UPDATE 2-Brazil extends auto tax breaks to avert slowdown

Mon Mar 30, 2009 2:28pm EDT
By Carmen Munari
SAO PAULO, March 30 (Reuters) - Brazil's government on Monday extended tax breaks for the automobile sector and cut taxes on cement, paint and other construction materials in a bid to revive key sectors in Latin America's largest economy.
The government extended a reduction of industrial taxes on new cars -- a measure which was first announced in December and helped lift car sales since the beginning of the year -- for three months to June 30. The tax breaks are conditioned on automakers not laying off workers.
The automobile industry has been among the worst hit by the global financial crisis, forcing many automakers to cut investments and jobs or put workers on paid leave.
The measures will offer additional respite to an industry likely to feel more pain after the United States rejected on Monday rescues for General Motors (GM.N) and Chrysler, rekindling concerns the two major U.S. automakers will go bankrupt.
The government said the measures cost 1.5 billion reais ($645.16 million) but would be offset by higher taxes on cigarettes.
"With the resources we will collect, we will be paying for the other measures which we are implementing to increase jobs, economic activity and prevent the crisis from hurting Brazil," Finance Minister Guido Mantega told a press conference.
Brazil is a major market for global automakers such as Italy's Fiat SpA (FIA.MI), Germany's Volkswagen AG (VOWG.DE), U.S.-based General Motors Corp (GM.N) and Ford Motor Co (F.N). Asian and French manufacturers are also increasingly relying on Brazil to offset slumping sales at home.
PRIMING THE PUMP, RELAXING DISCIPLINE
It was the latest in a series of measures aimed at reviving growth and suggesting Brazil is easing its grip on the kind of fiscal discipline that helped the country earn an investment grade rating last year.
The government announced a $15 billion housing plan last week, aimed at providing lower-income families with homes and generating jobs. Earlier this month, the government also relaxed its primary budget surplus target and froze less spending than initially planned.
But with tax revenues falling for a fourth consecutive month in February, analysts worry the government's policies could hurt its public accounts further.
"The aim of the measures the government has just launched is to stimulate the economy," said Monica Oliveira, economist at Banco Brascan. "But I think one needs to pay a lot of attention to the fiscal side. It seems like it will be much worse than in past years."
Brazil intends to reduce its primary budget surplus target, which excludes debt payments, by 0.5 percent of gross domestic product to 3.3 percent, the government said earlier in March.
The government will also reduce industrial taxes for motorcycles and will exempt income taxes for companies in the pulp and paper industry located in the northern Amazon region, Mantega said.
The government plan to increase taxes on cigarettes to make up for the revenue shortfall from the tax breaks, should cause a 30 percent increase in prices. ($1=2.325 reais) (Reporting by Carmen Munari and Ana Nicolaci da Costa; Editing by Theodore d'Afflisio)