This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BRASILIA 003349 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR CRONIN 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV EIND BR
SUBJECT: BRAZIL WILL BEGIN NEW YEAR WITHOUT A FEDERAL 
BUDGET; FINANCE MINISTER TO RUN FOR FEDERAL DEPUTY? 
 
REF: A) BRASILIA 3207 
     B) BRASILIA 3092 
     C) BRASILIA 3286 (NOTAL) 
 
¶1. (SBU) Summary: Brazil will begin 2006 without having 
approved a federal government budget.  Federal Deputy 
(congressman) Colbert Martins told Emboff December 20 he 
believes the budget would not be passed until February.  The 
GoB will be limited to paying salaries and current expenses 
(utilities, rent, etc.) until Congress approves a budget. 
The lack of investment and other discretionary spending 
during the first month or two of the presidential election 
year, however, while unrelated to Finance Minister Palocci's 
desire to keep overall fiscal policy tight, will likely 
expose him to renewed criticism of the Finance Ministry's 
over-performance of its primary surplus target (refs A and 
B).  Indeed, rumors have been circulating recently that 
Palocci will resign to run for federal deputy by the March 
31 deadline for federal officials to leave the government 
before an election.  While the constant attacks, 
particularly those from within the GoB, must be wearing on 
Palocci, in our view he is more vulnerable to the emergence 
of new evidence of wrong-doing in the ongoing political 
scandal (refs B and C) than to the friendly fire.  Even if 
Palocci departed and were replaced with an advocate of a 
more malleable fiscal policy, pro-spending forces within the 
GoB would be hard-pressed, given bureaucratic limitations, 
to conduct a significantly looser fiscal policy during the 
three to four month window between the passage of the budget 
and June 1, when election law limits on public sector 
investment spending kick in.  End Summary. 
 
No Budget Until February 
------------------------ 
 
¶2. (SBU) In a December 20 meeting, Federal Deputy Colbert 
Martins (Social Popular Party -- PPS, Bahia), a member of 
the joint budget committee, told Emboff that the budget 
approval process, for which the Congress has been called 
into special session, had only just begun.  The committee, 
he stated, would begin working on the seven sectoral budgets 
this week.  In the new year, these would be joined into one 
overall budget document, which could be voted out of 
committee for consideration by the full Chamber of Deputies 
and full Senate beginning January 16.  Based on his 
experience, he did not expect an approved budget to be in 
place before February 2006.  After December 31 and until the 
budget is passed, Martins said, the GoB was authorized by 
the already-approved budget directives law (LDO) to make 
outlays for salaries and current expenditures only.  No 
money could be obligated for other outlays, including 
investment. (Note: the GoB also has authority to continue 
servicing its debt even in the absence of a budget.) 
 
¶3. (SBU) Reflecting on the recent political pressure on the 
Finance Ministry to increase investment expenditures, 
Martins suggested there would be sharp debate on this issue 
within Congress in the coming weeks.  While this would 
generate political noise, he said, the fact was that since 
the GoB budget is an authorization only, of which the 
execution by the Executive Branch is not mandatory, Congress 
has much less leverage than it would like over actual 
expenditures.  (In practice, Brazilian presidents have 
traditionally used their power to release/sequester 
expenditures to entice wayward parliamentarians to vote in 
accordance with the Executive's wishes.)  Martins expected 
that Palocci would continue to be subjected to substantial 
criticism on fiscal policy over the next months, both from 
frustrated Deputies and Senators as well as the pro-spending 
forces within the Cabinet.  Martins further argued that 
reducing discretion in GoB budget execution would promote 
transparency as it would make it more difficult for public 
money to be "redirected" for corrupt purposes. 
Palocci Departure Rumors Redux 
------------------------------ 
 
¶4. (SBU) Against this budgetary backdrop, the press reported 
on December 19 that Palocci may leave his post to run for 
Federal Deputy or to work on Lula's campaign.  The move 
would be part of a broader cabinet shakeup expected in early 
2006 as those ministers who want to run for federal elected 
office must, by law, resign by March 31, 2006.  According to 
these reports, Palocci told friends he is unwilling to 
remain as Finance Minister and "bleed in public" should the 
attacks against him continue.  Should Palocci resign, 
Central Bank Chief Meirelles could leave as well -- 
depending upon whom Lula chose to replace Palocci. 
 
¶5. (SBU) Comment:  This most recent round of rumors about a 
Palocci departure appears to be simply the latest variant of 
what has become the routine scenario in the last few months: 
Palocci resists pressure, mostly from within the GoB and 
within his own party, to release funds for election-year 
investment projects while, on a second front, fighting off 
allegations of wrongdoing during his tenure as mayor of 
Ribeirao Preto.  Although Palocci must surely be tired of 
the constant friendly fire, we believe it more likely his 
departure would be caused by the emergence of new evidence 
substantiating the allegations of corruption/wrongdoing. 
The lack of an approved budget adds a new wrinkle to the 
story, for even if Palocci did leave and were replaced with 
a figure that pursued a more malleable fiscal policy, the 
window for significant election-related spending will be 
narrow.  Combined with the inability of Brazil's creaky 
bureaucracy to spend all of the funds released to it by the 
Finance Ministry, the pro-spending forces within the GoB 
would likely find moving money out the door more challenging 
than expected. 
 
CHICOLA