BRASILIA, (Reuters) – A quick belt-tightening, and then back to business as usual.
That appears to be the strategy in coming months for Brazil’s newly re-elected President Dilma Rousseff, who is trying to win back the business community’s confidence without sacrificing her leftist agenda of reducing poverty and ensuring a strong state presence in the economy.
Since narrowly winning an Oct. 26 runoff, Rousseff has fueled hopes of a market-friendly shift by allowing the central bank to raise interest rates, which surprised investors and should help control inflation running above 6.5 percent a year.
Local press has also percolated with talk that Rousseff will make a large cut to budget spending, and that she is looking for a more market-friendly replacement for long-serving Finance Minister Guido Mantega.
Investors are eager for any signs of change after Rousseff’s first term in office, which was marked by average annual economic growth under 2 percent, rising budget deficits that threaten Brazil’s investment grade credit rating, and huge losses for many financial investors.
Yet comments by Rousseff’s chief of staff Aloizio Mercadante, who is among the possible candidates to run the finance ministry, were one of several recent signs that hopes for a profound change in policies are likely to be dashed.
“We cannot have a drastic cut (in government spending) that leads to recession. We have to protect people’s jobs and income,” he told reporters on Wednesday. He also told business leaders taxes will not be raised to relieve the fiscal crunch.
Other government allies say that whatever pro-market shift does occur is unlikely to last very long.
They say Rousseff will make just enough gestures to win some breathing room from ratings agencies and stave off a downgrade, but then return to aggressive spending on poverty programs and infrastructure while guiding the private sector as she sees fit.
“If we need to take some tough measures that involve sacrifices, so be it,” Senator Humberto Costa, the ruling Workers’ Party leader in the Senate, told Reuters.
However, Costa said such measures should be “limited,” and they would be applied for just a few months and then wound down.
The belt-tightening would have the purpose of “allowing us to return to policies based on economic growth and the continued redistribution of income,” he said.
‘CONVINCED HER MODEL WORKS’
The planning and finance ministries are crunching numbers to decide where spending cuts can be made, starting with easy items like government travel and office supplies, government officials told Reuters on condition of anonymity.
Bigger savings could come from fighting social security fraud, ending the inheritance of lifelong pensions by spouses of civil servants, military officers and judges, and abolishing bonus salaries that cost the state dearly in an economy close to full employment, the officials said.
The latter steps would be politically difficult. They would also still fall short of wholesale economic changes, such as a reform of the tax code, that investors say are necessary to get Brazil back to the 4 percent-plus growth it saw last decade.
