Brazil Cuts Back to Get Aid For Region's Key Economy
To save currency and reassure investors, president ordered deep budget cuts Wednesday. Election results may hinder his efforts.
SO PAULO, BRAZIL — Francisco de Assis de Oliveira has had his water - and his livelihood - turned off. This is how a car-washer may help keep Brazil, South America's largest economy, from going into a deep recession and dragging much of Latin America with it.
Mr. Oliveira is a 13-year veteran of the 12-man car-wash brigade at the Finance Ministry in Braslia. The ministry shut off its outside faucets (savings: $220 a month) as one small measure in a tough austerity plan announced Wednesday to reduce public spending and pull Brazil back from the edge of a global financial abyss.
The plan is Brazil's part of a bargain to obtain as much as $30 billion in international aid from the International Monetary Fund, World Bank, and perhaps individual Group of Seven countries including the United States. The capital infusion would aim to help stop a drain on international reserves and hold off a massive devaluation of Brazil's currency, the real.
It will take a lot more than closed water spigots to make up the nearly $25 billion package of cuts and new tax revenues laid out by President Fernando Henrique Cardoso's government. But, as the case of the now-jobless car-washer demonstrates, the fiscal program is likely to end up affecting most of Brazil's 160 million people.
That is, if Brazil's Congress and state governors go along.
In a brief TV address Tuesday Mr. Cardoso told Brazilians he was "elected to defend the real," and he pledged to carry out that mandate. The next day his finance minister, Pedro Maln, outlined spending cuts, tax increases, and longer-term fiscal reforms intended to reduce annual deficits by a total of $80 billion through 2001. For 1999 Cardoso plans to cut $7.3 billion from the federal budget, affecting planned infrastructure projects, thousands of federal-government jobs, even free school lunches.
To boost revenues, the president proposes measures ranging from a tax hike on retirement and other social benefits for public employees, to an increase in a so-called "middle-class tax" on check-writing and other financial operations from 0.2 to 0.38 percent. Longer term, he wants a social security reform to redo Brazil's attractive but unsustainable retirement policies, and enforceable limits on state spending on personnel.
Cardoso will be able to implement some of the reform on his own, but much of the program requires the approval of Congress. And, with state governors holding particularly strong sway over congressional delegations in Brazil's federal system, the number of players needed to win approval of Cardoso's plan is large and the situation is complex.
Results of gubernatorial elections that ended Oct. 25 show that the president's nominal allies won in 20 of 27 states. A Cardoso supporter, Mario Covas, surprised the country and won a reelection battle in So Paulo State, which is something like the California of Brazil for its political and economic influence, only more so.
Yet those numbers mask problems ahead for Cardoso, analysts say. Three key states went to left-wing critics of his economic program, which they say has exposed the country to international speculators and undermined national industries.
At the same time, even some of Cardoso's congressional allies are balking at the size and kind of cuts being demanded, or suggesting that the battle for approval will not be easy.
The key to the debate may be public opinion.
"I see a certain disposition of the public to accept the sacrifice, because public opinion is convinced there is an international crisis, that the real is threatened, that instability could return," says Theotonio Dos Santos, an economist at Universidade Federal Fluminense in Rio de Janeiro.
"But we also have to remember that the opposition won 47 percent of the vote [in the presidential election], which is no small part of the country. If interest rates stay where they are [at about 50 percent], 20 to 30 percent of small businesses will close. Then people might become a little more vocal about what's happening."
CARDOSO'S plan is designed to restore the confidence required to allow interest rates to fall. "There is nothing worse for the country than the [high] interest rates," he said, insisting his package would "put an end" to them. But many business owners are skeptical.
Ask Mario Bernardini, president of MGM, a construction-machine manufacturing firm in So Bernardo do Campo. He says: "Even with an IMF agreement and a sizable cut in the public deficit in six months - and that remains a big question mark - it would still be difficult to cut interest rates to where business can live with them."