BRAZIL TO CUT BACK HIGH COST OF LABOUR / THE FINANCIAL TIMES

Brazil to cut back high cost of labour

By Jonathan Wheatley in São Paulo

Published: July 6 2009 16:28

Brazil’s government is preparing sharp cuts to the country’s very high labour costs as a way of boosting productivity and growth, Guido Mantega, finance minister, has told the Financial Times.

“We have the chance to turn the global economic crisis into an opportunity,” Mr Mantega said. “We want to make a qualitative leap in productivity and put Brazil at the forefront of global growth. These measures will make it possible for a range of industries to compete on world markets.”

The measures, expected to be announced in coming weeks, include abolishing the 25.5 per cent of each employee’s gross salary employers must pay into a range of welfare funds.

The government has launched a slew of initiatives to counteract the effects of the global economic crisis since last year. It released R$100bn ($51bn, €36bn, £31bn) from reserve requirements – the share of their deposits banks must park at the central bank – to provide funding to the banking sector during the first stages of the credit crunch. It also made short-term cuts in sales taxes on vehicles and big-ticket household electrical goods, which quickly returned sales to pre-crisis levels.

Many of those tax cuts, which had been expected to expire on June 30, were last week extended for several more months. Selected capital goods were granted new exemptions.

“We have used some short-term measures to provide an impulse during the crisis,” Mr Mantega said. “Now we are working on measures for the post-crisis period to take advantages of the opportunities offered to Brazil. For that, industry needs lower costs.”

Mr Mantega said the cuts in employer contributions would be made with no loss of benefits to workers. “We will cover the reductions with other measures,” he said, although he declined to give further details.

Worries have surfaced over the past month that the government may not be able to afford further stimulus measures. The cost of previous measures, combined with falling tax revenues, has pushed the government into the red after years of consistent primary budget surpluses (revenues minus expenditure, not counting debt payments).

There is also concern that some measures – such as pay rises for public sector workers, which are much harder to reverse later – will put a long-term burden on public accounts already in need of reform.

Net public debt has fallen to about 38 per cent of gross domestic product, although gross debt has risen since the onset of the crisis to about 61 per cent of GDP.

While the reduced labour charges will be welcomed by businesses, the measure will do little to reduce the rigidity of Brazil’s labour laws, which were imported from Mussolini’s Italy of the 1930s and give generous employee benefits while making it hard for companies to hire and fire.

Copyright The Financial Times Limited 2009