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Brazil announces measures to balance budget; it includes controversial tax on financial transactions

Tuesday, September 15th 2015 - 10:13 UTC
Full article 6 comments
Less subsidies for the chemical industry, cuts refunds to manufactured goods exporters by 2 billion Reais and raised the capital gains tax to up to 30% Less subsidies for the chemical industry, cuts refunds to manufactured goods exporters by 2 billion Reais and raised the capital gains tax to up to 30%
“We are living through difficult times and we have to adjust a lot of things,” Finance Minister Joaquim Levy said at a news conference. “We are living through difficult times and we have to adjust a lot of things,” Finance Minister Joaquim Levy said at a news conference.

Brazil's government announced on Monday spending cuts and tax increases totaling 65 billion Reais ($16.9 billion) 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 32 billion 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.

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

The measures are meant to bridge a shortfall of 30 billion Reais in the 2016 budget that President Dilma 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.

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 200 million Reais.

The reduction in public health and housing spending was a bitter pill for Rousseff who along with her 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.

Lawmakers had already rejected an earlier proposal to reinstate the CPMF financial transaction tax. Levy said the CPMF would be levied for at least four years.

Categories: Economy, Politics, Brazil.

Top Comments

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  • Brasileiro

    I agree to pay more taxes if it is to resolve the issue. But the government must spend better and more evenly, more effectively.

    I also agree that once the tax issue is resolved Brazil does not provide more information to any rating agency. Brazil to refrain from having investment grade.

    Sep 15th, 2015 - 10:33 am 0
  • Skip

    Well you are getting your wish about not having an investment grade.

    A government that doesn't release timely and accurate financial information is a scary concept.

    How will you know how your taxes are being spent if they keep it secret?

    Sep 15th, 2015 - 10:50 am 0
  • Eurgringo

    This package will be watered down by Congress significantly. Reintroducing the financial transactions tax is a mistake and will reduce economic activity.

    Better to save money by reducing public spending rather than imposing new damaging taxes. The government are all over the place and these announcements increasingly lack credibility.

    Sep 15th, 2015 - 03:23 pm 0
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