President Jose Sarney today sent the Congress an important package of tax reforms and state spending cuts that should reassure Western bankers worried by Brazil's decision to sidestep the International Monetary Fund's economic austerity policies.
He announced "drastic measures," including a federal hiring freeze and a 10 percent cut in payroll costs for state-backed companies.
The civil service would also cut staff costs by 20 percent and all new federal investments will be approved personally by the president.
Finance Minister Dilson Funaro said the savings from these decisions would be equivalent to savings from firing 17 percent of Brazil's civil servants, and the effect would be to reduce next year's deficit by 0.5 percent of gross domestic product. This year's estimated deficit is 2.7 percent.
The moves come as Brazil prepares to renegotiate $16 billion in short-term credits owed U.S. and other Western banks, which are due to expire Jan. 17.
Last weekend, Funaro, after talks in Washington, said that Brazil would not seek early IMF approval for its program and was not interested in rescheduling its full $103 billion debt at present.
Funaro told a congressional commission Wednesday that he had been under strong IMF pressure to continue with a recessionary policy designed to slow inflation and shrink deficits. The IMF had demanded that the 1986 government accounts should yield a surplus of almost 4 percent of GDP.
Though Sarney said Brazil's 6 percent growth this year showed the country was now "back on track," emerging from deep recession with real pay increases and the creation of 1.5 million new jobs, a profound change in taxation systems was needed.
Such new tax policies would "reduce concentration of wealth and democratize income," as well as balance the budget, he said.
For those earning less than $300 a month, top tax burdens will drop from 12 percent to around 4 percent. The extra burden will be carried by tax increases on the nation's top 3,800 companies and on capital gains.
Sarney also announced measures to deregulate the economy and clear away bureaucratic complications.