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Viewing cable 04BRASILIA291, GOB BACK-AND-FORTH OVER EARLY 2004 BUDGET FREEZES

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Reference ID Created Released Classification Origin
04BRASILIA291 2004-02-09 08:51 2011-07-11 00:00 UNCLASSIFIED Embassy Brasilia
This record is a partial extract of the original cable. The full text of the original cable is not available.
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