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It's time to bite the bullet

Brazil's finances are being taken in hand. But fiscal reform depends on constitutional changes, and so far president Cardoso hasn't fulfilled any of his promises. The team implementing the Real Plan for recovery believes some measures can be taken without a battle in congress, but these ideas are still on paper. Although inflation is down, external investment is up and privatization has sped up, the markets will give Brazil only so long. Danielle Robinson reports

Brazil's Real Plan celebrated its second birthday in July, but still without the constitutional fiscal reform needed to achieve sustained strong economic growth in a low inflationary environment. Is it time to panic?

The answer is no ­ at least not for some time. Although the 1995 fiscal balance was a shocker ­ there was a deficit of 5% of GDP, compared with 1994's 1.3% operational surplus ­ president Fernando Henrique Cardoso's economic team began preparing years ago for a long battle with congress.

The team say the government's top priority is a reduction in the fiscal deficit, now that it has successfully reduced monthly inflation to below 1.5% and is on target for annual inflation this year of between 13% and 14%. This is Brazil's lowest in 39 years ­ it was 23.2% in 1995 and 941.3% in 1994.

Reducing the fiscal deficit is possible, the team argues, even without constitutional reform. They claim to have a list of more than 30 measures that do not involve constitutional change that can be taken to reduce wage and social security costs. These, in combination with a visibly accelerated privatization programme and a new series of IMF-style contracts with state governments, should reduce the public sector borrowing requirement (PSBR) operational deficit to around 3% of GDP this year, compared with 3.5%

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