Brazil public sector demands stymie Rousseff's cost-control push

RIO DE JANEIRO Thu Jul 26, 2012 6:08pm EDT

People walk past banners hanging on the facade of the Brazil's Ministery of Planning, Budget, & Management in Brasilia July 25, 2012. REUTERS/Cadu Gomes

People walk past banners hanging on the facade of the Brazil's Ministery of Planning, Budget, & Management in Brasilia July 25, 2012.

Credit: Reuters/Cadu Gomes

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RIO DE JANEIRO (Reuters) - Brazil's civil servants haven't gotten President Dilma Rousseff's message.

A slowing economy, dwindling tax revenue and falling demand for the country's commodity exports mean the government must tighten its belt, she argues. But customs workers, university professors and myriad other federal employees are staging strikes across the country, pushing for salary increases worth 92 billion reais ($45.3 billion).

On Thursday, Brazil's statistics agency, normally a clockwork conveyor of economic data, postponed the release of June unemployment figures because of striking statisticians.

So far, the protests fall shy of the mass walkouts that once paralyzed Latin America's biggest economy. But the strikes are a growing headache for Rousseff at a time when she sees unexpected increases in state spending as counter to her current priority: reviving Brazil's stagnant economy.

"This is a direct challenge to her stated objective," said Alberto Almeida, a political analyst at the Instituto Analise, a research firm in Sao Paulo. "It's not likely she'll be willing to cede much."

Unlike many of her predecessors, Rousseff so far has preferred to limit increases in government spending as a means to stimulate economic growth. Instead, she is hoping fiscal restraint will allow Brazil's central bank to keep the country's historically high interest rates at their current lows - stimulating not just demand in the short term, but accessible credit in years ahead.

Public sector unions, however, say the government should make an exception for salaries.

Their strikes began in May, when professors at federal universities walked out. Since then, other employees have followed suit, crippling services and staging noisy protests along the grassy esplanade between the domino-like ranks of ministry buildings in the capital Brasilia, and outside government offices nationwide.

Their demands amount to half the government's existing salary obligations, according to Brazil's planning ministry, or just under 2 percent of the country's economy.

The unions argue that recent raises for some civil servants don't reflect the bonanza that led to average annual growth of more than 4 percent over much of the past decade. The growth, which catapulted 30 million Brazilians out of poverty, also swelled public coffers, with government revenues nearly tripling from 2003 to 2011.

But the push for higher salaries comes as Brazil's economy has screeched to a near halt. The crisis in Europe, uncertainty elsewhere, and a slowdown in China and other big buyers of commodity exports have eroded confidence among Brazilian businesses and crippled investment in the economy.

A TRAP FOR ROUSSEFF

After gangbuster growth of 7.5 percent in 2010, the economy grew by just 2.7 percent in 2011. This year, economists are forecasting growth of as low as 1.5 percent.

With the slowdown, tax revenues are down, dropping by more than 6 percent in June from the year-earlier period. The falling revenues, and growing pressures from opposition lawmakers for costly earmarks, are causing many economists to question whether Brazil will hit longstanding budget targets.

"There's a trap in front of the Planalto," newspaper O Globo said in a Thursday editorial, referring to demonstrations near Rousseff's office. "Just when fiscal responsibility is the only vaccine available."

Already, Rousseff has buckled to some of the demands of professors, whom she believes should in fact earn more, according to people familiar with the negotiations. She remains reluctant to make further concessions, though, especially considering uncertainty around tax revenues for next year.

Part of her strategy, government officials say, is to leverage the public perception that federal employees are already better paid than many private-sector peers. Because of a recent transparency law, many federal salaries, like those of well-paid workers at Brazil's regulatory agencies, are in the process of being disclosed for the first time.

During two terms as president, Luiz Inacio Lula da Silva, Rousseff's champion and predecessor, greatly expanded the size of Brazil's federal workforce.

Hoping to improve public services, he increased the federal headcount by more than 15 percent to more than half a million, according to official data. Personnel spending grew by an average of 11 percent annually during the period.

When Rousseff took office last year, she quickly had to downshift, as the economy showed clear signs of slowing by mid-2011. Though annual raises are built into the contracts of most civil servants, spending on personnel last year climbed by only 7.7 percent - barely more than inflation for the year.

Given the soaring tax revenues of recent years and healthy raises for some specialized civil servants, public sector unions began demanding across-the-board increases for all.

"Many civil servants haven't shared fully in Brazil's recent economic growth," said Vagner Freitas de Moraes, president of CUT, a big labor group that includes public sector unions. "This is like planting a seed, but then not watering the plant."

MISSED TARGETS?

Further concessions would drive Brazil farther away from its so-called primary surplus target, a measure of budgetary funds left over at year-end that excludes payments on debt. For more than a decade, the measure has been an anchor of Brazil's commitment to balanced public books.

Many economists are worried that Brazil could miss the 2012 target, equal to 3.1 percent of gross domestic product.

"Brazil's fiscal framework is poised to get worse," said Monica Baumgarten de Bolle, a professor at Rio's Pontifical Catholic University. "How bad it's going to be will depend on how anxious the government is to foster economic growth."

Since May, the government has forgone billions of reais in revenue by giving tax breaks to stimulate consumer demand. The measures, designed to be temporary, continue to be renewed as the economy so far has failed to respond.

Economists believe Rousseff may soften next year's primary target of nearly 156 billion reais to allow for infrastructure investments needed to host the 2014 World Cup and 2016 Olympics.

Still, Brazil's finances remain in far better shape than those of many developed countries. So while a missed target would create buzz, it's unlikely to scare away crucial foreign investment.

(Additional reporting by Ana Flor and Hugo Bachega; Editing by Todd Benson and Eric Walsh)

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