October 4, 2010 / 2:42 AM / in 8 years

Factbox - Economic proposals of Brazil candidates

BRASILIA (Reuters) - Brazil’s ruling party candidate Dilma Rousseff fell short of the 50 percent of votes needed for outright victory in Sunday’s presidential election, and now faces a runoff vote against opposition challenger Jose Serra.

Polls predict that Rousseff will defeat Serra on October 31 as she rides the popularity of President Luiz Inacio Lula da Silva, who has overseen an economic boom and raised Brazil’s international profile during his eight years in power.

Both of the leading candidates broadly endorse the pillars of current economic policy that have made Brazil one of the world’s hottest emerging markets.

Still, there are important differences between former Sao Paulo state governor Serra and Rousseff, Lula’s former chief of staff. Here are some of their positions on key issues:

ECONOMIC STABILITY

Serra, like Rousseff, would maintain the mostly market-friendly policies that have provided economic stability over the past decade: a free-floating currency, inflation control and fiscal discipline.

FISCAL DISCIPLINE

Serra of the Brazilian Social Democracy Party is perceived by some to be the tougher of the two on fiscal discipline, though he has not announced detailed budget targets. He pledged to cut government fat to allow for more public investment but also proposed boosting the minimum monthly salary to 600 reais ($349) from the current 510 reais, which would pressure public finances.

Rousseff, whose Workers’ Party has strong ties to public sector unions, proposes maintaining fiscal discipline with gradual adjustments but has ruled out the kind of drastic austerity measures that marked the first year of Lula’s administration in 2003. She has said Brazil does not need to rein in public spending for the economy to keep growing at a robust pace.

Rousseff says she would keep a primary budget surplus target of 3.3 percent of gross domestic product until net debt falls to 30 percent of GDP in late 2014. It was 41.7 percent in July.

The government still expects to hit its primary budget target in 2010, but a ramp-up in government spending this year means it may only be able to achieve that by excluding spending on its infrastructure program.

STATE ROLE IN ECONOMY

Rousseff favors a strong state role in strategic areas, such as banking, petroleum and energy, but she insists private companies in those sectors would not be crowded out.

She also pledges to promote government efficiency and a meritocracy while cutting red tape. But she would maintain current benefits for civil servants.

Rousseff may also increase state intervention in the mining sector, which could create risks for iron-ore giant Vale. Lula’s government has put pressure on the world’s biggest iron-ore producer to create more jobs in Brazil by investing in steel production.

Rousseff is likely to push on with a plan to funnel 11 billion reais ($6.5 billion) into boosting access to broadband Internet services among low-income households and make state-run Telebras, which is a shadow of its former self following privatizations in the 1990s, the network operator. Some private industry leaders have said they could be harmed by the plan.

Serra favors a strong and active government and applauded Lula’s fiscal stimulus measures during the 2008/09 global crisis. But Serra, who authorized the sale of a Sao Paulo state bank when he was governor there, is seen as more open to selective privatization and says he would not use state funds or push state-owned banks to promote private sector mergers and acquisitions. He proposes policies to develop national industry and would step up trade safeguards against cheap, mostly Chinese, imports.

CENTRAL BANK

Rousseff said she would maintain the central bank’s operational autonomy and the status of its president as a cabinet minister. Serra has said the central bank must be in line with government economic policy, and that its chief and the finance minister should think alike. Brazil’s central bank follows an inflation-targeting regime that investors say is crucial for price stability in the country.

STRUCTURAL REFORMS

Both main candidates agree on the need to overhaul Brazil’s complicated tax system to encourage investment, although previous efforts at reform by Lula have not amounted to much.

Rousseff has made tax reform a priority. Her proposals include capital investment and payroll tax breaks and harmonizing tax levels among states. She would set up a fund to offset some states’ revenue shortfalls.

Serra wants to reform the pension system by cutting benefits for some civil servants, while Rousseff favors a piecemeal reform that would raise more money to finance the growing pension deficit and alter some retirement rules.

MONETARY POLICY

Rousseff has said that until Brazil’s debt burden falls considerably, the central bank will have to focus exclusively on inflation, rather than looking at the broader economy, including job growth.

She has also ruled out targeting a specific exchange rate for Brazil’s real currency, which has surged to trade at its highest level since the September 2008 financial crash and is hurting Brazilian exporters.

Rousseff has said she wants to bring down Brazil’s interest rates, which are among the world’s highest and are a major factor keeping the currency strong. But she is not expected to act as aggressively as Serra to achieve that goal.

Serra has been more critical of monetary policy, calling the benchmark interest rate, now at 10.75 percent, “stupefying” and says that it must be brought down towards international levels through tighter fiscal discipline. He has also said the central bank is not the “Holy See,” although he would not change its informal autonomy.

OIL INDUSTRY

Rousseff fully supports the Lula government’s drive to heighten government control over new-found oil reserves, and she helped draft the proposal. The move includes the creation of a new state company to manage the reserves, a requirement that state-owned oil company Petrobras be the operator of every field, and the creation of a new fund to invest oil revenue into education, health and other development projects.

She is likely to continue to push Petrobras to align its goals with government policy, which could result in a more limited role for foreign companies in the sector.

Serra is critical of the reform, saying the current model was adequate to develop new reserves. He says there is no need to create more bureaucracy with a new state oil company. His party warns that Lula’s approach could sideline private oil companies, reducing investment, competition and efficiency.

CURRENCY

Rousseff has ruled out targeting a specific exchange rate for Brazil’s real currency, which is trading near a 10-month high. Serra has said the real is “mega overvalued” and was hurting exporters but ruled out abrupt measures or direct intervention in markets to influence the currency. He has said allowing the real to depreciate requires tighter fiscal discipline and lower interest rates.

FOREIGN POLICY

Serra has criticized Lula’s close ties to left-wing allies in Latin America and to Iran. Easing such ties could affect energy investments in Bolivia and Venezuela, where state-oil giant Petrobras has large investments. He has also called for an overhaul of the South American trade group Mercosur and more bilateral free trade deals.

Rousseff favors continuity of Lula’s foreign policy objectives, including regional integration and a bigger say for developing nations in international agencies. But given her priority on domestic issues and her lower international profile, she is less likely to continue Lula’s high-profile diplomacy.

Additional reporting by Stuart Grudgings; editing by Terry Wade and kieran Murray

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