Brazil proposes looser fiscal rules to spur growth

SAO PAULO Sat Dec 29, 2012 11:26am EST

Brazil's President Dilma Rousseff speaks during breakfast with reporters at the Planalto Palace in Brasilia December 27, 2012. REUTERS/Ueslei Marcelino

Brazil's President Dilma Rousseff speaks during breakfast with reporters at the Planalto Palace in Brasilia December 27, 2012.

Credit: Reuters/Ueslei Marcelino

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SAO PAULO (Reuters) - Brazil's government has proposed changes to a fiscal responsibility law that set the foundation for a decade of economic prosperity in Latin America's largest economy, two local newspapers said on Saturday.

The changes would make it easier for the government to cut Brazil's high tax burden and enact other stimulus measures after two years of slow economic growth, but they could also rattle investors who fear President Dilma Rousseff has been too quick to modify bedrock economic principles.

Changing part of the law enacted in 2000 would remove "the shackles of economic policy," an unnamed source from the finance ministry told Estado de Sao Paulo newspaper.

A finance ministry spokesman did not respond to an emailed request for comment.

Rousseff's economic team included the proposed changes in a bill aimed at fiscal reform at the state level on Friday, the newspapers said. That day, the government also posted a deficit of 5.5 billion reais ($2.7 billion) for November, jeopardizing its ability to meet a closely watched annual fiscal target.

The government needs to post a primary surplus of 31.5 billion reais in December to meet the target, and on Friday passed a decree that would allow it to dip into its sovereign wealth fund if tax income is lower than expected this month.

Rousseff has dished out tax breaks and intervened in state-run companies to cut electricity costs as she tries to boost growth, but the measures have dragged down government revenues.

The fiscal responsibility law put an end to a series of financial crises that rocked Brazil in the 1980s and 1990s. Brazil's finances are much more solid now, but any change to the text could unsettle investors.

At the same time her commitment to fiscal responsibility is being questioned, Rousseff has been under pressure to make even deeper structural reforms since economic growth slowed to a mere 0.6 percent in the third quarter of 2012.

Those efforts have drawn criticism from the TCU, a government agency that audits public spending, according to stories in Folha de Sao Paulo and Estado de Sao Paulo newspapers on Saturday.

The government believes altering the fiscal responsibility law would remove such constraints. Congress will consider the proposal after February, the papers said.

Despite slow growth and the increasingly unlikely fiscal target, many aspects of Brazil's economy still seem healthy compared to much of the developed world.

Unemployment remains near a record low, the debt to gross domestic product ratio has fallen below that of the United States and many European economies, and Rousseff is popular among voters who believe the economy will eventually improve.

(Writing by Caroline Stauffer; Editing by Brian Winter, Eric Beech and Vicki Allen)

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Comments (1)
MikeBarnett wrote:
Brazil’s stock market is up about 7% but the value of the real is down about 10%, so the country is running a net loss this year. Cutting prices of state run companies will lose revenue in the short term, but it may make private businesses more profitable and leave more money in the hands of customers who can spend. Expanding businesses can create more workers to become customers who pay taxes. The government gains more taxes from businesses as they expand, and it gains taxes from new workers. The new workers buy more products, and the stores gain more profits, add more workers, and pay more taxes. It allows for business expansion and a reasonable growth of taxes. That is the correct theory if it is applied correctly.

Our investments in Brazil have been profitable despite the drop in the currency, but we have focused on our specialties in global trade where the falling real improved the price point. In addition, we have shared expertise in metallurgy to improve production. This has given better quality at a lower price.

We approve of the goal of raising per capita GDP to increase the customer and tax payer base because it will raise business profits, raise tax revenues, and keep the public satisfied. However, it must be done carefully and monitored closely.

Dec 29, 2012 6:33pm EST  --  Report as abuse
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