Brazil congress defeats financial transactions tax

Wed Sep 21, 2011 6:55pm EDT

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* Vote signals growing difficulty to finance spending

* Defeat shows ongoing split within ruling coalition

By Raymond Colitt

BRASILIA, Sept 21 (Reuters) - Brazil's lower house of Congress on Wednesday rejected a government proposal to create a new tax on financial transactions to pay for healthcare, raising questions about President Dilma Rousseff's ability to maintain her program of fiscal austerity.

The government's defeat signals growing pressure for the administration to increase spending on public services without raising taxes, already among some of the highest in the world.

It also shows that Rousseff has not yet managed to patch up relations with her main allies, after months of political turmoil.

Despite her large nominal majority in Congress, the bill was defeated by a vote of 355 to 76, with 4 abstentions.

None of the parties in Rousseff's broad coalition backed the proposal, except for her own Workers' Party.

The political crisis in Brazil included last week's resignation of Tourism Minister Pedro Novais, the fifth cabinet member to depart in just over three months. Austerity measures and a series of corruption scandals had rattled the ruling coalition and caused allies to openly boycott Rousseff's legislative agenda.

Investors are paying particularly close attention to the government's budget after the central bank's surprise interest rate cut in late August. [ID:nE5E7IM05G]

With 12-month consumer price rises still well above the upper limit of the government's 6.5 percent target for this year, inflation control will depend increasingly on tight government spending.

TAX DEFEATED BEFORE

Rousseff and other cabinet members in recent days lobbied in favor of a new tax to finance health spending.

The financial transaction tax would have brought back one of the country's most controversial levies. Before it was defeated by Brazil's opposition parties in 2007 in a rare loss for Rousseff's predecessor Luiz Inacio Lula da Silva, the tax raised about 40 billion reais ($21 billion) a year.

All government allies, including the centrist PMDB party, the largest in Rousseff's coalition, backed an amendment by the opposition DEM party to eliminate the tax.

"Don't talk to us about creating new taxes, we won't back it," said Eduardo Henrique Alves, PMDB leader in the lower house.

The PMDB was at the center of Rousseff's disputes with her allies in recent weeks. Its leaders demanded more second-tier government jobs and bigger funds for legislators to spend in their constituencies.

But widespread opposition among tax payers and industry leaders swayed legislators to oppose the new tax.

"During the (election) campaign President Rousseff promised a thousand times she wouldn't raise taxes and now she wants to raise taxes -- an amazing turnaround," said Ronaldo Caiado, a lower-house deputy of the DEM party.

At around 37 percent of gross domestic product, Brazil has one of the highest tax burdens of any major economy.

The head of the Chamber, Marco Maia, created a committee that is to propose alternative sources to finance health. (Additional reporting by Maria Carolina Marcello; Editing by Cynthia Osterman)

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