Brazil's Rousseff eyes tax reform, debt

BRASILIA (Reuters) - Brazilian presidential candidate Dilma Rousseff said on Wednesday she would maintain strict fiscal discipline to push down public sector debt and revamp the country's tax code if she wins October's election.

Speaking at the Reuters Latin American Investment Summit in Brasilia, the candidate from the ruling Workers' Party (PT) said her government would keep a primary budget surplus target of 3.3 percent of gross domestic product until net debt falls to 28-30 percent of GDP from about 42 percent currently.

But President Luiz Inacio Lula da Silva's former chief of staff said she would not cut current expenditures, which have swelled under the current government, raising concerns among some economists about Brazil's public finances.

"For what? I wouldn't make cuts but adjustments," she said, arguing that the spending is necessary to pay decent salaries for civil servants and improve public services.

Rousseff said she would strengthen state-owned companies such as oil giant Petrobras (PETR4.SA)(PBR.N) and Banco do Brasil (BBAS3.SA) without encroaching on private firms.

"We will never weaken our (public banks). But no way do we want them to become an octopus gobbling up private financial institutions or the space of foreign banks -- on the contrary," Rousseff, 62, said at her campaign headquarters.

"State banks alone aren't enough to finance economic expansion," she said, adding that private banks are needed to finance investment and keep state banks on their toes.

"I'm in favor of competition."

A trained economist and career civil servant who beat cancer last year, Rousseff said she would not abandon the central bank's current policy of building international monetary reserves, which have climbed to an all-time high of more than $248 billion.

She ruled out targeting a specific foreign exchange rate for Brazil's currency. The real rallied 34 percent last year against the U.S. dollar, irking exporters who complain their goods are becoming less competitive on global markets.

"In order to solve the currency issue, we'll have to reduce the debt to GDP ratio and converge toward international interest rates," said Rousseff, a leftist militant during the military dictatorship that ruled Brazil from 1964 to 1985.

CENTRAL BANK

She defended the central bank's decision last week to lift its benchmark interest rate to 9.5 percent from 8.75 percent, the first rate hike in almost two years. Still, she said she did not agree with those who fear that Brazil's economy, Latin America's largest, is overheating.

Brazil's economy has roared back from a brief recession during the global financial crisis and is on track to expand around 6.0 percent this year.

Large capital investment in recent months will ensure growing industrial capacity and help reduce inflationary pressures, Rousseff said.

She also played down concerns that she could put political pressure on the central bank to be more tolerant of inflation to ensure higher economic growth rates.

"The central bank ... has done a great job. I don't see why it should be changed," Rousseff said.

"The central bank will only be able to act more like the Fed, with one eye on inflation and another on jobs, when we have a lower debt to GDP ratio. For now, the focus needs to be on inflation."

Rousseff said she wouldn't rule out naming a central bank chief from the financial market but said it wasn't a requirement, citing Antonio Palocci, Lula's first finance minister, as an example. Palocci is a physician turned politician who is credited with stabilizing Brazil's economy.

"I'd like to praise Antonio Palocci. Palocci was a physician and an excellent finance minister."

"BUILD IN BRAZIL"

If Rousseff were to become the country's first woman president, she would launch a "Build-in-Brazil" policy in an effort to reduce imports in certain sectors, she said, citing parts for the shipping industry as an example.

The candidate, who was hand-picked by Lula, said she also favors cutting taxes on capital and consumer goods such as automobiles to boost industrial output and create jobs.

The first economic measure she would take is a broad reform to simplify an unwieldy tax structure that stifles value-added production. The proposal would also aim to restrict states from competing to give companies excessive tax benefits, she said.

Rousseff proposes creating a fund that would compensate certain states and municipalities for revenue losses that are likely to come with a tax overhaul. Opposition from states that would lose tax income has been the biggest stumbling block for approval of a tax reform in Congress.

"We'll do a tax reform but we'll ensure fiscal stability," said Rousseff, wearing spectacles and a beige pin-striped suit.

(Additional reporting by Natuza Nery and Fernando Exman, Editing by Todd Benson and Chizu Nomiyama)