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Brazil's Fiscal Stimulus Package Announced

by Mike Godfrey,, Washington

24 January 2007

The Brazilian government has announced details of its long-awaited fiscal stimulus package which includes billions of dollars in tax cuts to encourage higher levels of investment and boost economic growth.

President Luiz Inacio Lula da Silva's grand economic plan, the so-called Accelerated Growth Program, is based around tax cuts and rebates totalling 6.5 billion reals (US$3.1 billion) in 2007. This will rise to 11.5 billion reals by 2011. Lula da Silva said that the tax cuts would be funded in part by a reduction in the government's budget surplus.

The measures will exempt capital goods producers from the payment of a variety of taxes, such as the industrial tax and welfare tax. They will also increase the value of personal computers exempted from tax. Currently, PC buyers do not pay tax on computers worth up to 3,000 reals, but the new measure increases this to 4,000 reals.

To help the president achieve his target of maintaining 5% annual growth in gross domestic product over the four years of his second term, which began last October, the growth plan also calls for an additional 67.8 billion reals to be invested in the country's infrastructure, primarily energy and transport systems, on top of the 436 billion reals already earmarked for public investment.

Economists have warned that Lula da Silva's plans do not go to the heart of Brazil's economic problems, which include an escalating public payroll bill. The President's plan aims to check rising public sector wages by pegging increases to no more than 3% above inflation, but analysts have said that this will only prolong the problem, while the growth plan may actually encourage inflation.

However, Lula da Silva has argued that the government's fiscal stability allows the plan to be carried out "without compromising (macroeconomic) stability."

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