Brazil slashes budget but gives welfare pledge

news.ft.com By Raymond Colitt in São Paulo Published: February 11 2003 4:00 | Last Updated: February 11 2003 4:00

The Brazilian government announced draconian cuts in this year's budget yesterday but sought to highlight efforts to resolve social and economic problems with a series of emergency measures.

In the latest sign of tough fiscal discipline since President Luiz Inácio Lula da Silva took office on January 1, the government said it was freezing R$14bn (£2.4bn) in expenditure this year.

Andre Singer, Mr Lula da Silva's spokesman, did not say where cuts would be made but insisted social welfare projects would be spared, blaming the previous government for a R$8.9bn underestimate of expenditure.

More than R$5bn in cuts are to increase Brazil's primary budget surplus target - its budget savings excluding interest payments on public debt - to 4.25 per cent of gross domestic product this year. Last August, Brazil agreed a 3.75 per cent target with the International Monetary Fund.

The increased primary budget surplus will allow the government to service its net public debt of R$881bn, or 56 per cent of GDP.

Meanwhile, an IMF mission arrived yesterday to evaluate Brazil's compliance with a $30bn loan package agreed last August. The previous government drew on $6bn of that loan. IMF officials welcomed the revised fiscal target. "This shows again the new government's commitment to a comprehensive and sustainable economic and social programme," IMF officials said.

But Mr Lula da Silva's austere economic policy has come under fire from unions and leftwing radicals in his Workers' party (PT). To assuage critics, the government announced yesterday a package of measures to point up efforts to tackle economic and social problems in spite of the tight budget.

Among the measures are tax breaks for co-operatives, financing for this year's cereal harvest, guaranteed government prices for dairy farmers, and incentives for private banks to increase lending to small farmers.

The government will also expropriate more than 200,000 hectares of fallow land to settle 5,500 poor families by the year-end and will expand and demarcate native Indian territories.

Other measures include authorising public power companies to participate in a tender to build 1,672km of transmission lines, increase scientific research grants, and install 4,200 computers to give citizens limited free internet and e-mail access.