At first glance, Brazil´s new package of spending cuts and revenue raising measures is welcome. The package - designed to cover the R$38bn shortfall left by the lapsing of the CPMF, a blanket tax on financial transactions - includes some R$20bn in spending cuts. If these are introduced it would be the first time since 2003 that the government has moved to cut spending by a significant amount.
But the extra tax charges could carry a significant political cost. Some R$10bn is to be raised through increasing the tax rate on net profits of financial institutions and on certain financial transactions, including bank lending.
That has angered opposition politicians who see it as violating an agreement not to impose new taxes to compensate for the loss of the CPMF. Renewal of the CPMF tax was voted down in the Senate after a bitter fight that culminated in a vote against the government on December 13. Opposition leaders from the Democrats, Social Democrats and left-wing PSOL (presumably upset by the spending cuts) are now threatening to make life tougher for ministers. And the government could well find negotiations over the 2008 budget more difficult than they expected.