April 27, 2016 / 9:47 PM / a year ago

Brazil's Temer to battle fiscal crisis without tax hikes

Opposition Senator Aecio Neves of the Brazilian Social Democracy Party (PSDB) smiles during a meeting with Brazil's Vice President Michel Temer (L) and President of the Brazilian Senate Renan Calheiros in Brasilia, Brazil April 27, 2016.Ueslei Marcelino

BRASILIA (Reuters) - A new government in Brazil led by Vice President Michel Temer would focus on cutting spending to close a gaping budget deficit and would only raise taxes as a last resort, the leader of his Brazilian Democratic Movement Party (PMDB) said on Wednesday.

Senator Romero Juca said that Temer, who would replace President Dilma Rousseff if she is put on trial by the Senate in mid-May as expected, would prioritize reform of Brazil's overextended pension system, one of the main drains on government coffers.

Brazil spends 13 percent of its gross domestic product on a generous pension system - more than all of the G7 developed economies, except Italy.

Juca, an economist who is being considered for the post of planning minister, said a Temer government would move quickly to recover credibility in policymaking and reduce state intervention in the economy.

To rapidly revive confidence in Latin America's largest economy, Juca said the next administration has to review what he called "unsustainable" public spending and could even discuss setting limits to government debt.

"Raising taxes is not the first option," he told a meeting with the international media. "In a recession, raising taxes does not increase revenues."

Juca said a Temer administration would eliminate some of Brazil's 31 ministries to pare back administrative costs but he declined to provide further details of how it would reduce expenditures.

Temer could assume the presidency as soon as May 12 if the Senate votes to press ahead with a trial of Rousseff on charges of breaking budget rules.

A close aide to Temer said he would only increase taxes under "extreme circumstances" to shore up the public accounts.

Temer has ruled out reinstating a levy on banking operations (CPMF) but could consider raising the financial transaction tax (IOF) or the Cide fuel tax if needed later in his presidency, said the source who asked for anonymity because he was not allowed to speak publicly.

TAX RISE A LAST RESORT

Temer met with the leader of the main opposition party, the Brazilian Social Democracy Party (PSDB), to secure support for a transitional government. A spokesman for party leader, Aecio Neves, said the PSDB will not officially form part of a coalition but Temer could pick members for his cabinet as the party will fully back his administration.

Juca stressed that Temer has not invited anyone to be part of a cabinet yet, and would only do so after the Senate decides to suspend Rousseff.

Temer has said former BankBoston COO Henrique Meirelles, who was central bank chief from 2003-2011, would be his pick as finance minister.

The Correio Braziliense newspaper has reported that Ilan Goldfajn, chief economist of Brazil's largest private bank Itaú Unibanco, is Temer's choice for central bank governor. However, three closes close to Temer told Reuters that Goldfajn was in the race for the post with other market economists.

Juca said a Temer administration would be determined to restore the financial health of state-run oil company Petrobras, which has been hit by a massive corruption scandal and fuel prices kept low by the Rousseff government.

He also said Temer could consider giving complete independence to the central bank, which only has administrative autonomy.

However, two sources close to Temer told Reuters there is no consensus inside the ideologically diverse PMDB about giving the bank total independence.

Juca said Temer saw his as a short, two-year transitional government of national reconstruction and he would not run for re-election in 2018.

Juca said an electoral court case that could annul the 2014 election of Rousseff and her running mate Temer would take months and would not be a "factor of political instability".

The PMDB also does not believe a bid to start impeachment proceedings against Temer will get off the ground, he said.

Reporting by Alonso Soto and Anthony Boadle; Editing by Alistair Bell

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