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ed, 20 Jan 1999, 8:14pm EDT
Brazil Congress to Vote on Pension Tax to Slash Growing Budget Deficit
Brazil's Congress to Vote on Tax to Cut Budget Gap (Update5) (Adds
congressional vote.)
Brasilia, Brazil, Jan. 20 (Bloomberg) -- Brazilian lawmakers approved a
procedural motion that will lead to a vote on a tax on pensioners, a key
test of the government's ability to narrow a yawning budget deficit and
shore up investor confidence.
Stocks rose on optimism the lower house of Congress will pass a bill it
defeated four times last year, rather than risk a burst of capital
flight and the cut-off of international aid after last week's currency
devaluation. The benchmark Bovespa index rose for a fourth day, gaining
4.1 percent. ''If this measure doesn't get the vote,'' said Roberto
Dotta Filho, who manages $35 million in equities at Tudor Asset
Management in Sao Paulo, ''It's goodbye Brazil.''
Legislators approved the motion 352-143, and were expected to vote later
on the tax bill, the first item on the night's agenda.
The tax, aiming to raise 3.1 billion reais ($2 billion) this year, is
vital to convincing skeptical lenders the government can narrow its 73
billion reais budget deficit. The pension system has become a symbol of
Brazil's failure to live within its means.
In New York, Finance Minister Pedro Malan met with senior investment
bankers, financier George Soros and Federal Reserve Gov. William
McDonough at the New York Federal Reserve Bank to shore up support for
the government's efforts.
Malan Meets Bankers
Bankers attending included Jon Corzine, co-chairman of Goldman Sachs &
Co.; David Komansky, chief executive officer of Merrill Lynch & Co.; and
Henrique de Campos Meirelles, president of BankBoston Corp., according
to newswire reports.
A jump in interest rates and a 22 percent decline in the currency's
value against the dollar in the past week won't keep the government from
repaying its 320 billion reais of domestic debt, Malan said, countering
speculation of a debt rescheduling, according to the reports.
The currency weakened 1.3 percent to 1.58. Malan declined to comment on
the real's value.
Markets around the world were focused on Brazil's Congress, whose role
was underlined in testimony by U.S. Federal Reserve Chairman Alan
Greenspan at the U.S. Congress. ''Follow through in reducing budget
imbalances and in containing the effects on inflation of the drop in
value of the currency will be needed to bolster confidence and to limit
the potential for contagion to the financial markets and economies of
Brazil's important trading partners,'' Greenspan said. 'Make-or-Break'
The currency devaluation has raised the stakes for legislators typically
focused on local issues. ''Before, the defeats were only the
government's,'' said Antonio Delfim Netto, a deputy who previously voted
against the tax. ''Now a defeat could hurt the whole country.''
The taxes are part of 28 billion reais in deficit cuts proposed last
year as condition for a $41.5 billion aid package arranged by the
International Monetary Fund. If passed by the house, it will move to the
Senate for final passage. ''The bill itself doesn't guarantee success of
the fiscal program,'' said Tulio Vera, head of global emerging markets
researh at ABN Amro Inc. ''But it's the first 'make-or-break'
legislative test of the events last week.''
The vote comes as Brazil struggles to cut deficit spending amid rising
interest rates and a weaker currency. The Brazilian central bank today
boosted overnight interbank rates to 32.5 percent from 32 percent.
Capital outflows have averaged more than $500 million a day this month,
sapping reserves -- which were more than $75 billion in August -- by
more than $6 billion to about $30 billion.
Deficit
Brazil's failure to overhaul its cash-strapped pension system has become
symbolic of its inability to narrow its deficit. ''The government hasn't
the money to meet its obligations with pensioners,'' said Communications
Minister Pimenta da Veiga in television interview this morning. '' I
don't want to think about a defeat today.''
Of the government's projected spending of 250 billion reais this year,
70 billion reais will be spent on debt servicing and 110 billion reais
will go towards salaries and pensions for state workers and pensions for
private-sector workers.
While Brazil collects about 3 billion reais in taxes from 520,000 state
workers, it spends about 22 billion reais paying pension to about
900,000 retired workers.
The pension tax was to have been reconsidered in February when a new
slate of lawmakers takes over. The recent currency devaluation and spike
in interest rates pushed up the schedule.
Although the government parties comprise more than three quarter of the
lawmakers in the house, congressmen have opposed the bill because many
are retired state workers or have family members who are. ''I will vote
for the bill because Brazil's needs my vote,'' said Dep. Jose Chaves,
who voted against the bill last month.
The bill could tax retirees for the first time. Pensioners earning
between 600 reais and 2,500 reais monthly would be taxed at a rate of 11
percent to 25 percent. It would also increase to 25 percent, from 11
percent, the income tax rate for current state workers.
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