Tough Times Remain for Brazil

Brazilian President Fernando Henrique Cardoso has cleared a big hurdle by ramming a tax bill through Congress’ reluctant lower house, which had rejected it on four previous attempts. But Brazil is not out of the woods yet. The bill, approved Wednesday, increases taxes on pensions of civil servants and makes retired public-sector workers pay taxes on their pensions too. This way Cardoso will raise more than $2.5 billion a year to cut public-sector debt, now running at 8% of gross domestic product.

Next week the Senate is expected to approve the bill, bringing some good news to a government that was on the economic ropes just last week.

This has been a time of near-crashes and small victories for the Brazilian leader, but as it stands today more than 60% of his proposed package of austerity measures has been approved. That comes as a great relief also to Brazil’s trading partners in North and South America and Europe, but the turnaround so far has failed to lift the prospects of Brazil’s currency, the real, which remained under assault Thursday.

The real fell Thursday to a low of 1.72 per dollar, compared with a close of 1.59 Wednesday and 1.21 before the first devaluation, early this month. Some additional budget cuts and a small tax on financial markets still must be pushed through. These are the elements of a sounder financial house that Cardoso has to put together to restore international confidence in Brazil and shake loose the installments of a $41.5-billion rescue package from the International Monetary Fund.

Cardoso has two more immediate hurdles to clear. On Feb. 1 a new Congress will be inaugurated and the numbers in Cardoso’s camp will be slightly fewer. More important and fundamental to the Brazilian problem, the federal leader must continue to get rebellious governors aboard on his recovery plan. They have been stalling on debt payments to Brasilia and making international investors increasingly nervous.

The federal government should use all legal means to ensure compliance on the contracts between the states and the federal government. If the states don’t comply, Cardoso should suspend federal fund transfers. International support depends on a tough rein by the president. This crisis is not over.