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Cablegate: Government Push for Financial Transactions Tax

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RR RUEHRG
DE RUEHBR #0160/01 0311555
ZNY SSSSS ZZH
R 311555Z JAN 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0950
INFO RUEHAC/AMEMBASSY ASUNCION 6553
RUEHBU/AMEMBASSY BUENOS AIRES 5277
RUEHMN/AMEMBASSY MONTEVIDEO 7206
RUEHRG/AMCONSUL RECIFE 7651
RUEHRI/AMCONSUL RIO DE JANEIRO 5745
RUEHSO/AMCONSUL SAO PAULO 1536
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

S E C R E T SECTION 01 OF 03 BRASILIA 000160

SIPDIS

NOFORN
SIPDIS

E.O. 12958: DECL: 01/31/2018
TAGS: PGOV KDEM KCOR EFIN BR
SUBJECT: GOVERNMENT PUSH FOR FINANCIAL TRANSACTIONS TAX
REVEALS POLITICS AS USUAL

REF: A. 07 SAO PAULO 1005

B. SAO PAULO 12
C. RECIFE 3
D. 07 BRASILIA 2258
E. 07 BRASILIA 2233

Classified By: Deputy Chief of Mission Phillip Chicola, reasons 1.4 b/d
.

1. (SBU) Summary. In the months-long unsuccessful effort to
renew the tax on financial transactions ("CPMF"), the Lula
administration tried to win congressional votes by
distributing jobs and federal funds, meddling in the
legislative agenda, and seeking favors for key legislators.
The episode offers examples of day-to-day political practices
and a case study in the persistence of spoils, favors,
manipulation, and cooptation in Brazilian politics. End
summary.

2. (SBU) Opposition senators and a few government coalition
turncoats handed President Lula a colossal defeat on December
12 by killing the proposed constitutional amendment to extend
the tax on financial transactions (refs A, B, C, and D),
which generated 40 billion reais (about USD 22 billion) in
federal revenues a year. The executive branch tried
desperately to win over fence-sitters but fell short, losing
45-34 on a vote that required 49 ayes for a government
victory. As a constitutional amendment, the CPMF bill had to
pass both houses of congress twice with at least 60 percent
approval, with a short intervening period between each body's
two votes. Passage in the Chamber of Deputies was never much
in doubt, but forces are more evenly balanced in the Senate
and passage required either several individual opposition
senators voting against their parties or a deal to get one of
the two major opposition parties to support the CPMF renewal.
The executive unsuccessfully tried a wide variety of
traditional and new tactics to win congressional approval.

Tactic 1: Clear the Agenda

3. (U) The government twice postponed bringing the CPMF to a
vote in the Chamber of Deputies to gain bargaining time.
More significantly, in an apparently unprecedented step, the
government withdrew four Provisional Measures (MPs) from
Congress, prompting opposition politicians to accuse the
president of abusing the MP mechanism, intended for only the
most urgent matters. (Note: The MP is an executive decree on
which Congress must vote within 45 days, after which the MP
"locks" the legislative agenda until voted. The executive
sent a growing number of measures to Congress through this
mechanism, which has effectively backed up the legislative
process on regular bills. End note.)

Tactic 2: Distribute Funds and Jobs

4. (U) From August to mid-December the presidential palace
released millions of reais for congressional pork barrel
projects to curry favor with targeted legislators. According
to press reports, the executive obligated 1.45 billion reais
(about USD 805 million), including 163.4 million (about USD
91 million) in the first six days of December. One report
cites 740 million reais (about USD 411 million) disbursed in
the first 15 days of December. Such pork barrel projects,
which are amendments to the budget that foster political
support in deputies' home states, are often never implemented
because Congressional approval of Brazil's budget does not
require the executive to spend funds, but merely authorizes
the expenditures, which then become discretionary for the
executive. The executive often uses such projects as a means
to of encouraging votes in favor of key legislation. The
government also yielded to allied parties' demands for senior
government jobs and appointed members of two such parties to
positions in Petrobras and Furnas (a parastatal electric
company).

Tactic 3: Placate the Opposition

5. (U) After the Chamber of Deputies passed the CPMF bill on
September 25 and again on October 10, the bill reached the
Senate during a protracted scandal involving accusations of
wrongdoing against its president, Renan Calheiros, a
government ally whom opposition leaders were determined to
oust from the presidency. Calheiros resigned the presidency

BRASILIA 00000160 002 OF 003


on December 5 (ref E) shortly after Lula signaled he was
withdrawing his support, a move made only after it became
clear that Calheiros had become more of a liability than an
asset in obtaining passage of the CPMF. The perception that
the government had finally abandoned Calheiros also served as
a positive gesture to the opposition.

Tactic 4: Help Congress Focus

6. (U) As the window closed for a Senate vote before a
mid-December recess, the government ramped up its efforts to
reach the 49 votes needed. A new problem of MPs had to be
resolved, though, since even after the government had
withdrawn four, others had reached the 45-day mark and locked
the Chamber's agenda. If the Chamber had passed any MP, it
would have gone to the Senate and "locked" the agenda there,
preventing a CPMF vote, so the government took the unusual
step of having its (majority) deputies go into "obstruction,"
that is, not vote. Opposition politicians accused the
executive of unfairly manipulating the congressional agenda
but they were powerless to prevent it.

Tactic 5: Help Problem Senators Find New Careers

7. (SBU) Shortly before the Senate vote, President Lula got
personally involved and tried to persuade Federal District
("DF") Governor Jose Roberto Arruda (DEM) to appoint Senator
Adelmir Santana (DEM-DF) to a senior post in the DF
government. Had that occurred, Santana's alternate, from the
Brazilian Democratic Movement Party (PMDB), would have
assumed office, almost certainly giving the government
another vote for the CPMF renewal. Although Lula transferred
project funds totaling 1.5 million reais (about USD 830,000)
to the DF government, Arruda ultimately refused to recruit
Santana out of the Senate.

Tactic 6: See If the Judiciary Will Help Out

8. (S/NF) Sensitive reporting indicates that government
officials sounded out key judges for assurances that senators
who were vulnerable under new party fidelity rules (ref E)
would be protected if their former parties sued for the jobs,
but the judges said they could not make such assurances.
Sensitive reporting also indicates that government officials
pondered whether opposition parties could expel senators
voting for the CPMF extension and, in light of the new party
fidelity rules, then force them to give up their seats, since
they had involuntarily switched out of their parties. The
government officials reasoned that such a judicial precedent
would be bad for Brazil, as it would give parties total
control over their benches, making individual legislators
practically irrelevant. The officials did not know what the
court would decide if the issue were to come up. (Comment:
Mission believes it is unlikely that the courts would allow
the new rules against party switching to be used against
expellees. End comment.)

Tactic 7: Take Advantage of Opposition Weakness

9. (U) President Lula ordered his ministers to negotiate
with the opposition Brazilian Social Democracy Party (PSDB),
which was split position between its 13 senators and five
governors. The PSDB senators were mainly against the CPMF,
but PSDB governors, who receive federal CPMF funds, pressured
them to approve the CPMF. Lula sent former finance minister
and sitting federal deputy Antonio Palocci (Workers Party,
PT, government; of Sao Paulo) and Pernambuco Governor Eduardo
Campos (Brazilian Socialist Party, PSB, government coalition)
to negotiate with PSDB Senate leaders on December 11, but
they did not reach agreement.

Tactic 8: When All Else Fails, Grovel

10. (SBU) Lula's final and desperate gesture was a letter to
the Senate in the evening of December 12 during the CPMF
pre-vote debate offering to direct all the revenues toward
health and to advance tax reform if the CPMF were renewed for
one year--the deal that many in the opposition had sought
from the beginning. The gesture came too late, and the bill
was defeated.

Comment


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11. (C) In the end, not even the ability to use money, jobs,
and influence were enough for the Brazilian executive to
convince congress to extend an unpopular 40 billion reais
annual tax on checks and bank transfers. However, the
victory was not in reality a triumph of popular democracy
over questionable political tactics. The opposition's
objection to the CPMF did not arise from principle or even
from popular pressure, but rather out of concern that
extension of the CPMF would provide an additional coffer for
the PT and its allies to buy influence in the run-up to the
2008 municipal elections. Most tactics used by the executive
were within the time-honored tradition of Brazilian politics,
demonstrating how the political system itself fosters such
practices by allowing the executive to release funds at will,
send and withdraw provisional measures, and try to take
advantage of the Congressional alternate ("suplente") system,
among other powers at its disposal. By revealing how
completely the once self-styled "untainted" Workers' Party
has adapted to the existing system, this episode also
reconfirms how resistant to change the political culture is,
and how much more there is for Brazil to do in consolidating
its democracy.

SOBEL
SOBEL

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