US embassy cable - 04BRASILIA936

UNCLAS SECTION 01 OF 02 BRASILIA 000936 
 
SIPDIS 
 
RIO FOR TREASURY DELEGATION - STEPHANIE SEGAL 
NSC FOR DEMPSEY 
TREASURY FOR OASIA/SEGAL 
PLS PASS FED BOARD OF GOVERNORS FOR ROBATAILLE 
USDA FOR FAS/FAA/TERPSTRA 
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC 
 
E.O. 12958: N/A 
TAGS: EFIN, ELAB, ECON, PGOV, PREL, EINV, SOCI, BR, Macroeconomics & Financial 
SUBJECT:  LULA'S NEXT FISCAL LITMUS TEST:  2004'S MINIMUM-WAGE 
HIKE 
 
 
1.  The annual adjustment of Brazil's official minimum wage 
takes effect May 1, meaning the GoB usually announces the new 
number by mid-April.  A 'strawman' figure is always included, 
and funds programmed accordingly, in the GoB's initial budget 
presentation to Congress the preceding August, but that figure 
has not been taken as a serious indicator of the final official 
one in recent years.  Lula's Worker's Party always attacked 
previous GoBs for keeping the minimum wage too low.  Lula 
during his 2002 presidential campaign proclaimed he would 
double it in real terms by 2007.  Last year, his first in 
office, he raised it 20% in nominal terms to 240 Reals per 
month. 
 
2.  The GoB's preliminary number for 2004 was a 7.9% nominal 
raise, to 259 Reals.  The August 2003 draft budget duly set 
aside about two billion Reals to cover that amount.  But the 
common expectation has come to be that the GoB will announce 
something between 270 and 280.  That would reportedly require 
extra budget outlays of two to three billion Reals.  This being 
Brazil's local-election year, with some 5,600 mayoral and 
60,000 town-counselor races, various voices, especially in 
Congress -- largely oppositionists, rather than from Lula's 
leftist coalition -- are agitating for upwards of 300 Reals. 
 
3.  For President Lula, the crux is fiscal, not political.  In 
Brazil, the minimum wage is overwhelmingly a public-sector 
budget issue rather than a private-sector business concern. 
Minimum-wage workers themselves are a relatively trivial 
factor.  Reportedly no more than a few hundred thousand public- 
sector employees work for minimum wage.  (An estimated six 
million maids, gardeners and other domestic informal workers 
do, according to the official IBGE estimate.)  However, the 
latter is the basis for extensive other government expenses. 
Of Brazil's 22 million INSS (Social-Security equivalent) 
private-sector retirees, for example, 15 million get a minimum- 
wage pension.  Thus, a relatively less-skinflint hike would hit 
INSS very hard, in a year when the INSS deficit is already 
increasing so fast that it has for the first time overtaken 
that of Brazil's public-sector pension system -- an infamous 
fiscal crater. 
 
4.  Overall, CSFB calculates that each one-Real hike in the 
wage means an extra Reals 141 million from the GoB budget for 
the balance of 2004 starting May 1.  An April 16 'Estado de Sao 
Paulo' column reported that each one-percent hike over the 259 
Real figure will translate to 438 million Reals a year extra 
expenditure by the government. 
 
5.  Commentators highlight the particular plight of Brazil's 
smaller municipalities in this respect.  Especially in the 
impoverished Northeast, their budgets, with puny and sometimes 
shrinking revenues, have a far higher proportion of minimum- 
wage-linked expenditures.  It is claimed that lifting the 
minimum wage even to 270 Reals would force at least a thousand 
of Brazil's mayors into the dilemma of either not making 
constitutionally mandated outlays or violating the May 2000 
federal Law of Fiscal Responsibility. 
 
6.  The GoB announcement of its minimum-wage decision, expected 
on April 15, was postponed without explanation.  Inter alia, 
the GoB is reportedly seeking creative devices by which to 
supplement payments to minimum-wage-income families, such as 
via an existing social program dating back to 1963 ("salario- 
familia") which would make payments for children under fourteen 
to the tune of 13 Reals per eligible child.  This would 
modestly increase such minimum-income-families' buying power 
without boosting the official minimum wage, thus avoiding 
follow-on costs for INSS and other linked government 
expenditures. 
 
7.  Lula has already admitted that the wage's doubling in real 
terms by 2007 does not look feasible.  In this fiscal-policy 
sphere, too, even his critics are giving him credit for casting 
away old PT ideology and rhetoric and responsibly weighing the 
consequences for Brazil's public budget. 
 
HRINAK