Brazil offers new tax breaks as economy sputters

BRASILIA Tue Dec 4, 2012 12:08pm EST

BRASILIA (Reuters) - Brazil's government on Tuesday extended tax breaks to the country's construction industry in a new effort to encourage investment and boost flagging growth in the world's sixth-largest economy.

The Brazilian economy grew much less than expected in the third quarter, surprising economists and policymakers alike and putting pressure on the government to widen a barrage of stimulus measures it launched this year.

Finance Minister Guido Mantega said the new stimulus, which includes an extension of a payroll tax exemption for homebuilders and the construction industry, will help boost investment and reduce home prices.

With the exemptions, the government will forego 2.85 billion reais ($1.36 billion) in tax revenue a year, money that could be redirected to investments and construction projects, Mantega said.

The government will also lower the tax rate charged on total revenue to 4 percent from 6 percent, freeing up an additional 410 million reais in foregone tax revenue for investments.

"This payroll tax exemption reduces the cost of labor and makes it easier to hire workers. It makes the building industry more competitive," President Dilma Rousseff said at an event marking the completion of one million low-cost houses since 2009 financed by the government.

The private sector welcomed the tax break as another step to reduce the heavy tax burden that businesses face in Brazil, which is just above 35 percent of gross domestic product.

Economists say cutting taxes is key to restoring investment levels, which have been dropping for five consecutive quarters.

"Any measure that reduces the tax burden is welcome, because it is too high," said Ilan Goldfajn, chief economist at Itau Unibanco, Brazil's largest private-sector bank.

Goldfajn said the government was moving in the right direction in cutting taxes to increase investments, but he argued that the tax breaks should be introduced across the board for all sectors of the economy and not just targeted industries.

Brazil's biggest publicly-listed homebuilders, including PDG Realty SA (PDGR3.SA), Cyrela Brazil Realty SA (CYRE3.SA) and Gafisa SA (GFSA3.SA), have struggled over the past year as demand cooled and projects overran budgets and timetables.

Shares of homebuilders rallied on the announcement, with PDG Realty rising 5.4 percent, Cyrela 3.8 percent and Gafisa 3.2 percent in mid-afternoon trading. The benchmark Bovespa index .BVSP in Sao Paulo was up 0.2 percent at the time.

(Reporting by Alonso Soto and Anthony Boadle; Editing by Chizu Nomiyama, Nick Zieminski and James Dalgleish)

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