GOVERNMENT PUSH FOR FINANCIAL TRANSACTIONS TAX

S E C R E T SECTION 01 OF 03 BRASILIA 000160 SIPDIS NOFORN SIPDIS E.O. 12958: DECL: 01/31/2018 TAGS: PGOV KDEM KCOR EFIN BR SUBJECT: GOVERNMENT PUSH FOR FINANCIAL TRANSACTIONS TAX REVEALS POLITICS AS USUAL REF: A. 07 SAO PAULO 1005 ¶B. SAO PAULO 12 ¶C. RECIFE 3 ¶D. 07 BRASILIA 2258 ¶E. 07 BRASILIA 2233 Classified By: Deputy Chief of Mission Phillip Chicola, reasons 1.4 b/d . ¶1. (SBU) Summary. In the months-long unsuccessful effort to renew the tax on financial transactions ("CPMF"),the Lula administration tried to win congressional votes by distributing jobs and federal funds, meddling in the legislative agenda, and seeking favors for key legislators. The episode offers examples of day-to-day political practices and a case study in the persistence of spoils, favors, manipulation, and cooptation in Brazilian politics. End summary. ¶2. (SBU) Opposition senators and a few government coalition turncoats handed President Lula a colossal defeat on December 12 by killing the proposed constitutional amendment to extend the tax on financial transactions (refs A, B, C, and D), which generated 40 billion reais (about USD 22 billion) in federal revenues a year. The executive branch tried desperately to win over fence-sitters but fell short, losing 45-34 on a vote that required 49 ayes for a government victory. As a constitutional amendment, the CPMF bill had to pass both houses of congress twice with at least 60 percent approval, with a short intervening period between each body's two votes. Passage in the Chamber of Deputies was never much in doubt, but forces are more evenly balanced in the Senate and passage required either several individual opposition senators voting against their parties or a deal to get one of the two major opposition parties to support the CPMF renewal. The executive unsuccessfully tried a wide variety of traditional and new tactics to win congressional approval. Tactic 1: Clear the Agenda ¶3. (U) The government twice postponed bringing the CPMF to a vote in the Chamber of Deputies to gain bargaining time. More significantly, in an apparently unprecedented step, the government withdrew four Provisional Measures (MPs) from Congress, prompting opposition politicians to accuse the president of abusing the MP mechanism, intended for only the most urgent matters. (Note: The MP is an executive decree on which Congress must vote within 45 days, after which the MP "locks" the legislative agenda until voted. The executive sent a growing number of measures to Congress through this mechanism, which has effectively backed up the legislative process on regular bills. End note.) Tactic 2: Distribute Funds and Jobs ¶4. (U) From August to mid-December the presidential palace released millions of reais for congressional pork barrel projects to curry favor with targeted legislators. According to press reports, the executive obligated 1.45 billion reais (about USD 805 million),including 163.4 million (about USD 91 million) in the first six days of December. One report cites 740 million reais (about USD 411 million) disbursed in the first 15 days of December. Such pork barrel projects, which are amendments to the budget that foster political support in deputies' home states, are often never implemented because Congressional approval of Brazil's budget does not require the executive to spend funds, but merely authorizes the expenditures, which then become discretionary for the executive. The executive often uses such projects as a means to of encouraging votes in favor of key legislation. The government also yielded to allied parties' demands for senior government jobs and appointed members of two such parties to positions in Petrobras and Furnas (a parastatal electric company). Tactic 3: Placate the Opposition ¶5. (U) After the Chamber of Deputies passed the CPMF bill on September 25 and again on October 10, the bill reached the Senate during a protracted scandal involving accusations of wrongdoing against its president, Renan Calheiros, a government ally whom opposition leaders were determined to oust from the presidency. Calheiros resigned the presidency BRASILIA 00000160 002 OF 003 on December 5 (ref E) shortly after Lula signaled he was withdrawing his support, a move made only after it became clear that Calheiros had become more of a liability than an asset in obtaining passage of the CPMF. The perception that the government had finally abandoned Calheiros also served as a positive gesture to the opposition. Tactic 4: Help Congress Focus ¶6. (U) As the window closed for a Senate vote before a mid-December recess, the government ramped up its efforts to reach the 49 votes needed. A new problem of MPs had to be resolved, though, since even after the government had withdrawn four, others had reached the 45-day mark and locked the Chamber's agenda. If the Chamber had passed any MP, it would have gone to the Senate and "locked" the agenda there, preventing a CPMF vote, so the government took the unusual step of having its (majority) deputies go into "obstruction," that is, not vote. Opposition politicians accused the executive of unfairly manipulating the congressional agenda but they were powerless to prevent it. Tactic 5: Help Problem Senators Find New Careers ¶7. (SBU) Shortly before the Senate vote, President Lula got personally involved and tried to persuade Federal District ("DF") Governor Jose Roberto Arruda (DEM) to appoint Senator Adelmir Santana (DEM-DF) to a senior post in the DF government. Had that occurred, Santana's alternate, from the Brazilian Democratic Movement Party (PMDB),would have assumed office, almost certainly giving the government another vote for the CPMF renewal. Although Lula transferred project funds totaling 1.5 million reais (about USD 830,000) to the DF government, Arruda ultimately refused to recruit Santana out of the Senate. Tactic 6: See If the Judiciary Will Help Out ¶8. (S/NF) Sensitive reporting indicates that government officials sounded out key judges for assurances that senators who were vulnerable under new party fidelity rules (ref E) would be protected if their former parties sued for the jobs, but the judges said they could not make such assurances. Sensitive reporting also indicates that government officials pondered whether opposition parties could expel senators voting for the CPMF extension and, in light of the new party fidelity rules, then force them to give up their seats, since they had involuntarily switched out of their parties. The government officials reasoned that such a judicial precedent would be bad for Brazil, as it would give parties total control over their benches, making individual legislators practically irrelevant. The officials did not know what the court would decide if the issue were to come up. (Comment: Mission believes it is unlikely that the courts would allow the new rules against party switching to be used against expellees. End comment.) Tactic 7: Take Advantage of Opposition Weakness ¶9. (U) President Lula ordered his ministers to negotiate with the opposition Brazilian Social Democracy Party (PSDB), which was split position between its 13 senators and five governors. The PSDB senators were mainly against the CPMF, but PSDB governors, who receive federal CPMF funds, pressured them to approve the CPMF. Lula sent former finance minister and sitting federal deputy Antonio Palocci (Workers Party, PT, government; of Sao Paulo) and Pernambuco Governor Eduardo Campos (Brazilian Socialist Party, PSB, government coalition) to negotiate with PSDB Senate leaders on December 11, but they did not reach agreement. Tactic 8: When All Else Fails, Grovel ¶10. (SBU) Lula's final and desperate gesture was a letter to the Senate in the evening of December 12 during the CPMF pre-vote debate offering to direct all the revenues toward health and to advance tax reform if the CPMF were renewed for one year--the deal that many in the opposition had sought from the beginning. The gesture came too late, and the bill was defeated. Comment BRASILIA 00000160 003 OF 003 ¶11. (C) In the end, not even the ability to use money, jobs, and influence were enough for the Brazilian executive to convince congress to extend an unpopular 40 billion reais annual tax on checks and bank transfers. However, the victory was not in reality a triumph of popular democracy over questionable political tactics. The opposition's objection to the CPMF did not arise from principle or even from popular pressure, but rather out of concern that extension of the CPMF would provide an additional coffer for the PT and its allies to buy influence in the run-up to the 2008 municipal elections. Most tactics used by the executive were within the time-honored tradition of Brazilian politics, demonstrating how the political system itself fosters such practices by allowing the executive to release funds at will, send and withdraw provisional measures, and try to take advantage of the Congressional alternate ("suplente") system, among other powers at its disposal. By revealing how completely the once self-styled "untainted" Workers' Party has adapted to the existing system, this episode also reconfirms how resistant to change the political culture is, and how much more there is for Brazil to do in consolidating its democracy. SOBEL SOBEL