By Marcela Ayres

BRASILIA (Reuters) -Brazil’s authorities on Wednesday proposed to lift earnings tax exemptions for decrease-earnings Brazilians and lift taxes on folk who receive more, while outlining plans to excellent public spending in coming years.

Brazilian markets sank sooner than the televised announcement by Finance Minister Fernando Haddad, on stories that the authorities used to be introducing the earnings tax reform as a change of focusing exclusively on the long-awaited spending cuts.

The Brazilian exact slipped 1.8% on the news to 5.91 per U.S. greenback, its weakest end ever in home trading. Brazil’s benchmark stock index slid 1.7% and long-time frame passion charges climbed sharply greater.

After markets closed, Fernando Haddad announced what he described as “the very finest earnings reform in our ancient previous,” proposing to rob the tax-free threshold to 5,000 reais ($842) monthly from 2,824 reais monthly, while making up for the misplaced earnings with greater taxes on those incomes over 50,000 reais.

The greater tax exemption carries out a campaign promise by leftist President Luiz Inacio Lula da Silva.

Haddad also outlined the principle parts of a a lot-anticipated spending sever equipment, which are expected to generate savings of 70 billion reais ($11.8 billion) over the next two years.

The complete measures restful need be formalized after which voted on by Congress. They attain after weeks of interior authorities debate and repeated delays to proposed spending cuts, which the authorities had initially aimed to sing after municipal elections on the head of October.

Uncertainty over the fiscal measures has been riding volatility in Brazilian markets amid concerns the authorities has no longer carried out ample to meet unusual budget rules passed final year to rein in the enhance of public debt.

“The market used to be waiting for something more concrete, associated, on spending cuts,” said Lucelia Freitas, a foreign trade specialist at Manchester Investimentos. “Nonetheless the announcement on earnings tax went in the change direction.”

Haddad argued that the shifting earnings tax burden would back Brazil’s middle class without making a salvage fiscal affect, adding that the coverage used to be “in step with established world standards.”

A authorities expert, speaking on situation of anonymity, expressed disappointment with the inclusion of the tax exemption in Wednesday’s speech, warning it may maybe possibly maybe well overshadow unusual spending controls and damage talks in Congress over the fiscal equipment.

MINIMUM WAGE, MILITARY PENSIONS

Amongst the measures to govern public spending, Haddad said exact enhance of the minimum wage would stop within the same limits that practice to overall expenditure, reining in the enhance of a massive change of valuable expenditures linked to the minimum wage.

He also said that militia pensions would now be arena to a minimum retirement age, and public sector salaries may maybe well be capped in step with a constitutional ceiling.

On one more front, he announced restrictions on the annual “wage bonus” profit, which boosts the earnings of the poorest formal staff.

Haddad said in case of a predominant deficit, the creation, enlargement or extension of tax advantages will be prohibited.

Lula, who has overtly adverse calls for fiscal austerity, final year well-liked a brand unusual fiscal framework that mixes predominant budget targets with a cap that limits overall spending enhance to as a lot as 2.5% above inflation.

Nonetheless, with many valuable charges – equivalent to social advantages and pensions – rising at a faster tempo, the unusual rules bear constrained funding for investments and operational prices.

Many economists bear warned that, without reforms to curb valuable spending, the framework would change into unsustainable within a few years.