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São Paulo 2015 Blog: A Breakdown of Brazil's Latest Budget Cuts

Brazilian Finance Minister Joaquim Levy during a hearing in the Economic Affairs Committee in March 2015. (Image: AP)

Tuesday, May 26, 2015

Brazil’s new economic outlook is starting to take a more concrete shape, as the federal government aims to pass economic reforms to balance its accounts and get the economy back on track to grow. On May 22, the federal government announced its largest budget cut in 13 years, freezing $22.6 billion in expenses for 2015. Additionally, the federal government is awaiting the Senate’s approval on two temporary executive actions that will reduce spending on workers’ benefits.

Ahead of the 2015 Latin American Cities Conference in São Paulo, which will examine Brazil’s economic outlook, AS/COA Online looks into the main economic reforms in the federal government’s package that are about to become a reality in the country.

Budget freeze: The plan announced last week to cut $22.6 billion from the country’s federal budget goes into effect immediately, and it spurred debate within the government. It hits 38 ministries and many popular social programs created in the last decade. The ministries of cities, health, and education together account for nearly 55 percent of the spending freeze in the accounts. The main goal of the spending freeze is to maintain Brazil’s current debt repayment conditions and to achieve a primary surplus target of 1.2 percent announced by Finance Minister Joaquim Levy in April. Levy said on May 25 that the cuts were necessary, as budget spending was not keeping up with tax revenues, which decreased by 2.7 percent in the first quarter of this year.

Workers’ benefits: This week, the federal government is waiting for the Senate to pass two temporary executive actions into law as part of its economic plan that would, among other measures, make the rules stricter around some workers’ benefits, such as unemployment and death and disability insurance. The bills initially forecast $6 billion of government savings, but that estimate fell to $4.7 billion in the most recent version of the bill approved by the country’s lower house of congress. 

Taxes: Also included in the executive action currently before the Senate is a measure to raise a tax on financial institutions’ profits from 15 to 20 percent. The tax hike would go into effect in September of this year and, through it, the federal government expects to collect $241 million by the end of 2015 and $1.2 billion in 2016. According to Brazil’s Central Bank, financial institutions operating in Brazil took in more than $13 billion in profits in 2014.

Minister Levy was at AS/COA in New York in February of this year, where he outlined Brazil’s economic trends and explained what the budgetary and macroeconomic measures entail. Watch the video:

Incentives: Another federal policy announced addressed incentives, given out mainly through infrastructure concessions. The federal government will launch a second round of bidding for public contracts in June, which will now involve not just roadways but railway projects as well. The contracts should yield more than $10 billion in investments.

While lobbying the Brazilian congress to approve the executive actions, the Finance Ministry departed from its previous growth projection of 0.8 percent and said it now anticipates GDP to contract by 1.2 percent in 2015, the country’s lowest growth rate in 20 years. The revised figure, which was based, in part, on a rise in inflation during the first quarter of this year, is lower than the International Monetary Fund’s most recent projection for the country of a one percent contraction.