US embassy cable - 04BRASILIA1048

UNCLAS BRASILIA 001048 
 
SIPDIS 
 
NSC FOR DEMPSEY 
TREASURY FOR OASIA/SEGAL 
STATE FOR EB/IFD/OMA - O'REILLY 
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 3134/USFCS/OIL/WH 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, PREL, BR, Macroeconomics & Financial 
SUBJECT: BRAZIL MINIMUM WAGE DECISION REINFORCES LULA'S 
FISCAL AUSTERITY 
 
REF:  BRASILIA 936 
 
1. (U) The GoB announced April 29 that it would increase the 
minimum monthly wage to Reals 260 (about USD 88) from the 
current Reals 240 (reftel).  The adjustment represents an 
increase in real terms of only 1.2%, despite considerable 
political pressure on the GoB for a significantly more 
substantial rise.  To assuage critics that it is 
shortchanging the needy, the GoB also announced an increase 
(from Reals 13.48 to Reals 20 per child) in a government 
stipend targeted at families with an income less than one- 
and-a-half times the minimum wage.  While the GoB's 2004 
budget originally called for a minimum wage adjustment 
sufficient only to make up for inflation (i.e. to Reals 
256.54), significantly higher than anticipated first quarter 
revenues give the GoB budgetary room for maneuver to cover 
the additional Reals 677.7 million cost over the remainder 
of this year without vitiating its primary surplus target 
(see septel on budget). 
 
2. (U) The minimum-wage level has repercussions throughout 
federal, state and municipal budgets.  While the federal 
government has comparatively few minimum-wage employees, the 
increase will have a big impact on state and municipal 
budgets, particularly in the northeast.  Many of these 
municipalities reportedly lobbied for an increase no greater 
than that which was granted, saying they could afford no 
more.  The problem at the federal level is the need to cover 
an increased deficit in the private-sector social-security 
pension system (INSS).  The minimum pension level is linked 
to the minimum wage.  A big factor here are the so-called 
"rural pensions," which granted INSS pensions, albeit at the 
minimum level, to many agricultural laborers or small 
farmers who never contributed to the system.  The chart 
below illustrates the costs of the increase (which takes 
effect in June) for the remainder of 2004 and over the next 
twelve months. 
 
 
                Fiscal Impact of Minimum Wage 
                 and Family Stipend Increase 
                     (Millions of Reals) 
 
                                   Jun-Dec      Over next 
                                    2004        12 months 
 
Increase above budgeted level        3.46          3.46 
Cost of each 1 Real Increase       141.23 m     214.70 m 
Cost of minimum wage Increase      488.66 m     742.86 m 
Cost of Family Stipend Increase    189.00 m     324.00 m 
Grand Total                        677.66 m    1,066.86 m 
 
Source: CSFB 
 
3. (SBU) This decision appears to have been difficult for 
Lula on a very personal level.  He postponed the 
announcement several times and reportedly asked his economic 
team to review the numbers repeatedly to see if there was 
not wiggle room for a larger increase.  While Lula had 
already acknowledged that his campaign pledge to double the 
minimum wage in real terms by the end of his term was simply 
not possible, his history of having been born into a poor 
family makes him feel in a very personal way the need to 
provide relief for low-income families.  That the financial 
team won out on this issue illustrates yet again how deep 
Lula's commitment to fiscal responsibility has become. 
 
HRINAK