Brazil

The cheque bounces

Dec 19th 2007 SÃO PAULO
From The Economist print edition
A setback for Lula and new uncertainty for public finances

IT IS an odd conjunction. The government struggles to get much done. But the president, Luiz Inácio Lula da Silva, floats above other politicians on a cloud of his own popularity. On December 13th he suffered the biggest defeat of his second term, when the Senate rejected the renewal of the CPMF, a tax on financial transactions. On the same day, Ibope, a pollster, suggested that 65% of Brazilians approve of their president.

What explains this mixture of popularity and impotence? First, it is rare for any president to enjoy a majority in the Senate. He must use patronage to build coalitions and involve himself in negotiations with the opposition. Lula does neither of these things particularly well. His government has given too many jobs to Lula's own Workers' Party and to its biggest coalition partner, the PMDB, a blancmange of a party whose guiding philosophy is to wobble in the direction of power and then demand rewards for its support.

Second, an expanding economy has kept tax revenues buoyant, making arguing for more taxes tricky. In a last-minute bid to save the CPMF, Lula announced that all the 40 billion reais ($22 billion) the new tax would raise would be spent on health care. Earlier, the government said it was essential to pay for bolsa família, a large-scale anti-poverty scheme. The opposition reckoned the tax would allow the government to splurge before municipal elections next year.

The loss of the CPMF is a setback but not a disaster for the government. It can probably plug the gap through clever accounting and rises in other taxes. It could even trim a bloated bureaucracy. But the overall fiscal deficit runs close to 2% of GDP. Traders in the financial markets reckon that the Senate's blow to the public finances will discourage the ratings agencies from elevating Brazil's debt to investment grade. Lula was more serene. When his finance minister suggested that a new tax would be needed to replace the missing revenue, Lula told him to stop worrying and calm down.