Brazil Forced To Cut Spending Over Failure To Extend Financial Transactions Tax

by Robert Lee, Tax-News.com, London

17 May 2002

The Brazilian government announced this week that as a result of Congress's failure to extend a crucial financial transactions tax (known as the CPMF), planned spending of 5.3 billion reais ($2.1 billion) will be cut from this year's budget to compensate for the shortfall.

Congress would have needed to approve the extension in March in order for there to have been no interruption in the collection of the tax. However, as a result of resistance on the part of the Brazilian Liberal Front Party the bill, which has already been passed by the lower house, remains stalled in the Senate.

Once agreement is reached, the proposed extension will still need to be voted on twice in the upper house, and will then only be imposed after a 90 day period. However political observers have said that it is virtually impossible to predict when the extension plans will be passed by the full Congress. Meanwhile, the government faces a shortfall of 400 million reals every week from mid-June, when the CPMF expires.

In a televised address to the nation following the announcement on Tuesday, President Fernando Henrique Cardoso urged Congress to pass the bill extending the tax as soon as possible: 'If there was no blocking of the CPMF, there would be no blocking of the budget,' he argued.

The Brazilian Finance Minister, Pedro Malan revealed that the shortfall created by the expiry of the financial transactions tax will be compensated by an increase in the country's financial operation tax from mid-June, and a 'budget squeeze' which is set to affect all areas of government spending with the exception of health, education, land reform, and public pensions.

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