Brazil’s economy has been in dire straights for some time. After years of slowing down, 2014 saw nearly zero GDP growth. The economy is expected to shrink by as much as two percent in 2015.
President Dilma Rouseff has been scrambling to plug the holes in her 2016 budget with money that simply does not exist. After much political consternation, the government has announced today a $17 billion austerity package that will freeze public-sector salaries, eliminate ministries, cut jobs and trim social programs.
Joaquim Levy, the Brazilian finance minister, proposed this plan of spending cuts and tax increases in order to avoid any further credit downgrades- last week Standard & Poor, an international credit rating agency, deemed Brazil’s sovereign debt rating junk.
“We know this effort to cut spending will only take us so far, so as would happen in any country in the world in a moment of reduced economic activity and tax income, you have to seek out other resources,” said Levy. “We’re trying to find that balance.”
The government will try to save money by slashing programs that provide social services such as sanitation, housing, training, and broadband. Additionally, a delay in wage increases for civil servants will save some 7 billion reais.
“We should thank S&P for this fiscal-austerity proposal,” said Joao Paulo Peixoto, a political science professor at the University of Brasilia. “This is only happening because of the pressure from the downgrade.”
New taxes will also be introduced on banking transactions by reviving the CPMF- a tax that expired in 2007. Some worry that the introduction of a banking tax will cause the entire budget to fail to pass in Congress.
“It’s a controversial issue,” said Eduardo Cunha, leader of the lower house of Congress. “It’s unlikely to pass through Congress because support for the government is weak.”
Mr. Cunha points to the true dilemma facing Brazil: political stagnation. Despite the great need for economic reform, Levy’s proposal is unlikely to go over smoothly as it will reduce funds available to lawmakers’ pet projects by shifting all available resources to programs deemed government priorities.
The combination of economic and political crisis, as well as the Petrobras corruption scandal, has resulted in a major selloff of Brazilian assets. The Brazilian currency, the real, has fallen to a 12-year low since the S&P credit downgrade.
All of this turmoil has led to ever-louder cries of impeachment for President Rousseff, whose ability to guide the country is being called into question. Many believe that it was the economic initiatives of Rousseff’s first term that has caused the debacle of today.