Brazil & Southern Cone - February 2012 (ISSN 1741-4431)

The finance minister, Dionisio Borda, announced on 13 February that he was planning a 5% cut in spending to balance the budget. The only public institutions exempted from the cut will be the legislature and the judiciary, whose budgets are protected against such arbitrary cuts. Borda said that he was obliged to impose the cuts because tax revenues were already well below what was needed to balance the budget. He said that the budget imposed tax increases of 15%, but once congress had finished increasing the government’s spending commitments a 37% increase would have been needed on the revenue side. Cuts, he said, were the only alternative to a worrying rise in the fiscal deficit.

In the budget approved by congress, the fiscal deficit was set at G$2.8 trillion (US$622m). This was largely the result of increases in the public sector wage bill, which in turn was the result of 14,000 new jobs in the public sector. Finance ministry officials say that the cut will amount to G$1.3trillion (US$289m) of expenditure financed from the revenue account. The officials say that spending financed by loans or the reinvestment of profits from state companies will not be subject to the cuts.

Borda added that congress could avoid the cuts by deciding to approve his proposal to introduce an income tax and his separate proposal to set up a national development fund, Fondo Nacional de Desarrollo Económico y Social (Fondes). This fund would be supported by the increased payments Brazil is making for electricity generated by the Itaipú project.

A third alternative for generating extra revenue is to introduce export taxes on soya, maize and sunflower. This is a proposal that has come from congress, not the government.

Inflation: In January monthly inflation was 1.1%. This brought the lagging 12 month rate down to 4.4%. In calendar 2011 the rate was 4.9%.