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S E C R E T SECTION 01 OF 03 BRASILIA 000160 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 01/31/2018 
TAGS: PGOV KDEM KCOR EFIN BR
SUBJECT: GOVERNMENT PUSH FOR FINANCIAL TRANSACTIONS TAX 
REVEALS POLITICS AS USUAL 
 
REF: A. 07 SAO PAULO 1005 
 
     ¶B. SAO PAULO 12 
     ¶C. RECIFE 3 
     ¶D. 07 BRASILIA 2258 
     ¶E. 07 BRASILIA 2233 
 
Classified By: Deputy Chief of Mission Phillip Chicola, reasons 1.4 b/d 
. 
 
¶1.  (SBU) Summary.  In the months-long unsuccessful effort to 
renew the tax on financial transactions ("CPMF"), the Lula 
administration tried to win congressional votes by 
distributing jobs and federal funds, meddling in the 
legislative agenda, and seeking favors for key legislators. 
The episode offers examples of day-to-day political practices 
and a case study in the persistence of spoils, favors, 
manipulation, and cooptation in Brazilian politics.  End 
summary. 
 
¶2.  (SBU)  Opposition senators and a few government coalition 
turncoats handed President Lula a colossal defeat on December 
12 by killing the proposed constitutional amendment to extend 
the tax on financial transactions (refs A, B, C, and D), 
which generated 40 billion reais (about USD 22 billion) in 
federal revenues a year.  The executive branch tried 
desperately to win over fence-sitters but fell short, losing 
45-34 on a vote that required 49 ayes for a government 
victory.  As a constitutional amendment, the CPMF bill had to 
pass both houses of congress twice with at least 60 percent 
approval, with a short intervening period between each body's 
two votes.  Passage in the Chamber of Deputies was never much 
in doubt, but forces are more evenly balanced in the Senate 
and passage required either several individual opposition 
senators voting against their parties or a deal to get one of 
the two major opposition parties to support the CPMF renewal. 
 The executive unsuccessfully tried a wide variety of 
traditional and new tactics to win congressional approval. 
 
Tactic 1: Clear the Agenda 
 
¶3.  (U) The government twice postponed bringing the CPMF to a 
vote in the Chamber of Deputies to gain bargaining time. 
More significantly, in an apparently unprecedented step, the 
government withdrew four Provisional Measures (MPs) from 
Congress, prompting opposition politicians to accuse the 
president of abusing the MP mechanism, intended for only the 
most urgent matters. (Note: The MP is an executive decree on 
which Congress must vote within 45 days, after which the MP 
"locks" the legislative agenda until voted.  The executive 
sent a growing number of measures to Congress through this 
mechanism, which has effectively backed up the legislative 
process on regular bills.  End note.) 
 
Tactic 2: Distribute Funds and Jobs 
 
¶4.  (U) From August to mid-December the presidential palace 
released millions of reais for congressional pork barrel 
projects to curry favor with targeted legislators.  According 
to press reports, the executive obligated 1.45 billion reais 
(about USD 805 million), including 163.4 million (about USD 
91 million) in the first six days of December.  One report 
cites 740 million reais (about USD 411 million) disbursed in 
the first 15 days of December.  Such pork barrel projects, 
which are amendments to the budget that foster political 
support in deputies' home states, are often never implemented 
because Congressional approval of Brazil's budget does not 
require the executive to spend funds, but merely authorizes 
the expenditures, which then become discretionary for the 
executive.  The executive often uses such projects as a means 
to of encouraging votes in favor of key legislation.  The 
government also yielded to allied parties' demands for senior 
government jobs and appointed members of two such parties to 
positions in Petrobras and Furnas (a parastatal electric 
company). 
 
Tactic 3: Placate the Opposition 
 
¶5.  (U) After the Chamber of Deputies passed the CPMF bill on 
September 25 and again on October 10, the bill reached the 
Senate during a protracted scandal involving accusations of 
wrongdoing against its president, Renan Calheiros, a 
government ally whom opposition leaders were determined to 
oust from the presidency.  Calheiros resigned the presidency 
 
BRASILIA 00000160  002 OF 003 
 
 
on December 5 (ref E) shortly after Lula signaled he was 
withdrawing his support, a move made only after it became 
clear that Calheiros had become more of a liability than an 
asset in obtaining passage of the CPMF.  The perception that 
the government had finally abandoned Calheiros also served as 
a positive gesture to the opposition. 
 
Tactic 4: Help Congress Focus 
 
¶6.  (U) As the window closed for a Senate vote before a 
mid-December recess, the government ramped up its efforts to 
reach the 49 votes needed.  A new problem of MPs had to be 
resolved, though, since even after the government had 
withdrawn four, others had reached the 45-day mark and locked 
the Chamber's agenda.  If the Chamber had passed any MP, it 
would have gone to the Senate and "locked" the agenda there, 
preventing a CPMF vote, so the government took the unusual 
step of having its (majority) deputies go into "obstruction," 
that is, not vote.  Opposition politicians accused the 
executive of unfairly manipulating the congressional agenda 
but they were powerless to prevent it. 
 
Tactic 5:  Help Problem Senators Find New Careers 
 
¶7.  (SBU) Shortly before the Senate vote, President Lula got 
personally involved and tried to persuade Federal District 
("DF") Governor Jose Roberto Arruda (DEM) to appoint Senator 
Adelmir Santana (DEM-DF) to a senior post in the DF 
government.  Had that occurred, Santana's alternate, from the 
Brazilian Democratic Movement Party (PMDB), would have 
assumed office, almost certainly giving the government 
another vote for the CPMF renewal.  Although Lula transferred 
project funds totaling 1.5 million reais (about USD 830,000) 
to the DF government, Arruda ultimately refused to recruit 
Santana out of the Senate. 
 
Tactic 6: See If the Judiciary Will Help Out 
 
¶8.  (S/NF) Sensitive reporting indicates that government 
officials sounded out key judges for assurances that senators 
who were vulnerable under new party fidelity rules (ref E) 
would be protected if their former parties sued for the jobs, 
but the judges said they could not make such assurances. 
Sensitive reporting also indicates that government officials 
pondered whether opposition parties could expel senators 
voting for the CPMF extension and, in light of the new party 
fidelity rules, then force them to give up their seats, since 
they had involuntarily switched out of their parties.  The 
government officials reasoned that such a judicial precedent 
would be bad for Brazil, as it would give parties total 
control over their benches, making individual legislators 
practically irrelevant.  The officials did not know what the 
court would decide if the issue were to come up.  (Comment: 
Mission believes it is unlikely that the courts would allow 
the new rules against party switching to be used against 
expellees.  End comment.) 
 
Tactic 7: Take Advantage of Opposition Weakness 
 
¶9.  (U) President Lula ordered his ministers to negotiate 
with the opposition Brazilian Social Democracy Party (PSDB), 
which was split position between its 13 senators and five 
governors.  The PSDB senators were mainly against the CPMF, 
but PSDB governors, who receive federal CPMF funds, pressured 
them to approve the CPMF.  Lula sent former finance minister 
and sitting federal deputy Antonio Palocci (Workers Party, 
PT, government; of Sao Paulo) and Pernambuco Governor Eduardo 
Campos (Brazilian Socialist Party, PSB, government coalition) 
to negotiate with PSDB Senate leaders on December 11, but 
they did not reach agreement. 
 
Tactic 8: When All Else Fails, Grovel 
 
¶10.  (SBU) Lula's final and desperate gesture was a letter to 
the Senate in the evening of December 12 during the CPMF 
pre-vote debate offering to direct all the revenues toward 
health and to advance tax reform if the CPMF were renewed for 
one year--the deal that many in the opposition had sought 
from the beginning.  The gesture came too late, and the bill 
was defeated. 
 
Comment 
 
 
BRASILIA 00000160  003 OF 003 
 
 
¶11.  (C) In the end, not even the ability to use money, jobs, 
and influence were enough for the Brazilian executive to 
convince congress to extend an unpopular 40 billion reais 
annual tax on checks and bank transfers.  However, the 
victory was not in reality a triumph of popular democracy 
over questionable political tactics.  The opposition's 
objection to the CPMF did not arise from principle or even 
from popular pressure, but rather out of concern that 
extension of the CPMF would provide an additional coffer for 
the PT and its allies to buy influence in the run-up to the 
2008 municipal elections.  Most tactics used by the executive 
were within the time-honored tradition of Brazilian politics, 
demonstrating how the political system itself fosters such 
practices by allowing the executive to release funds at will, 
send and withdraw provisional measures, and try to take 
advantage of the Congressional alternate ("suplente") system, 
among other powers at its disposal.  By revealing how 
completely the once self-styled "untainted" Workers' Party 
has adapted to the existing system, this episode also 
reconfirms how resistant to change the political culture is, 
and how much more there is for Brazil to do in consolidating 
its democracy. 
 
SOBEL 
SOBEL