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Wednesday, October 28, 1998 Published at 10:08 GMT

Business: The Economy

Brazil finance measures get thumbs up

President Cardoso wants to get Brazil's economy back on course

The International Monetary Fund has welcomed the Brazilian austerity plan, which is aimed at stabilising public finances and prevent capital flight.

Brazil Correspondent Stephen Cviic: "Higher unemployment and more hardship"
A spokesman described it as an important step in Brazil's stabilisation and reform programme.

He said it would be supported by the Fund and other members of the International Community.

The BBC Economics Correspondent, James Morgan, says a lending package worth about $30bn is expected to be announced within a week.

The tough package of spending cuts and tax rises was announced by Brazilian finance minister Pedro Malan.

Economics Correspondent James Morgan: Plan received muted welcome from markets
The government wants to cut its budget by 28bn reals ($24bn) next year.

The package will hit corporations, civil servants and everyone with a bank account.

The government plans to:

  • Increase a tax on financial transactions from 0.2% to 0.38%, declining to 0.3% in 2000; the tax will affect every financial instrument from cheques to stock market investments.
  • Raise a tax on corporate earnings from 2% to 3% and levy the tax on banks as well.
  • Raise social security payments for government employees and collect them from pensioners too.
  • Cut government spending by 8.7bn real ($7.4bn) in 1999, and similar amounts in the following two years, with the central government bearing the brunt of the cuts.
  • Reduce the transfer of federal funds to the country's states.

The cuts and taxes announced by Mr Malan should produce a central government budget surplus of 1.8% and an overall surplus of 2.6% for the entire public sector in 1999.

[ image: Brazilian stock exchange traders were edgy ahead of the announcement]
Brazilian stock exchange traders were edgy ahead of the announcement
The government's options are limited by the constitution, as three-quarters of the budget is untouchable.

Sharp cuts of government spending were a precondition for any IMF rescue package.

Brazil's economy has been hit hard in recent months, mainly because of plummeting investor confidence in so-called 'emerging markets', and not so much because of the country's economic record.

However, the package is expected to cause the economy to shrink by 1% in 1999. For the year 2000 the government predicts a rebound of 3%.

'Unite the country'

Before details of the plan were released President Fernando Cardoso had addressed the nation on television.

He said: "At this time when Brazil is stoutly confronting a serious international financial crisis, we must be united and think of the country's highest interests."

The proposals are seen as crucial to prevent the world's eighth largest economy from becoming the latest victim of the global financial turmoil.

Mr Cardoso faces a tough challenge pushing the reforms through the Brazilian congress. The changes could well be unpopular after his supporters were defeated in elections in three of Brazil's most important states at the weekend.

Some lawmakers have vowed to resist some of the plan's measures, including higher taxes the federal government retains from spending by local governments under a controversial Fiscal Stabilisation Fund.

Last month, Mr Cardoso became the first Brazilian president to be re-elected democratically for a second term after promising a tough austerity plan to protect Brazil from economic recession and win back foreign investors.

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