Government gets real-ity check after cuts announcement

Brazil’s Finance Minister Fernando Haddad announced on Wednesday the government’s long-awaited plan for budget cuts, deemed necessary to meet the year’s fiscal targets.

The hope from the administration was that the announcement would reduce uncertainty and appease markets while remaining aligned with the Lula government’s goals, but instead the plan triggered frustration and market volatility.

Alongside spending cuts and caps on real minimum wage increases and public servant salaries, Mr. Haddad also announced a move to raise the tax threshold, meaning that anyone earning BRL 5,000 or less per month would be exempt from paying income tax. This was accompanied by an increase on taxes for those who earn more than BRL 50,000 a month, measures that, in themselves, make sense considering Brazil’s highly regressive tax apparatus.

On the one hand, this extra announcement had political reasoning. Worried about how spending cuts would play among its base, the government sought to soften the blow by tacking on its income tax threshold plans. However, the added measures ended up sucking out almost all of the credit that markets were willing to give the government for its fiscal plan.

The announcement caused the Brazilian real to plummet to its lowest nominal value in history, passing the BRL 6 threshold for the first time ever.

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