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Brazil seeks additional US$7.7b with first round of tax hikes

Brazilian Finance Minister Joaquim Levy delivers a news conference in Brasilia on Jan 19, 2015.

[BRASILIA] Brazil on Monday announced tax increases on fuel, imports and consumer loans aimed at raising 20.6 billion reais (US$7.7 billion) in additional revenues this year, although some economists have warned the measures may boost inflation.

The plan is part of an effort to help balance budget accounts and revive investor confidence, Finance Minister Joaquim Levy said at a news conference. The taxes will help the government collect one-third of the savings it needs to meet debt-reduction goals for the year. "The main goal of these measures is to boost confidence on the economy," said Levy, who took office at the start of the year. "These measures, taken together, should improve confidence, encourage people to invest in Brazil and take risks." Yet, the tax hikes are likely to stoke inflation, putting the 12-month trailing number potentially above the official target ceiling of 6.5 per cent, and put the breaks on an already sluggish economy, analysts have said.

Levy, who said he is working on other measures to strengthen public finances, declined to say when he will announce potential cuts to this year's budget. Levy has also pledged to curb state intervention by scaling back subsidies to certain industries.

Credit agencies have threatened to cut Brazil's sovereign debt ratings if the government fails to arrest a surge in spending and gross debt.

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The government will restore a fuel tax known as Cide and a Pis/Cofins social security tax on diesel, both of which had previously been eliminated, with the former adding 0.22 reais per liter of gasoline and the latter 0.15 reais to each liter of diesel. The reinstatement of Cide could prop up the ethanol industry, which said the elimination of the tax in recent years made it less competitive at the pump.

The Finance Ministry also raised the IOF tax on personal loans to 3 per cent from 1.5 percent previously, while increasing a Pis/Cofins social security tax on imports to 11.75 per cent. The measures include a simplification of the tax structure for producers and wholesalers of cosmetic products.

Brazil's complex tax system is often blamed by investors as one of the main obstacles to faster economic growth.

Some of the measures will take effect early on Feb. 1, Levy said.