Brazil's ruling party has had a difficult year. Falling commodity prices and diminishing Chinese demand have left Brazil's economy in tatters, and the country's leaders have several difficult choices ahead if they are to mitigate the ongoing economic crisis.
Beginning in the early 2000s, a decade of high commodity prices largely driven by rising Chinese consumption fueled a period of economic growth in Brazil. The country's exports of commodities like iron ore, oil, gold, coffee, soybeans, sugar and meat surged, and the Brazilian government used its newfound income to boost social spending. In turn, its support among voters rose. But in the past few years, global commodity prices have plummeted, and Brazil's fortunes have taken a turn for the worse.
In light of the country's new economic reality, the Brazilian government faces the difficult prospect of both raising taxes and cutting social spending. Rousseff is planning to implement a financial transactions tax aimed at increasing government revenue by hiking taxes on banking transactions next year. At the same time, lawmakers plan to cut around $6.5 billion from the government's budget in 2016, and some low-income housing programs have already been canceled. But because the ruling Workers' Party draws most of its electoral support from low- and middle-income voters, significant slashes to spending on social welfare packages could result in the loss of its support base ahead of Brazil's presidential election in 2018 — a risk party leaders are not willing to take.
The new tax bill could also further strain the ruling party's relationship with the Brazilian Democratic Movement Party, its main political ally. Rousseff's tax policy, though economically sound, has encountered stiff opposition from members of her own coalition, the PMDB initially withheld its support for the measures. But Rousseff needs her allies' help to pass and implement the tax and, more important, to slow the impeachment process the opposition has threatened to begin against her. She already garnered some support by striking a deal to fill several Cabinet positions with PMDB members. However, her bargaining power will continue to wane as the corruption scandal plays out and Brazil's economy continues to stall.
