RIO DE JANEIRO -- Congress dealt the government a stinging defeat when it voted down two key social security tax proposals included in a recently outlined fiscal austerity package.
More such congressional defeats could compromise both the fiscal package and the release of a substantial part of Brazil's $41.5 billion in International Monetary Fund emergency credit.
The Chamber of Deputies, the lower house of Congress, soundly defeated (205-187) the two proposals; a proposed increase, to 20% from 11%, in the social security tax paid by higher-paid civil servants on the part of their earnings that exceeds $1,000 per month; and a proposed 11% tax on social security payouts to retired civil servants, and a 20% tax on payouts to retired civil servants exceeding $1,000 a month.
These proposals would have saved the government $2 billion of the $13.1 billion in tax hikes that made up next year's $23.1 billion fiscal package.
President Fernando Henrique Cardoso justified the social security taxes/tax hikes, which were to have been in effect for five years, because public-sector social security payouts have created a $15 billion shortfall this year, nearly half of the current $35 billion social security deficit. His administration had originally planned to put the two social security tax proposals up for a vote separately, as taxing retiree payouts was quite controversial. But the government tried to push both measures through as one, a strategy that backfired. President Cardoso called the defeat "a tragedy."
He promised to resubmit the defeated proposals to congress early next year, along with proposing new ones. The government already has drawn up two new social security tax proposals that the Chamber of Deputies plans to vote on soon. One would make philanthropic enterprises -- like nonprofit Catholic schools and hospitals -- pay social security for their employees, which would generate revenues of $1 billion a year. Another would increase what commercial rural property owners pay into their employees' social security.
But the real showdown will come when Congress decides, early next year, whether to extend the January 1999 expiration date on the so-called CPMF tax, which is paid on all bank transactions, and increase it to 0.38% from 0.2% in 1999, dropping to 0.3% in 2000-2001. This tax proposal, which needs a three-fifths vote for passage (because it amends the constitution), could generate fiscal package revenue of $6 billion in 1999.
"The Chamber defeated the civil servant social security tax proposals because dozens of government coalition legislators voted with the opposition," said Luis Fernando Lopes, chief economist for the Sao Paulo-based Banco Patrimonio investment bank. "Unless the government can count on its ruling coalition for crucial votes, like for the CPMF tax proposal, it won't get enough of the fiscal package through Congress either to sufficiently cut the budget deficit or to honor its agreement with the IMF."
The Chamber defeat of the social security proposals occurred Dec. 2, the same day the IMF board officially approved an accord to reduce Brazil's public budget deficit in line with the fiscal austerity package. The IMF action paves the way for the release of the first tranches of its $41.5 billion emergency bailout to help replenish government reserves, now at $42 billion. Brazil lost $30 billion in reserves since late August because of investor fears that its shaky economics would cause a currency devaluation.
While defeat of the social security tax proposals will not jeopardize the release of the first tranche of IMF emergency credit, future defeats of other fiscal package proposals could jeopardize the release of further aid.
