UPDATE 3-Brazil unveils $3.6 bln tax breaks to spur economy

Thu Dec 11, 2008 5:49pm EST
(Recasts, adds details, quotes, analysts)
By Isabel Versiani and Raymond Colitt
BRASILIA, Dec 11 (Reuters) - Brazil's government announced on Thursday tax breaks worth 8.4 billion reais ($3.6 billion) designed to help boost demand and stem a slowing economy but which could undermine its fiscal strength.
The government will cut industrial taxes on cars and reduce financial taxes on consumer loans to help an ailing automobile industry and bolster once-buoyant consumer demand, economic authorities told a news conference in Brasilia.
It will cut income taxes by as much as 54 percent on lower and middle salary brackets.
Also, the central bank will use international reserves to extend loans to Brazilian companies with foreign debt maturing in 2009, bank chief Henrique Meirelles told a news conference. Total loans could exceed $10 billion, the bank said.
The measure is designed to ease a liquidity crunch on the currency market, which has made it difficult for companies to service their overseas loans.
"We're in a position to minimize the impact of the international financial crisis," Finance Minister Guido Mantega told a news conference. He confirmed the government's economic growth target of 4 percent for 2009.
Industry leaders applauded the moves.
"The government gave a clear message that it will take any necessary action to recover the dynamism in sectors most affected by the slowdown," said Jackson Schneider, head of the automobile manufacturer's association Anfavea.
But critics said the measures could signal a deterioration of the government's fiscal position.
"I think it's very bad because you'll increase fiscal vulnerability ... at a time when revenue is falling and the government will increase a lot of expenditures in coming years," said Roberto Padovani, chief economist at West LB bank.
The measures announced on Thursday will reduce the IOF financial transactions tax on consumer loans to 0.0041 percent a day from 0.0082 percent, Mantega said.
This should reduce interest rates by 4 percentage points, he said.
Brazil has some of the world's highest interest rates, exceeding 50 percent per year on some consumer loans.
In addition, the government will eliminate through the end of March an industrial tax on cars with a 1-liter engine and halve the industrial tax on new cars with engines of up to 2 liters.
A commission of authorities and business leaders will study further measures, Mantega said.
"Certainly new measures will be taken to deal with other issues," he said.
Brazil's booming economy is showing signs of slowing. Car sales plunged in October and November, industrial output is contracting, and some companies like mining giant Vale (VALE5.SA: Quote, Profile, Research, Stock Buzz) (RIO.N: Quote, Profile, Research, Stock Buzz) have begun to lay off workers and scale back investment plans.
Brazil's economy grew by 6.8 percent on an annual basis in the third quarter but is expected to slow to around 3 percent next year. ($1=2.348 Brazilian reais) (Additional reporting by Ana Nicolaci da Costa; Writing by Raymond Colitt; Editing by James Dalgleish)