SUNS  4313 Friday 30 October 1998


BRAZIL: FINANCIAL UNCERTAINTY SPREADS INTO POLITICS

Rio de Janeiro, Oct 28 (IPS/Mario Osava) -- Political resistance to fiscal measures announced by Brazil's government Wednesday casts a shadow of doubt over the national economy, provoking collateral international effects, above all in Latin America.

Contrary to expectations, increases in taxes and contributions constitute two thirds of the fiscal initiative which Finance Minister Pedro Malan said would raise an additional $23.3 billion in 1998.

The Contribution on Financial Movements (CPMF), the so-called "cheque tax," charged on all bank withdrawals, will increase from 0.2 to 0.38 percent in 1999. The political world and business community expected this to reach only 0.3 percent.

Another measure given a cool reception by members of parliament is the contribution of retired civil servants to social insurance payments. This will run at 11 percent of their salary, just as it does for active public employees.

Furthermore, the contribution of active civil servants earning more than 1,000 dollars per month will increase to 20 percent - a "temporary additional amount, for five years," said Malan.

These measures will have a hard time getting through the legislature, warned parliamentary leaders from ruling parties, including head of Senate, Antonio Carlos Magalhaes, the main ally of President Fernando Henrique Cardoso.

The idea of charging of contributions to retired, or "inactive" civil servants, has already been rejected twice by the Congress, but the economic authorities are expecting a change of tune now, due to the current economic crisis.

Malan and his counterparts in the economic area of the government stressed the CPMF of 0.38 percent will only last through 1999, "falling" to 0.3 percent from the year 2000.

But this tax is totally opposed by the business sector for its accumulative nature, imposing charges on every phase of the productive chain. As a result it can total more than four percent in products
which go through several phases and incorporate various inputs and services, argue the business people.

The cost of national production will increase up to five percent, affecting its export chances, said Giulio Lattes, director of the Brazilian Foreign Trade Association.

This is because the companies will suffer another blow - the increase in the Contribution to Fund Social Security (COFINS), from two to three percent on total turnover. The banks will have to pay this if the government can swing approval of a law setting a tax on their income.

Fernando Bezerra, senator and chairman of the main business organisation, the National Confederation of Industry, lamented the adjustment was based "more on increasing taxes than cutting expenditure."

Bezerra said, cautiously, better evaluation was needed of whether the measures were indispensable and whether they would permit a substantial reduction in interest rates, an effect which would be very beneficial for production.

The Central Bank increased its maximum interest rate in September to 49.75 percent, and today pays around 42 percent. President Cardoso announced the fiscal adjustment could reduce this to levels prior to the current international financial crisis - or 19 percent - in January.

Malan stressed the adjustment is an emergency measure but which, at the same time, aims to "change the Brazilian public resource management culture," with "structural" measures.

The Finance Minister divided the so-called Fiscal Stabilisation Programme into two aspects, one of immediate impacts, like budget cuts and tax increases, and another of a more permanent nature, to
definitively balance the country's public accounts.

The latter includes various pieces of legislation currently being worked on or in the approval process. One is the public administration reform, based on a constitutional amendment already approved, the application of which must be regulated in the coming weeks.

Furthermore, this reform has a law attached which establishes that municipal, state or central governments can only use up to 60 percent of fiscal income for the payment of salaries.

Malan announced Congress would be sent a Fiscal Responsibility Law "in the next few days" to "discipline and demand transparency in public spending."

It will be the main instrument for imposing the culture of budget restriction, planning sanctions against governors who overspend.

The government also promises to promote tributary reform, substituting several taxes and contributions with the Value Added Tax, successfully applied in many countries, with the aim of simplifying "the current chaotic system" and reduce evasion, said the minister.

On the contribution of retired civil servants, Malan and his helpers stressed that social welfare is "the main primary source" of fiscal imbalance, with an increasing annual deficit of 35 billion dollars.

The private sector, with 18 million beneficiaries, only contribute 18.5 percent of this deficit and "do not present great inequities." Hence it will not be affected at all by the adjustment.

The central government officials, 905,000 in total, represented 43.4 percent of the total deficit and their contribution only covers 13 percent of the benefits received. The states and municipalities, with
some 4.3 million officials are in a similar position.

There is obvious injustice. The problem lies in convincing the members of parliament, who are also part of the privileged sector, to approve measures which will affect individuals who exercise direct pressure over them.

The adjustment will also suffer from strong resistance between the state governors and mayors, by increasing from 20 to 40 percent the part of income free from budgetary assignation, which the central power could manage at will, above the heads of states and municipalities.