Brazil announces $17bn in taxes and spending cuts to combat recession

http://www.theguardian.com/world/2015/sep/14/brazil-taxes-spending-cuts-recession-economy

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Brazil’s government has announced spending cuts and tax increases totaling 65bn reais ($16.9bn) as it races to close a budget deficit that led to a downgrade of the country’s credit rating last week.

The biggest item was the revival of the unpopular CPMF tax on financial transactions that will raise 32bn reais next year if it passes a congress opposed to new taxation.

The drastic spending cuts hit health and low-cost housing programs, investments in infrastructure, agricultural subsidies as well as salaries and bonuses for government employees.

Related: Dilma Rousseff: can Brazil’s fighter survive the turmoil? | Observer profile

Brazil’s economy is in recession, and the economic woes have contributed to President Dilma Rousseff’s plummeting popularity ratings, which have dipped to single-digits

The government reduced tax subsidies for the chemical industry, cut refunds to exporters of manufactured goods by 2bn reais and raised the capital gains tax to up to 30% to bring in 1.8bn reais in new revenue.

The measures are meant to bridge a shortfall of 30bn reais in the 2016 budget that Rousseff sent to congress last month and reach a budget surplus of 0.7% of GDP before interest payments.

“We are living through difficult times and we have to adjust a lot of things,” Finance Minister Joaquim Levy said at a news conference on Monday.

The latest round of spending cuts sought by Levy includes the elimination of 10 federal ministries in Brasilia, a symbolic measure that will save only 200m reais.

The reduction in public health and housing spending was a bitter pill for Rousseff who along with her leftist Workers’ party have resisted cuts to Brazil’s social programs. The party’s flagship family conditional cash-transfer program called Bolsa Familia was not touched by the cuts.

The forecast of a 2016 budget gap cost Brazil its hard-won investment-grade rating from Standard & Poor’s last week, and other credit agencies are expected to follow suit.

A downgrade by a second agency to speculative territory would require many foreign pension funds and other large investors to unload Brazilian bonds.

The downgrade appeared to strengthen Levy’s position. He has been the government’s face of austerity but his push for deeper spending cuts to improve Brazil’s finances and avoid a downgrade faced resistance inside the cabinet and congress.