Brazil’s President Dilma Rousseff has taken one of her biggest political gambles yet to win back the trust of investors by cutting R$18bn ($6.7bn) a year in pension and unemployment benefits.
The government is set to publish rule changes on Tuesday that will save Latin America’s largest economy 0.3 per cent of its gross domestic product next year, shoring up the country’s finances and helping to preserve its all-important investment grade credit rating.
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“If we don’t act in a sustainable way now, future generations will have to pay a high price,” Ms Rousseff's chief of staff, Aloizio Mercadante, said after announcing the measures late on Monday. In a press release, the presidential palace described the cuts as a way to “guarantee the government’s fiscal balance in the coming years and attract investments so the country can resume economic growth”.
Once the darling of emerging markets, Brazil’s economy has slowed from 7.5 per cent growth in 2010 to around 0.1 per cent this year under the watch of Ms Rousseff. The country also risks suffering its first primary fiscal deficit on record in 2014.
However, after only narrowly winning re-election in October, the former leftwing guerrilla has been forced to make a series of market-friendly moves to put the economy back on track, delighting investors but angering many voters and fellow members of the Workers’ party (PT). After appointing the Chicago-trained banker Joaquim Levy as her new finance minister last month, Ms Rousseff even promised last week to sell off part of Caixa, the state-run bank responsible for administering the Bolsa Família social welfare programme.
“I just found out about the changes (to employment benefits) and, wow, I could not be more disappointed — they are taking money away from the poor,” one PT supporter tweeted on Tuesday as Brazilians interrupted their holiday celebrations to express their indignation on social media.
I just found out about the changes (to employment benefits) and, wow, I could not be more disappointed — they are taking money away from the poor
- Tweet by Workers’ party supporter
As part of Tuesday’s rule changes, workers will have to be employed for 18 months rather than six before they are eligible for unemployment insurance. Employees on low salaries will also have to work for six months rather than just one before they can receive a state-sponsored yearly bonus.
The government included further restrictions to limit fraud in the system and made it harder for the spouses of deceased workers to lay claim to their pensions.
Economists have long called for such changes to Brazil’s wildly generous employment laws as well as the pension system, which is often described as a “financial time-bomb”, ready to go off as more of Brazil’s relatively young population hit retirement age.
Brazil’s rapidly deteriorating fiscal situation as a result of the government’s toxic combination of state interventionism and populist tax incentives has only made such changes more urgent, they say. Brazil’s primary budget surplus, or excess revenue before debt payments, has fallen from 4 per cent of GDP in 2008 to an expected deficit this year, raising alarm among investors and credit rating agencies.
The government said it would enact Tuesday’s rule changes via a so-called provisional measure — a controversial legal tool designed for emergencies that allows the president to enforce immediate changes without the prior approval of Congress.
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