Corruption scandal rocks crisis-hit Brazil while government gears up for tax hike

By MoneyTimes

Sep 11, 2015 07:27 AM EDT

The widening budget deficit has become a cause of concern for the Brazil. To speed up the economic recovery, the country needs a tax hike to ease the burden, the country's Chief of Staff Aloizio Mercadante said.

On the other hand, corruption scandal is rocking the Brazilian government more particularly defaming the President Dilma Rousseff. The country is heading for flat growth regime as GDP growth dropped to less than 0.5 percent in 2014 from a little over two percent in the previous year.

Brazil government is favoring tax hike to give a boost to the ailing economy. But, Mercandante didn't specify about the how should be the tax structure. He favored more space for interest rates so that they could ease further. Economist forecast that Brazil economy is likely to shrink by two percent for 2015. 

If Brazil government increases taxes, it's expected to bring down the deficit by Reais 30.5 billion ($7.9billion) in the next year's budget. The government can also cut down expenditure, for which, it has to pass bills on cost cutting. 

Expressing his views on economic measures required for Brazil economy, Mercadante said in an interview: "We need to raise taxes temporarily so we can open room for the interest rate to drop faster." 

In addition to economic challenges, the corruption scandal is taking a toll on the Brazilian government. 
Marcelo Odebrecht has been accused of bribing millions of dollars to secure major building contracts from the state oil company Petrobras. 

Odebrecht is the construction major in Brazil and Marcelo Odebrecht is the President of the company. Odebrecht has been under preventive arrest following charges against him for bribing senior officials of Petrobras to get housing projects. 

Brazil's President Dilma Rousseff was at the helm of affairs at Petrobras for a long time, but she is not drawn in the scandal. 

The Brazilian government ordered for a probe (Operation Car Wash) into the corruption scandal in 2013 and the investigation team secured evidence, in 2014, relating to the corruption. Subsequently, the investigation went beyond Petrobras. As a result, several arrests of officials belonging to Eletrobras, a state-owned electric company, have taken place. 

Brazil, a part of Brics (Brazil, Russia, India, China and South Africa), is reeling under severe pressure as intensified protests against the corruption charges defamed the President Dilma Rousseff. Poll ratings of her tumbled to lowest since she assumed office in 2010. People are taking out processions raising their voice against Rousseff. 

Since the 'Operation Car Wash' probe into corruption involving Petrobras is in progress, Rousseff is at the center of criticism from the public. Over 86 percent of Brazilians expressed their disapproval of Rousseff's way of handling the corruption. More than 75 percent people voiced against the corrupt political leaders terming them a big problem for the country.

Brazil's economy growth is fast slowing down. The first quarter of 2015 witnessed shrinking of Brazil economy by 1.6 percent when compared with the previous corresponding quarter.

Until 2014, the annual average growth Brazil GDP was just 2.2 percent during 2011-14. This was the period, in which Ms Dilma Rousseff was Brazil's President. During her regime, the public spending had surged putting more pressure on the budget.

The budget deficit also doubled to 6.75 percent of GDP. This situation has led the Brazilian government in a desperate position as it failed to keep aside supporting funds to pay back creditors. This situation arose for the first time since 1997. Rousseff sought for re-election. 

The interest rates in Brazil are very high at 13 percent making the borrowing costs very expensive for industry and services sectors. To bridge this gap, public sector banks are offering subsidized loans, which account for 55 percent of total lending in 2014 and it was 40 percent in 2010. 

The gross government debt of 62 percent looks manageable when compared with a whopping 175 percent of Greece, 227 percent of Japan. 

The GDP growth rose more than six percent in 2010 and this was the best performance during the past thirteen years, according to IMF data. 

GDP growth was over three percent in 2011 and since then, it's been drastically falling every year. The GDP growth rate recovered in 2013 to over two percent from less than two percent in 2012. It dropped by less than 0.5 percent in 2014 and expected to register a negative two percent this year (2015).

Brazil is worst performer among Brics. The inflation rate is hovering at 10 percent. The currency value was dipped by more than 50 percent against the US dollar. The unemployment rate is rising alarmingly as about 110,000 people are falling out of employment every year. 

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