Lawmakers in Brazil Adopt Step on Austerity

In an important advance in the Government's effort to cut its deficit and reduce market pressures that have humbled the economy, the lower house of Congress tonight decisively approved a change in social security benefits for civil servants after four earlier attempts had been defeated.

The action is significant because it takes Brazil a step closer to complying with a $41.5 billion rescue package that it agreed to in November with the International Monetary Fund.

The vote also sends a signal to foreign investors and speculators that the political skills of President Fernando Henrique Cardoso and his Cabinet are sufficient to persuade a divided and recalcitrant Congress to approve his costly austerity program.

The vote tonight - the second in two days in which the Government succeeded in pushing through fundamental elements of that policy - was taken after a long string of reverses that led to the devaluation of the currency, the real, by more than 25 percent.

On Tuesday, the Senate resoundingly approved a measure that would prolong and increase a tax on checks and other financial transactions.

Several other steps remain, however, before Mr. Cardoso can proclaim victory.

The tax on financial transactions, for instance, would have to be passed by the 513-member lower house, which has a reputation for recalcitrance. That measure requires a 60 percent majority vote, because a constitutional amendment is necessary to enact it.

As a condition for I.M.F. assistance, Brazil has to cut its deficit almost in half this year.

The Government has proposed a package of $23.5 billion in tax increases and spending cuts to be incorporated in its 1999 budget.

The social security tax approved by the lower chamber tonight was the central feature of that package.

If the tax on financial transactions is renewed, it is generally expected to add $10 billion to Government revenues this year.

The proposed new social security tax would add less, $3 billion over two years, but was far more controversial. It therefore grew to be emblematic of Mr. Cardoso's entire program.

In his election campaign last year, Mr. Cardoso portrayed many of the required Government workers who would be affected as a pampered elite.

That alienated many of them, including judges, professors and other influential professionals who quickly demonstrated an ability to lobby members of Congress.

The Government's last attempt to pass the measure was last month, and the failure of the legislation then raised questions about Mr. Cardoso's ability to deliver what he had promised the I.M.F. and other lenders.

Today, in an indication of the controversy that the issue has aroused, opponents again went to Congress to demonstrate and had a pushing and shoving match with guards.

That passion spilled over onto the floor of Congress, where Cabinet members circulated among legislators in an effort to win over fencesitters and the arguments were heated.

One backer of the bill cited President Clinton's State of the Union speech on Tuesday in support of his position.

But opponents accused Mr. Cardoso of selling out Brazil, which has the largest economy in Latin America, and its 165 million people to the I.M.F. and American banks and investors.

"What the Government has asked for to calm the markets is the blood of civil servants," said Walter Pinheiro, a leader of the Workers' Party, the main opposition party. "To please investors we are being asked to massacre retirees and government employees."

The Government overcame such opposition by narrowing the focus of the tax on benefits to retirees and current Government workers, 1.4 million people in all.

A blanket exemption for retirees who earn less than $400 a month was added to the bill, and sponsors included language that would exempt all but a handful of retirees older than 70 from having to pay anything at all.

The measure moves to the Senate, where the Government hopes that a vote can be scheduled as early as next week.

The term of Congress expires on Feb. 1, and any further delays would undo much of the political impact of the vote tonight and could lead to an intensification of speculative pressure on the Brazilian currency.