Brazil's big government seen as good for politics, bad for economy

BRASILIA Thu May 9, 2013 7:14pm EDT

Brazil's President Dilma Rousseff participates in the inauguration ceremony of the Chief Minister of the Micro and Small Enterprise Secretariat, Guilherme Afif Domingos, at the Planalto Palace in Brasilia May 9, 2013. REUTERS / Ueslei Marcelino

Brazil's President Dilma Rousseff participates in the inauguration ceremony of the Chief Minister of the Micro and Small Enterprise Secretariat, Guilherme Afif Domingos, at the Planalto Palace in Brasilia May 9, 2013.

Credit: Reuters / Ueslei Marcelino

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BRASILIA (Reuters) - President Dilma Rousseff added a new minister to her Cabinet on Thursday, further enlarging a federal government whose rapid growth since her leftist party came to power a decade ago has increased Brazil's heavy tax burden.

Rousseff, who is seeking re-election next year, swore in Guilherme Afif Domingos to head the newly created Ministry of Micro and Small Businesses, the country's 39th ministry.

When civilian rule replaced military dictatorship in 1985, there were only 17 ministries in Brasilia. The number of Cabinet posts has almost doubled since the Workers' Party took office under former President Luiz Inacio Lula da Silva in 2003.

Brazil's Cabinet now has twice the number of ministers that Organization of Economic Cooperation and Development nations have on average.

Rousseff said the new ministry's priority would be to cut bureaucracy and red tape that strangle small businesses as her government strives to inject new life into the fragile recovery of the world's seventh largest economy.

Political analysts say, however, the main reason is to widen support for the president's re-election by bringing Afif Domingos' fast-growing PSD party, the third largest in Congress, into her unwieldy 18-party coalition.

"The number of ministries is a result of the president's political need to accommodate such a variety of different parties," said Octavio Amorim Neto, a political science professor at Brazil's Getulio Vargas Foundation.

Their leaders range from former communists to conservative evangelicals, such as Bishop Marcelo Crivella who became fishing minister last year, even though he admitted publicly to understanding little about fishing.

Even Rousseff's top adviser from the business sector, steelmaker Jorge Gerdau, criticized the new ministry, saying the government could operate with "half a dozen" key ministries and did not need 39.

"But as the number of parties grows, this is all but impossible," Gerdau, who heads an advisory group on making government more efficient, told the Folha de S.Paulo newspaper.

TAX BURDEN

Officials in Rousseff's administration say that while the federal government has grown steadily in size, revenues have risen even faster.

But economists warn that the increasing cost of government is to blame for Brazil's tax burden, which at 36 percent of GDP is close to the average for rich OECD countries, but far too high for an emerging middle-income nation, economists say.

Over the past decade, Brazil greatly expanded social programs to lift more than 30 million Brazilians from poverty through conditional cash transfers, to the point where spending on social assistance, pensions, health and education now account for 91 percent of the government's current expenditure.

That has come at the expense of public investment in Brazil's deficient infrastructure that has become a costly hurdle to economic growth, said economist Mansueto de Almeida of the government think tank IPEA. Add Brazil's high taxes and labor costs and that has undermined Brazilian industries' ability to compete in the world, he said.

The once-booming Brazilian economy grew a mere 0.9 percent last year and the government has resorted to a barrage of tax breaks, lower interest rates and other incentives over the past two years to try to restore solid growth, so far to no avail.

De Almeida said the Rousseff government had begun to see the tax burden as a problem, but had no solution, especially since it was cranking up spending as it enters an election year.

"We have a large government that increased the number of ministries, expanded social spending, but wants to increase investment to grow: something has to give," he said.

(Reporting by Anthony Boadle; Editing by Peter Cooney)

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