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 This week, leaders in President Dilma Rousseff's own Workers' Party
refused to pass a reduction in social welfare benefits designed to
save the government 9 billion reais ($2.9 billion) this year.
Instead, the House of Deputies narrowly passed a watered-down
version of the bill that reduced the measures' estimated savings by
at least 2 billion reais.
Even though the Bovespa share index is up about 16 percent since
Levy took office, the unemployment rate is still rising and so is
the nation's primary deficit, raising questions about whether his
plan of budget cuts and tax increases will put Brazil's finances in
order after years of high deficits and disappointing growth.
"(Levy) is shooting himself in the foot," Paulo Paim, a senior
Workers' Party senator who introduced many of the changes in the
watered-down bill, told Reuters. "I don't think these measures will
make us grow more in the future. They make the recession worse."
Brazil's economy has been stagnant for most of the past four years,
and is expected to shrink 1.2 percent this year, according to the
average forecast of economists in a weekly central bank poll.
Rousseff's generous spending and tax breaks in her first term left
Brazil with an overall deficit of 7.8 percent of GDP in the 12
months through March, and contributed to annual inflation currently
at 8.2 percent, well above the government's 4.5 percent target.
The time has come for Levy to show austerity "was in fact
necessary," Leonardo Picciani, the allied Brazilian Democratic
Movement Party's (PMDB) leader in the lower house, told Reuters.
"Once the house is in order, we need economic growth to come back."
The finance ministry declined to comment. Levy has said the
government's "tremendous" austerity efforts will help the economy
start growing again later this year as confidence and investment
bounce back.
In the wake of the vote on the benefits-reduction bill, Levy on
Thursday called the budget deficit the "biggest risk" to Brazil's
stability. He urged Congress to quickly approve further austerity
measures or else "the costs will be higher."
Economists have warned that, without cuts, Brazil would face an
exodus of capital, higher borrowing costs for the government and
families, and a possible currency crisis.
On the other hand, other countries have tried to narrow budget
deficits at a time when economic activity is weakening, and it
hasn't worked out, either politically or economically.
"This is a path that has already been trodden by several developed
economies since the global financial crisis – and their experience
suggests that investors in Brazil should now brace themselves for a
series of missed targets for deficit reduction," according to a note
from Capital Economics, a London-based consultancy.
DIFFERENT FROM 2003
Some pushback against unpopular measures was always expected.
Indeed, Brazil has been down this road before.
In 2003, then-President Luiz Inacio Lula da Silva held off protests
from the left wing of the Workers' Party to push spending cuts
through Congress. The savings restored investor confidence, and
Brazil's economy boomed in ensuing years, helped also by a surge in
commodity prices.
This time, though, the challenge appears greater.
Unlike Lula, who was enormously popular, about two-thirds of
Brazilians express disapproval of Rousseff in polls as unemployment
rises and she deals with a corruption scandal at state-run oil
company Petroleo Brasileiro SA.
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The cuts themselves will also be deeper and longer-lasting. Alberto
Ramos, an economist at Goldman Sachs, said it will likely be a
"three-year process" to bring the primary surplus - its budget
balance minus debt interest payments - back to 3 percent of gross
domestic product, the level he said is needed to stop Brazil's gross
debt from rising further.
Ramos warned the austerity drive "has yet to start in earnest" -
highlighted by the government's posting of a primary surplus of just
239 million reais in March, well short of the 5.15 billion reais
analysts had expected.
The primary deficit climbed to 0.70 percent of GDP in the 12 months
through March, putting the 1.2 percent surplus target Levy has set
for 2015 in doubt.
Ramos said investors will likely give Levy the benefit of the doubt,
even if he misses the 2015 target, because of his credibility as a
budget expert and former banking executive.
But Rodrigo Almeida, a political analyst with consultancy Barral M
Jorge in Brasilia, said Congress will be much less forgiving - and
that the government's already strained coalition of 19 parties could
fracture.
"Unless things get better, the rats could start to abandon the
ship," Almeida said.
Wellington Moreira Franco, a long-time PMDB leader and former
aviation minister under Rousseff, told Reuters members of his party
were questioning why they should support austerity if elements of
the Workers' Party did not.
"We're going through a very deep political crisis," he said.
Meanwhile, unemployment has risen to a three-year high of 6.2
percent in March, while recent teacher strikes in the states of
Parana and Sao Paulo have highlighted the strain of tight budgets on
everyday Brazilians.
Overall, Ramos said investors are "suspicious" of whether Levy will
have the support needed to be effective, especially with another
round of belt-tightening likely to occur by late this year.
"Do they have the degree of conviction and resilience to stick for
this as long as it's needed? We don't know," he said.
(Additional reporting by Silvio Cascione and Anthony Boadle; Editing
by John Pickering)
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