The Revenue Report determines the beginning of voting for the 2012 budget proposal. The proposal, signed by Sen. Acir Gurgactz (PDT/Ro) with the aid of the Revenue Committee, was delivered to the Mixed Budget Committee (CMO) on October 11. It’s voting was scheduled for Wednesday, October 19.

Based on examination of the economic situation, this report seeks to provide the recent evolution of tax collection and behavioral hypotheses for macroeconomic variables, and assess revenue estimates and methodology contained in the 2012 Budget.

It’s worthwhile highlighting that, under the terms of the 2012 Budget Guidelines Law, the Ministry of Planning, Budget and Management must send the eventual update of the economic parameters for 2011 and its projections used to prepare the 2012 Budget Law Bill (PLOA 2012) to the Mixed Budget Committee by November 21. This data may require new revenues assessment for more or for less.

The new forecasts for 2012

The Revenue Report uses various macroeconomic projections for the next year and incorporates, in its revenue projection, the new tax collection numbers published in September, in the Federal Government’s fourth two monthly assessment.

For the large macroeconomic variables, in 2012 the Report forecasts that both GDP growth and the Selic rate (average) will be lower than the PLOA forecasts. On the other hand, the exchange rate and inflation will be higher.

This combination, as indicated in the report, will enable that the drop in revenue, determined by lower GDP growth in real terms, to be compensated by a scenario of greater inflation, as shown by the small variation projected for nominal GDP in 2012.

Furthermore, the Report foresees that inflation for 2012, as measured by IPCA, will reach 6%. This is a very high figure, which goes against monetary authority expectations that there will be a convergence to the center of the target next year.

However, the greatest differentials used by the Report are with regards to the revenue calculation base. Revenue achieved in 2011 has been superior to governmental estimates every month. And, only now in September, when the report pertaining to August was published, did the government recognize that its forecasts for the year were under estimated. Therefore, this perception was not part of the picture that guided the preparation of the budget proposal by the government, which took the accumulated amounts from January to June as a base.

In order to construct a new calculation base, the report is purged of nontypical income that occurred in 2011; it incorporates the effect of already approved legislative changes for various taxes (IPI on cigarettes and beverages), taxation impacts of the new projections on the exchange rate and applies this set of variables to 2011 tax collection, which was recognizably greater.

Another aspect raised by the Report is the difficulty of incorporating the effect of company and employment formalization on the various revenues. This is a phenomenon that has already been happening for various years and was not afforded appropriate treatment up to now. A significant portion of the errors that culminated in tax collection underestimates may have originated from this projection imperfection.

As the fruit of this exercise, the Report concludes that the revenues projected by the government for 2012 are underestimated and proposes a correction.

Public Administration

State. For Dilma, the state has to act where there is market failure. Especially where there are large concentrations of power or networking. For example, in the case of electricity, we must ensure that the magawatts reach the consumer’s home, regardless of who controls the transmission networks. The same applies to the highways.

Public Officials.  The former minister defends the hiring of new workers in essential activities of the state. “More engineers, more technicians, more teachers. Less general services assistant,” said the former cabinet minister in an interview with CBN radio (17/05).

Public official’s remuneration. Advocates the creation of differentiated pay for public officials as an incentive. The civil servant needs to be valued so that there are quality services.

Regulatory agencies. For Dilma, the criteria for filling positions in regulatory agencies must be technical. But when a party indicates members to agencies, this does not necessarily mean that the person is unable or does not meet technical requirements. Agencies need to act to prevent the formation of cartels, monopolies and market imperfections.

Privatization. At an event in New York, the PT’s candidate for president, Dilma Rousseff said that we should not privatize Petrobras, Eletrobras and all companies in the electricity sector and public banks. She said she supports the granting of new dams and highways to the private sector where it is cheaper to make by way of grants rather than by public works.

3. Agriculture

Family farming. At the 2nd National Meeting of Family Farming Housing in Santa Catarina, pre-PT candidate for president, Rousseff, criticized the governments that did not give importance to family farms and pledged to continue and advance in the actions of the Lula government in this area.

Rural housing. Dilma promised to make some changes to the program My House, My Life, among them the inclusion of retirement homes and the cutting of red tape. But she also promised to create within the national housing management of the Caixa Economica Federal, a specific sector devoted to rural areas.

4. Education

Education. For Dilma Rousseff quality education means more than just building, laboratories and installing broadband in schools. It is about well-paid and trained teachers. The former minister has promised the creation of six thousand daycare centers. To be a developed country, according to her, you must have quality education and daycare.

Teachers. Advocates appreciation of teachers through “decent wages” and continued education. It is favorable that school teachers have university degrees.

5. Economic Stimulus

Role of the State. During a seminar on infrastructure in Rio de Janeiro (May 10) organized by Valor Economico and the Financial Times, Dilma said: “In certain areas it is absolutely imperative that the state has active planning, regulation. I believe that the Brazilian state needs to be agile. Today it is not agile. The state is inductive, but the private sector is important. Without it, you cant build an avenue or a dam.”

Growth. Dilma, during an event in Sao Paulo (31/05) said that Brazil can grow around 5.5% per annum on average until 2014. Among the sectors which would boost this growth are oil and gas, electricity, logistics, housing construction and agribusiness.

Ministry of Micro and Small Businesses. The PT’s candidate defended during the “Industry Meeting with the Presidential Hopefuls” held by the National Confederation of Industry (CNI), the creation of a ministry oriented towards micro, small and medium sized businesses. Dilma reported that this hypothesis has been raised by the current government, but that with the arrival of the international financial crisis, the project was suspended. According to Dilma the micro and small businesses need local production support.

Industrial park. In the same CNI event, Dilma said everything that can be produced in Brazil, should be produced here. For her, we have a diversified industrial sector.

Payroll tax reduction. The pre-candidate was favorable to a topic that is being requested by employers for some time, which is the relief of the payroll. “This is fundamental. At one point, the Treasury will have to bear the difference, because it does not break the system, but capital goods and investment, export, and payroll are essential,” she said. Moreover, she said that would also discuss the Brazil cost. “We have an encumbrance in the energy sector and energy is critical throughout the production chain,” she said at an event organized by CNI (25/05).

Tax credits. During a debate sponsored by CNI, Dilma said that tax reform is now the major step towards competitiveness with other items such as tax relief and encouraging investment, increasing exports and employment. “This means so much that we complete exoneration of capital goods allowing immediate use of PIS, Confins IPI … today they leak and are not considered.” She also defended the automatic return of the tax credits based on the estimated payment in the last 12 months by entrepreneurs. “The return of 100% of these loans is essential and is done on all exporting countries,” she compared.

6. Economic policy

Economic fundamentals. On several occasions, Dilma has reinforced her commitment to the primary surplus, a regime of inflation targeting and floating exchange rate.

Inflation target. Dilma said at an event in New York, that she has as a goal the reduction of the inflation target from 2011 to 2014. But said this must be done gradually and carefully, because we live in turbulent world.

Central Bank autonomy. The pre-presidential candidate for the PT Dilma Rousseff said (10/05), in an interview after attending the seminar Brazil Infrastructure Summit in Rio de Janeiro, that she considers “extremely important” the autonomy of the Central Bank. Dilma made the statement while answering questions from journalists about the interview given by the pre-PSDB presidential candidate Jose Serra to CBN radio in which he stated that “the CB is not holy.” Asked if she intends to maintain the autonomy of CB, the PT’s candidate said: “I think the important operational autonomy to the Central Bank had in the government of President Lula. We always had a very tranquil relationship with the CB.”

Sovereign Fund. According Rousseff, the growth of the Brazilian economy opens the doors so there is extra in the national sovereign wealth fund, which currently accumulates close to R$ 17 billion, according to the pre-candidate. “Clearly, economic growth enables us to increase the sovereign fund, why not?” she asked during the “Industry Meeting with Presidential Hopefuls” held at the headquarters of the National Confederation of Industry (CNI), in Brasília.

7. Fiscal policy

Spending cuts. During a debate sponsored by CNI (25/05), Dilma says you have to cut government spending, but in a rational way. “It is not cutting spending costs, but spending costs that are not rational for the country and its investment,” she said. The pre-candidate cited the example of the gap in wages between executive officials and those who oversee the Executive.

Real interest. According to Dilma, it is possible to achieve in the coming years a real interest rate “just below 5%” and for that we need to move forward on the issue of taxation, reducing the government debt.

8. Industrial policy

Funding of public banks. Dilma said the big challenge for the next government will be to find “different sources of funding” for the economy. “The crisis showed that it was very important that Brazil has owned banks for financing. But we can only rely on the public benches. We achieved, I believe, the limit of public banks, “said the minister in an event in the United States.

Pension funds. One source of funding for infrastructure, according to the PT candidate, are the pension funds. “Without that, we will not redeem the problem of private and public savings,” said the former minister at an event organized by CNI (25/05). For the pre-candidate, you must have technical features that enable the management, induction and correct regulation of the increase in public savings without harming the private sector.

Ports. Rousseff argued during debate in the National Industry Confederation, the creation of a centralized port management to expedite the clearance at the ports that today is extremely fragmented and decentralized.

9. Social policy

Social inclusion. Dilma, during a conference on infrastructure in Rio de Janeiro (May 10), said her government has committed to a policy that continues the process of development with social inclusion.

Health. Rousseff advocates the allocation of more resources for health. In an interview with CBN radio (17/05), the former minister criticized the CPMF who, she says, took R$ 40 billion a year from the health sector. In her opinion, there are two ways to ensure more resources for health: 1. Reassign money, and 2. Create a new tax. Defends the provision of Amendment 29, which seeks more resources for health.

Medicine. Dilma argued (26/05) for the reduction of taxes on medicines. For the PT, in addition to forwarding the tax reform proposal, the government must make decisions “immediate” to lessen the tax burden. “In medicine, it is absurd to tax. The next action is immediate remedy because it is a matter of survival of the population.”

CPMF. According to the PT candidate, the end of the CPMF has not brought lower prices to consumers, as was stated by entrepreneurs at the time of the extinction. Furthermore, with the end of CPMF, we lost the ability to monitor suspicious financial transactions.

Extreme poverty. In an interview with IstoÉ (8 / 05), Dilma said her great mission is to eradicate poverty and that it is possible to do so in coming years. In the interview, she cites IPEA study showing that by 2016 it is possible to eradicate extreme poverty.

10. Reforms

Pension reform. She is against a broad pension reform. In countries that have, according to the minister, there was one problem: a race to retirement. Maintains systematic adjustments.

Tax Reform. The former minister is in favor of a tax reform that will end tax cascading. It would be a way to increase our productivity and therefore our competitiveness. She says that to reform, however, is impossible without compensation. So, to counteract the negative effect of loss of revenue, she plans to propose the creation of a compensation fund for states and municipalities.

Workday. The minister believes the government should not go on defending the reduction of working hours from 44 to 40 hours weekly. In her view, this is an understanding that needs to be built between the trade union movement and business associations.

11. Other topics

Reelection. Dilma is in favor of reelection. However, when asked if she could give up on reelection in 2014 if elected in October, she said: “He [Lula] already told me not to answer that question.”

Energy. Thinks that Brazil needs to invest in plants of Belo Monte, in the plants of San Antonio and in the mills of the Tapajos. At the same time, investing in biofuels, wind, biomass and small hydroelectric dams.

Settlement of accounts with municipalities. During the March XIII of Mayors to Brasilia, Dilma advocated the settling of accounts with the Municipalities of the INSS. According to the National Confederation of Municipalities, the municipalities should pay to Social Security R$ 22 billion. The account is being charged by federal agency withholding portions of the Municipal Participation Fund. Moreover, the INSS owes these local executives about R$ 26 billion.

Oil royalties. Argues that the producing states receive most of the royalties as bill sponsored by President Lula to Congress.

UPA. The former minister said she intended to create, if elected, more Emergency Care Units (UPA). UPAs structures are intermediate in complexity between the Basic Health Units and the doors of emergency hospital, where together they make up with an organized network of Attention to Emergencies. Also defends the Polyclinics for specialized treatment.

Security. On public safety, she speaks of a combination of “authority” and inserting in social programs of marginalized populations in regions dominated by organized crime. “Our issue is to defeat crime and we need to strengthen the National Security Force, which we created,” said the candidate of the PT in Bahia (16/05). Dilma advocated expanding the intelligence activities of the police and social programs in places where the police authority has taken control of the territory of organized crime, as occurs today with Peacemaker police units (upps) in Rio de Janeiro.

MST. During an interview on Agrishow (Ribeirao Preto, April 29), Dilma said it is very important to maintain dialogue with social movements. However, she said she did not agree with any activity of any social movement that results in lawlessness. Asked about the estimate of the National Confederation of Agriculture of loss of R $ 9 billion to the agribusiness sector caused by the “Red April,” the MST, Dilma was firm: “I’m not condoning any illegal activity. Lawlessness cannot be rewarded,” she said. Also argued against illegal land invasions.

Flooding. If elected, Dilma promises to invest R$ 10 billion in drainages. “There was no investment during the Lula government because it could not. The federal government had no obligation to invest in drainage. So it did not, but now it seems important to stop this where rain floods homes and people lose everything, “said pre-candidate in an interview with Radio Record (26/05).

Managerial Performance –The suggestions considered by Defense minister Nelson Jobim to the aviation sector, made 18 months ago, are still on paper. Among them, tariff differentiation, subsidies for regional aviation and more space in between seats.  

Fiscal Performance –The social security deficit in 2008 was 24.1% lower than in 2007, and equivalent to 1.25% of the GDP (36.2 bi). The reason was the employment expansion in nine months of the year. 

Political Performance –Congressional succession continues to cause turbulence in the political atmosphere. After meeting with Lula, Sarney confirmed his name as candidate to the Senate presidency. Lula is still trying to guarantee Temer in the House.

Economic Performance –The Central Bank reduced the basic interest rate (Selic) from 13.75% to 12.75%. Government announced the the BNDES will have R$ 100 billion for loans. 

Social Performance –Labor Minister informed that over 650 thousand workers were fired. Unemployment rates in 2008 was of 7.9%, against 9.3% in 2007. It was the lowest rate since the IBGE started the series, in 2002. 

The election results in two Capital Cities confirm the classic political rule: popularity is not something that is easily transferable.  In São Paulo, Lula was unable to manage additional votes for Marta Suplicy, who did not perform as well as expected. In Belo Horizonte, all of Aécio Neves’ and Fernando Pimentel’s prestige was insufficient to elect Márcio Lacerda.

One must also take into consideration that municipal dynamics are different from the national debate. However, the ballot boxes have sent a clear message to the PT leadership and, especially, to Minister Dilma Rousseff: the president’s support might not be sufficient to guarantee an easy election. More will be required.

Although voters didn’t follow Lula’s orientation, they did however demonstrate a strong impetus for continuity. The quantity of reelected Mayors suggests that Brazilians are less susceptible to gamble, favoring the maintenance of current public policies and awarding good administrators. This might be the natural path for Lula and his nominee for the 2010 elections.

Within the universe of political parties, it can be said that the PT and the PMDB surfaced as the main winners.  Members of the PT achieve the greatest number of Capital Cities and increased the quantity of municipalities under their administration.  Besides traditional areas, such as the São Paulo ABCD, the PT consolidated its presence in the North, Northeast and Midwest, affording continuity to the party’s interiorization process initiated by Lula.

The PMDB maintained its municipal hegemony. It has good chances in Porto Alegre, Salva­dor and Rio de Janeiro, and is part of the Kassab ticket in São Paulo. Orestes Quércia, who is the articulator of the alliance, gained space in the dispute for the party’s leadership against Michel Temer, who was in favor of a coalition with Marta Suplicy.

The big loser was the DEM. It has practically left the “G4”, becoming a medium sized party. It launched its own candidates in only 300 municipalities, lost in Rio de Janeiro and did not make the runoffs in Salvador, it’s symbolic stronghold. It may gain a little breathing room with a Kassab victory in São Paulo.

In 1994, President Lula lost the elections in first-round voting because, amongst other reasons, he vehemently attacked the Real Plan. During that year, Lula stated that the plan was electoral and was only put together in order to elect Fernando Henrique Cardoso and therefore would be short lived.

Similarly as it was unpopular to badmouth the Real Plan in 1994, opposition candidates are realizing that attacking President Lula is not good business. The PSDB, adversary of Antônio Carlos Magalhães Neto (DEM) who currently leads the dispute in Salvador, is using declarations from the time of the “monthly payoff” scandal when he stated that he would give the president a “thrashing” in order to destroy his favoritism.

Aware of the damage that this could cause his campaign, ACM Neto even threatened to implode the alliance amongst the parties for the 2010 presidential race. Eduardo Paes (PMDB), who leads the dispute in Rio de Janeiro, also attempted to justify attacks made against President Lula in 2005, when he was a member of the PSDB.

It’s hardly surprising that for a long time now Aécio Neves has been stating that he doesn’t want to be an anti-Lula candidate, quite to the contrary, he wants to be post-Lula.  This will be one of the greatest challenges to be faced by the president’s adversaries: besides not being able to attack him, they will have to conjure up a message capable of seducing the electorate.

Considering the atmosphere of the Brazilian Petroleum Institute (IBP) meeting in Rio de Janeiro, last week, there is as yet much to be discussed. The industry is united around Petrobras and, there is also a movement for minority shareholders to take judicial action to avoid having the company negatively affected.  Another vector of confusion is the possibility that exploitation contracts might be annulled, which would affect the country’s image and Investment Grade.  Curiously, Petrobras, that always maintained an arrogant posture in relation to other industry companies, now seeks support amongst the private sector, which it needs to face the threat of the new state-owned company.

An exclusive article in this weekend’s Veja magazine includes a dialogue proving that government spies (Abin) recorded conversations of the Chief Justice of the Supreme Federal Court, Gilmar Mendes. Federal and Congressional authorities were also spied upon. Mendes and President Lula will meet this Monday to discuss the issue, which is annoying the Republic.

According to the Abin agent that passed on information to the magazine, under the condition that his name would not be released, illegal bugs placed on Mendes, are far from being an isolated action, and is almost becoming routine in Brasília. The targets, name by which spied victims are known in investigator slang, usually occupy important positions.

The accusation is serious and might rock the boat in Brasília. In the House, the Illegal Phone Tap CPI (Parliamentary Inquiry Committee) is underway.  The magazine stated that José Dirceu told Lula that he was being targeted by the illegal operations and accused Tarso Genro (Justice).  The opposition may submit a requirement summoning Dirceu and Genro to render depositions.

Whatever the case, it is as yet early to talk about an institutional crisis. It will depend on how President Lula and the government’s political coordination will conduct the issue.

This is the answer given by vice-President José Alencar to the Veja magazine regarding the possibility of the third mandate: “The Constitution doesn’t allow it.  But the truth is – I have already said this and will repeat it – is that, if someone were to ask what the people would like, they would hear that they want President Lula to continue in power.  For obvious reasons: good economic performances, sensible social programs, care afforded the less favored layers of society. However, for President Lula, this is out of the question. He doesn’t accept it in any way whatsoever”.

n March, President Lula presented Minister Rousseff as the “mother of the PAC” to an approximately one thousand strong audience at the Complexo do Alemão (in the northern region of Rio de Janeiro), where he launched PAC undertakings (Accelerated Growth Program) in the Fluminense favelas. This was President Lula’s first gesture favoring a potential successor.

Coincidence or not, Rousseff began to face problems. First, there was the story of the dossier put together against former President Fernando Henrique Cardoso. Then, accusations made by a former Anac Director that the Civil Cabinet interfered in the Varig sale.

As a precaution, President Lula determined that Rousseff stay out of the municipal elections this year, with the exception of Rio Grande do Sul, where she made her political career. The President feared that she could be targeted by the opposition with the objective of politically harming him. Both Rousseff and factions of the PT and allies complained, forcing Lula to back down.

However, is this really a good thing for Rousseff? In principle, yes.  Firstly, because it will give her campaign experience.  Secondly, because it will be an opportunity for her to have some contact with the electorate, and become more well-known to the population.

However, she will have to act with much caution. There are many base parties running for the same position and this may influence the government’s relationship with its allies at the federal level. Furthermore, as stated by the president, when an ally wins, the merit belongs to him – the victorious candidate.  When the ally loses, someone else is to blame – the person who tried to help, for not having given enough effort.

Whichever the case, Rousseff has more to win than to lose. For her, it will be a good deal. Vote intention polls for the presidency post-municipal elections may bear good tidings for the Minister.