Rousseff under pressure to ease Brazil budget cuts

Fri Feb 11, 2011 12:11pm EST

* Pressure on Rousseff to ease pain from budget cuts

* Government seen "overpromising" on cuts, may not deliver

By Stuart Grudgings and Ana Nicolaci Da Costa

RIO DE JANEIRO/BRASILIA, Feb 11 (Reuters) -- President Dilma Rousseff is facing intense political pressure to water down $30 billion of budget cuts that seek to cool Brazil's overheated economy and restore its fiscal credibility among investors.

Ministries and labor unions are already clamoring for special treatment or to be made exempt from the 50 billion reais in cuts, which Finance Minister Guido Mantega unveiled on Wednesday and said could not be made without "pain." [ID:nN09134882]

Meanwhile, some economists are questioning the government's calculations, saying its commitment to meet its main budget target for 2011 is based on over-optimistic projections.

Equivalent to about 1.23 percent of gross domestic product, the cuts are critical to Rousseff's plans to bring inflation back under control, reduce upward pressure on interest rates and an overvalued currency, and ensure that the economy continues its recent run of strong, sustainable growth.

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Q+A on the budget: [ID:nN01252895]

Key political risks in Brazil: [ID:nRISKBR]

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The most vocal threat to the cuts has come from unions and their supporters in Congress, who have stepped up pressure on Rousseff to raise the national minimum wage beyond her proposed level of 545 reais ($324) per month.

The minimum wage is used to calculate state benefits and other payments, meaning that even a modest increase would have a major knock-on effect on spending. Every extra real in the minimum wage adds about 286 million reais, or more than $170 million, to the overall budget.

As union leaders pressured her for better terms at a meeting on Thursday night in the capital Brasilia, Rousseff plaintively told them: "I can't do it."

Folha de Sao Paulo newspaper reported on Friday, however, that the government had prepared a "Plan B" to accept a minimum wage of 560 reais if its original plan failed to win enough support. Congress votes on the wage next Wednesday in the first big test of Rousseff's ability to harness an often unruly pro-government coalition.

The dispute has opened up early strains with unions who form a critical base of support for Rousseff's Workers' Party. Yet the president is likely to prevail since her political capital remains high early in her term, said Alexandre Marinis of the Mosaico political consultancy in Sao Paulo.

"I honestly don't think Congress is going to begin a confrontation with Dilma in the first major vote," he said.

Rousseff inherited a fiscal mess from her predecessor Luiz Inacio Lula da Silva, who ramped up public spending in the 2010 election year and missed his main budget target.

The 50 billion reais in proposed cuts amount to about 6.5 percent of the previous budget, excluding debt service.

'SMOKE AND MIRRORS'

Inflation has surged to a six-year high of around 6 percent, forcing the central bank to raise interest rates. Already high rates have fueled a currency rally that has badly damaged Brazil's trade competitiveness.

Rousseff's administration has signaled the bulk of the cuts will come from operating expenses and congressional earmarks, but will not announce more specific details until next week.

"They are overpromising on what they can deliver." said Christopher Garman, a Brazil analyst at Eurasia Group in Washington. "The game now will be all the ministries saying 'You can't cut this'."

Spending that Brazil badly needs to unplug infrastructure bottlenecks and meet Rousseff's election pledges of poverty reduction will be spared, Mantega said.

As they pore through the government's proposed numbers, though, economists find that hard to believe.

"At this stage, pledges of fiscal austerity look more like parlor tricks, but smoke and mirrors fall considerably short of the challenges the country is now facing," wrote Alexandre Schwartsman, chief Brazil economist at Santander.

Another concern is that the budget overestimates the economy's growth, and thus revenues, this year. The 5 percent expansion it assumes is at the top of most forecasts.

"I don't think they are going to get 5 percent." said Tony Volpon, emerging markets head at Nomura Securities in New York. "I think they are going to get more toward 4 percent, which means that tax revenues will fall by more than expenditures." ($1=1.67 Brazilian reais) (Writing by Stuart Grudgings; Editing by Brian Winter Kieran Murray)

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