Crisis-hit Brazil announces spending cuts, tax hikes

“These are major corrections”, said finance minister Joaquim Levy.

The measures were announced at a news conference by Finance Minister Joaquim Levy and Planning Minister Nelson Barbosa.

This is the third time this year the Brazilian government changed its 2016 budget. Ratings agency Standard & Poor’s on Wednesday downgraded its rating of Brazil’s debt to “junk”, prompting a massive bond selloff. Further cuts to Brazil’s rating are possible, S&P said. “This is only happening because of the pressure from the downgrade”.

The government plans to save 20.6 billion reais in spending by cutting back on programs that provide sanitation, housing, technical training and broadband.

The biggest item was the revival of the unpopular CPMF tax on financial transactions that will raise 32 billion reais next year if it passes a Congress opposed to new taxation.

The government in August scrapped plans to reintroduce CPMF after congressional leaders expressed opposition.

“It’s a controversial issue”, he said about the tax. Despite the great need for economic reform, Levy’s proposal is unlikely to go over smoothly as it will reduce funds available to lawmakers’ pet projects by shifting all available resources to programs deemed government priorities.

The government forecast its GDP to shrink by 1.49% this year, and announced last month that the recession could last through 2016, which would make it the longest since 1931. That would entail combined savings and extra revenue of about 65 billion reais.

Brazil’s recently announced austerity measures are a positive development, a senior analyst with Moody’s Investors Service said on Tuesday in a vote of confidence to President Dilma Rousseff’s efforts to plug a budget deficit in 2016.

Yet Ms Rousseff – painted into a corner by recession, growing unemployment and surging inflation, plus corruption allegations against her government – has seen her legacy as the first female Brazilian head of state take a body blow from public approval that has slid into the dark realm of single digits. Eurasia Group this week increased to 40 percent the odds that Rousseff won’t finish her term, citing “the government’s increasingly limited capacity to respond effectively to economic and political challenges”.

Yet some signs are emerging that Rousseff is gaining support to stay in office.

Many Brazilians are quick to float the idea of a potential impeachment of Rousseff, 67.