will be supported by the IMF and
other members of the international community."

Deputy Treasury Secretary Lawrence H. Summers, at a luncheon with
Washington Post editors and reporters, praised Brazilian President
Fernando Henrique Cardoso for having proposed "quite substantial" deficit
reduction measures. He noted that the measures total nearly four percent
of Brazilian output, which in U.S. terms "would be like a $320 billion
reduction in the budget deficit over an 18-month period."

But at the same time, Summers cautioned that it is "crucial" for the
government's plan to be implemented swiftly -- a point of considerable
concern to private analysts, who fear the plan relies too heavily on reforms
that will require bargaining with Brazil's unpredictable Congress and
powerful state governors.

"I would even call parts of the plan unrealistic," said Mauro Schneider, an
economist with ING Bank in Sao Paulo. "I'm surprised the government
decided to look to the state and local levels for so much of the package. I
think the market would have preferred the federal government take a total
leading role."

Economists also criticized the plan for making overly optimistic
assumptions about Brazil's ability to quickly lower interest rates, which
were almost doubled last month to 49.75 percent to stop the bleeding of
foreign investment. An estimated $30 billion in foreign capital has already
fled the world's eighth-largest economy since the Russian crisis erupted in
August. The plan assumes the lowering of interest rates in the next few
months will help Brazil stimulate its economy and reduce its debt.

Even if everything goes according to plan, officials concede for the first
time in forecasts made within the package that the besieged Brazilian
economy will likely shrink by 1 percent next year. But Cardoso, the
architect of free-market reforms in Brazil, promised Brazilians in a 
national
address Tuesday night that many of the measures are only temporary and
that the painful downturn will be brief.

The austerity package, the details of which were released today by
Finance Minister Pedro Malan, calls for savings of $23.5 billion in 1999,
with greater savings forecast for 2000 and 2001. In 1999 -- the most
important year in terms of IMF targets -- about $7.3 billion in federal
spending cuts are planned. But economists pointed out that changes in the
federal budget would account for less than 70 percent of the total
adjustments in 1999; the plan relies on local and state governments for the
rest.

The bulk of the savings would be realized by increasing taxes or imposing
new fiscal restraints on local and state governments -- considered very
unpopular and difficult to achieve in Brazil, especially since Cardoso lost
key political allies in several states during Sunday's runoff elections.

While economists had largely anticipated the contents of the plan, it still
drew fire today for looking more toward tax increases than cutting Brazil's
bloated public sector. "It's obvious that raising taxes is easier than 
cutting
spending in Brazil, but it will have the effect of slowing down Brazil's
economy even more," said Joyce Chang, emerging-market analyst with
Merrill Lynch in New York. "While this isn't a total surprise, I think the
preferred course would have been to cut spending more than increase
taxes, and it's worked out the other way around."

One controversial part of the plan calls for increasing one form of
corporate tax and extending it to new sectors -- such as utilities and
financial companies -- that were previously exempt. Taxes would also be
levied on some financial transactions, such as writing checks. But the plan
also won praise for addressing some of the lingering problems economists
see in Brazil's relatively generous public-sector benefits. Cardoso's plan 
is
once again calling for "administrative reform" of the social security system
in Brazil, including hikes in the amount of money civil servants contribute 
to
their pension funds. It also would require retirees to start paying taxes on
the benefits they are already receiving.

Shedding light on the forthcoming IMF aid package, Summers said it will
have a "contingent, precautionary character" that will differentiate it from
other recent IMF-led rescues for Asian countries and Russia. This suggests
that instead of providing a big up-front loan, with further loans disbursed
according to a fixed schedule, the IMF will give Brazil access to a large
line of credit to be drawn whenever the money is needed. Thus, Summers
said, Brazil will "in some ways be a test case" for a proposal advanced last
month by President Clinton to provide new forms of IMF help for
countries threatened by the global financial crisis but not yet engulfed by 
it.

Staff Writer Paul Blustein in Washington contributed to this report.

Brazil's Reform Package

Brazil's new austerity plan, under which it plans to save almost $24 million
next year, aims at extricating the nation from economic crisis. Here are the
principal provisions, which still need to be approved by Congress:

* Government spending cuts: Savings worth $7.3 billion next year.
Spending cuts is a condition for Brazil to obtain $30 billion in emergency
credits from the International Monetary Fund.

* Federal revenues: Federal government will double the revenues it retains
from states and municipalities.

* Social Security: Extra revenue $2.2 billion. Corporate tax to fund the
social security system will go up. Social security tax paid by government
workers will rise, and retired civil servants will have to pay the tax for 
the
first time. 

* Financial transaction tax: Extra revenue more than $6 billion. Tax to
increase to 0.38 percent from 0.2 percent. This will affect bank
withdrawals, check writing and stock market transactions.

* Tax on corporate earnings: It will rise to 3 percent from 2 percent, and
the government will submit a bill to levy the tax on banks, which were
previously excluded.

* Government will propose law to prevent public overspending and
deregulate fuel prices. 

SOURCES: Reuters, staff reports


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