BRASILIA (Reuters) – Brazil’s government announced spending cuts and tax increases totaling 65 billion reais ($16.9 billion) yesterday 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 percent 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 per cent 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 leftist Workers’ Party have resisted cuts to Brazil’s social programmes. The party’s flagship family conditional cash-transfer programme 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.
