Brazil Unveils Plan to Stave Off Economic Crisis

The Brazilian government announced a long-awaited $23.5-billion austerity package Wednesday, a high-stakes counterattack against a crisis that could damage economies across the Americas.

Unveiled after weeks of anticipation and negotiation, the plan features about $11 billion worth of tax increases and about $12.5 billion in budget cuts and major fiscal reforms such as a restructuring of the costly social security system, according to Finance Minister Pedro Malan.

The drastic initiative could be Brazil’s last stand, according to worried investors and analysts. Despite the proven talents of recently reelected President Fernando Henrique Cardoso, the extent of the task and expected opposition by governors and the fractious National Congress raise doubts about the president’s ability to implement measures that have been blocked before.

The package is a prerequisite to an expected $30-billion bailout from international financial institutions. The rescue is seen on Wall Street and in Washington as critical to preventing a Brazilian economic collapse--one that would be likely to cause a hemispheric domino effect and finally bring the full impact of the global crisis to the thriving U.S. economy.

U.S. Treasury Secretary Robert E. Rubin and the International Monetary Fund voiced support for the austerity plan, and a White House official said President Clinton phoned Cardoso on Wednesday to discuss the planned IMF bailout.

The proposals “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,” the IMF said in a statement released in Washington.

Disclosure of Brazil’s plan initially helped send stocks higher on Wall Street and in Latin America, but the gains largely vanished. Brazilian markets ended down 0.6%, Mexico fell 1.1% and Argentina lost 3.2%.

In beleaguered Brazil, the austerity moves are likely to produce a punishing recession and an unpleasant 1999. And there is the worst-case scenario: Even the combination of fiscal reform and a bailout might not prevent a continuing drop in stock markets and foreign reserves that began in August and has resulted in the flight of $30 billion in capital. Brazil could still be forced into a chaotic currency devaluation, analysts say.

“There is a general feeling of insecurity,” said political scientist Amaury De Souza. “Even if we do our utmost, it may be too late.”

But Malan, the finance minister, repeated Wednesday the government’s determination to avoid a devaluation of the Brazilian currency, the real.

“We are not going to alter our exchange rate, as I have said systematically and want to reiterate once again,” Malan said. He added that Brazil must “take advantage of this historic opportunity that we cannot, we must not, squander. We must confront the challenge of fiscal imbalance and the roots of Brazil’s fiscal problem.”

Plan Aims to Reduce Deficit

Striking a similarly urgent tone, Cardoso asked Brazilians in a televised speech Tuesday night to rally behind him at a moment of extraordinary importance.

“I was elected to defend the real, to preserve the buying power of salaried workers and protect our economy from the threat of speculative capital,” he said. “I will not waver in fulfilling the wishes of the Brazilian voters.”

During his campaign, Cardoso made no secret of the need to raise taxes and slash budgets. Voters elected him anyway, because they hope he can overcome this challenge as he has previous troubles.

After long discussions with representatives of the International Monetary Fund and Brazilian political and business leaders, the president and Malan have presented a plan aimed at reducing a yawning budget deficit that now stands at about 7% of the gross domestic product.

Pension System Focus of Reform

If all the goals are realized, the austerity plan would total $23.5 billion next year. Further proposed retrenchments, if implemented, would make it an $84- billion program over three years.

The Cardoso administration says the time has come to push through long-delayed structural reforms of the archaic and inefficient social security, civil service and taxation systems. The federal budget suffers about a $15.1-billion-a-year drain from a lavish public pension system that, in the most extreme cases, allows retired federal officials such as police commanders and judges to earn higher salaries than the nation’s president.

The austerity package singles out the pension system with a new 11% tax on pensions collected by retired civil servants and on retirement contributions by active public employees. An additional 20% tax would be imposed on the highest pensions. The total new revenue would be about $3.6 billion, officials said.

But similar reforms have already been stymied twice in the National Congress. Once again, Cardoso must overcome a contentious opposition bloc as well as reluctant allies in his own ruling coalition, an uneasy multi-party alliance whose loyalty is not guaranteed.

Social Services Are Shielded

The announcement does not represent a done deal but the start of a grueling process. Even before Malan revealed the details of the plan Wednesday, the president of the Chamber of Deputies, Michel Temer, warned that the pension tax will be very difficult to approve.

Another feature of the package would raise the tax on corporate earnings to 3% from 2% and levy the tax on banks as well.

Business would also be hit by a proposed increase in the so-called check tax on financial transactions, from 0.20% to 0.38%, a hike expected to bring in an estimated $5 billion. The proposal would most affect companies, which tend to make large payments by check, rather than individuals, who can get around the tax by paying in cash.

The looming political battle will be influenced by the results of last Sunday’s runoff elections for key governorships. Cardoso’s coalition scored important victories, primarily the governorship in Sao Paulo, a giant state that accounts for one-third of the nation’s gross domestic product.

But the leftist opposition won in Rio de Janeiro state and other bastions.

Cardoso’s frank talk about belt-tightening during the campaign left lingering resentment among candidates who believe the repercussions damaged their performance in the elections, according to David Fleischer, a professor at the University of Brasilia.

“Some of the politicians were wounded, but it may not be fatal,” Fleischer said. “The main issue is will the politicians follow their party leaders or what can they negotiate for not doing so and supporting Cardoso. The main problem is the governors who were just elected and are asked to make further sacrifices.”

Although Brazil devotes a higher percentage of its budget than any other Latin American nation to social spending, services such as health and education are often ineffective. The cuts in the federal budget will total $7.3 billion and only make matters worse for millions of Brazilians who depend on public services, though the government says it will shield essential services vital to the poor, who make up almost half the population.

“We will not accept any measure that puts more burdens on the most humble,” said Jader Barbalho, a leader of the Party of the Brazilian Democratic Movement, a partner in the ruling coalition.

Brazilians hope Cardoso will disprove the doubters who think the president, a master of compromise, does not have the political will to ram the austerity package through the political gantlet that awaits.

Commentators noted wryly that the unveiling of the plan coincided with the day of St. Judas Tadeo, patron saint of impossible causes.