LULA'S NEXT FISCAL LITMUS TEST: 2004'S MINIMUM-WAGE

UNCLAS SECTION 01 OF 02 BRASILIA 000936

SIPDIS

RIO FOR TREASURY DELEGATION - STEPHANIE SEGAL
NSC FOR DEMPSEY
TREASURY FOR OASIA/SEGAL
PLS PASS FED BOARD OF GOVERNORS FOR ROBATAILLE
USDA FOR FAS/FAA/TERPSTRA
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC

E.O. 12958: N/A
TAGS: EFIN ELAB ECON PGOV PREL EINV SOCI BR
SUBJECT: LULA'S NEXT FISCAL LITMUS TEST: 2004'S MINIMUM-WAGE
HIKE



1. The annual adjustment of Brazil's official minimum wage
takes effect May 1, meaning the GoB usually announces the new
number by mid-April. A 'strawman' figure is always included,
and funds programmed accordingly, in the GoB's initial budget
presentation to Congress the preceding August, but that figure
has not been taken as a serious indicator of the final official
one in recent years. Lula's Worker's Party always attacked
previous GoBs for keeping the minimum wage too low. Lula
during his 2002 presidential campaign proclaimed he would
double it in real terms by 2007. Last year, his first in
office, he raised it 20% in nominal terms to 240 Reals per
month.


2. The GoB's preliminary number for 2004 was a 7.9% nominal
raise, to 259 Reals. The August 2003 draft budget duly set
aside about two billion Reals to cover that amount. But the
common expectation has come to be that the GoB will announce
something between 270 and 280. That would reportedly require
extra budget outlays of two to three billion Reals. This being
Brazil's local-election year, with some 5,600 mayoral and
60,000 town-counselor races, various voices, especially in
Congress -- largely oppositionists, rather than from Lula's
leftist coalition -- are agitating for upwards of 300 Reals.


3. For President Lula, the crux is fiscal, not political. In
Brazil, the minimum wage is overwhelmingly a public-sector
budget issue rather than a private-sector business concern.
Minimum-wage workers themselves are a relatively trivial
factor. Reportedly no more than a few hundred thousand public-
sector employees work for minimum wage. (An estimated six
million maids, gardeners and other domestic informal workers
do, according to the official IBGE estimate.) However, the
latter is the basis for extensive other government expenses.
Of Brazil's 22 million INSS (Social-Security equivalent)
private-sector retirees, for example, 15 million get a minimum-
wage pension. Thus, a relatively less-skinflint hike would hit
INSS very hard, in a year when the INSS deficit is already
increasing so fast that it has for the first time overtaken
that of Brazil's public-sector pension system -- an infamous
fiscal crater.


4. Overall, CSFB calculates that each one-Real hike in the
wage means an extra Reals 141 million from the GoB budget for
the balance of 2004 starting May 1. An April 16 'Estado de Sao
Paulo' column reported that each one-percent hike over the 259
Real figure will translate to 438 million Reals a year extra
expenditure by the government.


5. Commentators highlight the particular plight of Brazil's
smaller municipalities in this respect. Especially in the
impoverished Northeast, their budgets, with puny and sometimes
shrinking revenues, have a far higher proportion of minimum-
wage-linked expenditures. It is claimed that lifting the
minimum wage even to 270 Reals would force at least a thousand
of Brazil's mayors into the dilemma of either not making
constitutionally mandated outlays or violating the May 2000
federal Law of Fiscal Responsibility.


6. The GoB announcement of its minimum-wage decision, expected
on April 15, was postponed without explanation. Inter alia,
the GoB is reportedly seeking creative devices by which to
supplement payments to minimum-wage-income families, such as
via an existing social program dating back to 1963 ("salario-
familia") which would make payments for children under fourteen
to the tune of 13 Reals per eligible child. This would
modestly increase such minimum-income-families' buying power
without boosting the official minimum wage, thus avoiding
follow-on costs for INSS and other linked government
expenditures.


7. Lula has already admitted that the wage's doubling in real
terms by 2007 does not look feasible. In this fiscal-policy
sphere, too, even his critics are giving him credit for casting
away old PT ideology and rhetoric and responsibly weighing the
consequences for Brazil's public budget.

HRINAK