GOB BACK-AND-FORTH OVER EARLY 2004 BUDGET FREEZES

UNCLAS SECTION 01 OF 02 BRASILIA 000291 SIPDIS NSC FOR SHANNON TREASURY FOR SSEGAL PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE USDA FOR U/S PENN, FAS/FAA/ITP/TERPSTRA USDOC FOR 4322/ITA/IEP/WH/OLAC-SC E.O. 12958: N/A TAGS: ECON PGOV EINV EIND EAGR SOCI BR SUBJECT: GOB BACK-AND-FORTH OVER EARLY 2004 BUDGET FREEZES ¶1. SUMMARY. FINANCE MINISTER PALOCCI'S AUSTERITY APPROACH HAS PREVAILED YET AGAIN, WITH PRESIDENT LULA'S DECISION TO ENDORSE THE FREEZE OF 4.5 BILLION REALS (USD 1.6 BILLION) IN 2004 GOB BUDGET EXPENDITURES. LOCAL MEDIA FOR THE LAST WEEK HAD BEEN REPLETE WITH REPORTS THAT LULA'S CHIEF OF STAFF DIRCEU AND PLANNING MINISTER MANTEGA WERE PRESSURING AGAINST THE STEP. LULA'S LATEST ENDORSEMENT OF HIS FINANCE MINISTER'S CAUTION-FIRST APPROACH OUGHT TO QUASH THE MARKET MINI-JITTERS WHICH BEGAN TO ARISE IN LATE JANUARY OVER SUPPOSED GOB ECONOMIC-POLICY IRRESOLUTION. END SUMMARY. ¶2. BACKGROUND: A PERENNIAL FEBRUARY FISCAL ISSUE FOR THE GOB IS WHETHER TO SUSPEND ("CONTINGENCIAR") DISCRETIONARY BUDGET EXPENDITURES FOR THE COMING FISCAL YEAR, AT LEAST TEMPORARILY, AND IF SO BY HOW MUCH. THIS IS A STANDARD, REQUIRED STAGE OF BRAZIL'S FEDERAL BUDGET PROCESS. THE EXPENDITURES IN QUESTION TYPICALLY ARE THOSE FOR INVESTMENT PROJECTS ADDED BY CONGRESS DURING DEBATE OVER THE GOB'S INITIAL BUDGET PROPOSAL SUBMITTED IN AUGUST. ONCE CONGRESS APPROVES A FINAL BUDGET (WHICH IT MUST DO BY LAW BEFORE CALENDAR-YEAR'S END),THE PRESIDENT MUST SIGN IT WITHIN 30 DAYS. THEREAFTER, HOWEVER, THE GOB HAS ANOTHER THIRTY DAYS TO DECLARE WHETHER IT PLANS TO SPEND THE AMOUNTS AUTHORIZED, WHICH IT HAS AUTHORITY NOT/NOT TO DO IN FULL, OR AT ALL. IMMEDIATELY UPON ENTERING OFFICE IN JANUARY 2003, FOR EXAMPLE, THE LULA GOVERNMENT SUSPENDED 14 BILLION REALS OF INVESTMENT EXPENDITURE IN ITS `INHERITED' BUDGET FOR 2003, AND ENDED UP SPENDING UNDER TWO BILLION THROUGH YEAR'S END. ¶3. THIS PROCESS ALLOWS BRAZIL'S EXECUTIVE TO WALK BACK AT LEAST PART OF THE UNREALISTIC REVENUE ASSUMPTIONS AND CONCOMITANT SPENDING INCREASES THAT CONGRESS INVARIABLY ADDS TO THE GOVERNMENT'S ORIGINAL BUDGET SUBMISSION. THIS YEAR, FOR EXAMPLE, CONGRESS ADDED 11 BILLION REALS TO THE GOB'S 2004 REVENUE PROJECTIONS, JUSTIFYING ITS ACTION WITH, AMONG OTHER ITEMS, A GDP GROWTH PROJECTION OF 4%, VS. 3.5% IN THE GOVERNMENT'S SUBMISSION. THE INCREASED REVENUE PROJECTION WAS THEN USED TO AUTHORIZE EXTRA EXPENDITURE, INCLUDING A HIKE IN THE INVESTMENT BUDGET FROM THE 7.8 BILLION REALS OF THE GOB'S ORIGINAL BUDGET SUBMISSION TO 12.4 BILLION REALS. 
¶4. LOCAL MEDIA FOR A FORTNIGHT HAVE HEADLINED A SUPPOSED TOP- LEVEL INTRA-GOB BACK-AND-FORTH ON THE ISSUE OF SPENDING SUSPENSIONS FOR 2004. PALOCCI WAS PRESUMED EX OFFICIO TO FAVOR A PARTIAL SUSPENSION. PRESIDENTIAL CHIEF OF STAFF DIRCEU REPEATEDLY DECLARED THE 2004 INVESTMENT BUDGET SHOULD AND WOULD BE FULFILLED IN FULL. MINISTER OF PLANNING MANTEGA, WHOSE JOB IT IS TO DRAFT THE FORMAL SPENDING PLAN FOR THE YEAR, WAS QUOTED MORE CAUTIOUSLY ALONG THE SAME LINES. SOME PT MINISTERS, INCLUDING MANTEGA, REPORTEDLY FELT LULA'S GOB WOULD BE ON SHAKY POLITICAL GROUND IF IT WERE TO SUSPEND ANY INVESTMENT, SINCE THE PT LONG ATTACKED PREVIOUS GOVERNMENTS FOR FAILING TO EXECUTE ALL AUTHORIZED EXPENDITURES AND THUS MAKING THE BUDGET "A FICTION." UNEXPECTEDLY GOOD JANUARY GOB TAX COLLECTIONS, WHICH CAME IN 1.8 BILLION REALS OVER THE GOVERNMENT'S 2004 BUDGET TARGET, ALSO UNDERMINED THE MINISTRY OF FINANCE'S CONSERVATIVE STANCE, IN THE EYES OF CRITICS. ¶5. THE UPSHOT: ALL LOCAL MEDIA ON FEBRUARY 6 REPORTED LULA'S DECISION, ALBEIT STILL NOT PUBLICLY ANNOUNCED, TO GUARANTEE GOB EXPENDITURE ON PUBLIC-INVESTMENT IN 2004 OF ONLY THE 7.8 BILLION REALS LAID OUT BY THE THE GOB IN ITS ORIGINAL BUDGET PROPOSAL LAST AUGUST. THE 4.5 BILLION REALS IN ADDITIONAL PROJECTS INSERTED DURING THE SUBSEQUENT CONGRESSIONAL DEBATE ARE THUS ALL TO BE ALL SUSPENDED. (NOTE: AT LEAST ONE LOCAL ACCOUNT INACCURATELY REFERRED TO THE GOB'S BUDGET "CUTS" AND THE FIGURE OF FOUR BILLION REALS. END NOTE). IN AN EVIDENT ATTEMPT TO MOLLIFY POLITICAL REACTION, LULA AND THE GOB SUPPOSEDLY AIM TO ACHIEVE THESE SAVINGS AS MUCH AS POSSIBLE THROUGH ECONOMIES OF MAINTENANCE AND OPERATIONAL EXPENSES ("CUSTEIO") -- RATHER THAN PURELY BY ELIMINATION OF INFRASTRUCTURE PROJECTS IN A LOCAL-ELECTION YEAR. THE TOTAL 2004 GOB BUDGET FOR "CUSTEIO" IS A REPORTED REALS 38 BILLION. ¶6. THE FEBRUARY 6 FINANCIAL DAILY `VALOR' REPORTS THAT THE GOB HAD FOUND A WAY TO FURTHER FINESSE THIS POLITICAL FIX WHILE MAINTAINING SUFFICIENT CONTROL OVER EXPENDITURES TO ENSURE MEETING ITS 4.25% OF GDP PRIMARY-SURPLUS TARGET. INSTEAD OF AN OUTRIGHT SUSPENSION, THE GOB WILL RESORT TO A FORMULA, REFERRED TO IN THE BRAZIL'S FINANCIAL RESPONSIBILITY LAW AS "TECHNICAL RESERVES," WHICH KEEPS IN RESERVE REVENUES ABOVE ITS BASELINE PROJECTION, ACCORDING TO THIS ACCOUNT. ANY "WINDFALL" REVENUES COULD THEN BE SPENT BEGINNING IN THE LAST QUARTER OF THE YEAR. HENCE, SHOULD JANUARY'S HIGHER- THAN-EXPECTED TAX REVENUES PROVE A SUSTAINED TREND, THE GOB WOULD INCREASE EXPENDITURES COMMENSURATELY FROM THE BASE LEVEL IN ITS ORIGINAL BUDGET SUBMISSION, AS OF THE FOURTH QUARTER. THIS STRATEGY WOULD FREE THE GOB FROM HAVING TO USE THE POLITICALLY SENSITIVE "CONTINGENCIAR" WORD. ¶7. COMMENT: A CLEAR MESSAGE THROUGH ALL THIS INTRA-GOB POLITICAL MANEUVERING IS THAT THE GOB'S ECONOMIC TEAM, AND FIRST AND FOREMOST PRESIDENT LULA AS SUPREME POLICY ARBITER, REMAIN DEDICATED TO THE 4.25% SURPLUS TARGET FOR THE 2004 BUDGET, UNMOVED BY THE POLITICAL MINUSES OF CONTINUED SLOW GROWTH AND JOBLESSNESS IN BRAZIL'S LOCAL-ELECTION YEAR. HRINAK