Cablegate: Brazil Minimum Wage Decision Reinforces Lula's

This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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

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