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