Brazil's north faces wider poverty gap with spending freeze

In Salgueiro, a crossroads town in one of the poorest corners of arid northeastern Brazil, Maria Adelaide dos Santos's small shop selling shoes and clothes springs to life for just a few days at the end of each month.

Amid Brazil's worst recession in a century and a long drought that has crushed hopes of making this an agricultural center, dos Santos survives thanks to a trickle of customers when government employees get paid.

"Unemployment here is very bad and these public servants are all we've got now. There are no factories here," said the 48-year-old mother of three.

During a decade-long commodities boom that pushed Brazil's average yearly growth rate to 4 percent, the country became a poster child in the global fight against poverty.

Heavy spending by the leftist Workers Party government helped lift more than 26 million Brazilians out of poverty - more than a tenth of the population and mostly in the underdeveloped north.

But the collapse of the boom two years ago has hit public coffers and asphyxiated poor towns like Salgueiro.

In an effort to tackle Brazil's bloated deficit, center-right President Michel Temer is now pushing through Congress an unprecedented 20-year limit on federal spending, expected to be approved next month.

In regions like the parched Sertão of the northeast with scant prospects for private investment, there are growing fears that the cuts could stoke unemployment and worsen the gap between rich and poor in what is already one of the world's most unequal countries.

As in most of Brazil's least-developed regions, the government here is the main provider not just of education and healthcare but also credit and jobs.

In more than half of Brazil's 27 states, public sector salaries account for more than one-fifth of economic output.

In Brazil's northernmost states of Roraima and Amapá, in the Amazon, the state accounts for nearly half of the economy while in the southern state of São Paulo, Brazil's richest and most populous, public salaries account for just 10 percent of GDP.

"This spending cap is terrible," said the mayor of Salgueiro, Marcones Libório de Sá. "All of the Northeast is very poor. Many cities are outright bankrupt."

While pushing ahead with spending cuts, Temer has ruled out reductions in the government's flagship welfare programs Bolsa Família, a monthly allowance of up to 336 reais ($100) to impoverished families that won international acclaim for its success in fighting poverty.

About 40 percent of Salgueiro is enrolled in the program, which could mitigate a spike in poverty and discourage migration to the slums of São Paulo and Rio de Janeiro.

But Bolsa Família alone is not enough for real prosperity.

"Two other shops on my street closed recently," Santos said.

BUREAUCRACY INC.

In the long run, the cap is expected to make government spending more efficient and boost productivity. It may also create opportunities for private investors in areas dominated by the state, such as sanitation.

"The long-term effect should be positive but in the short run, the North and the Northeast will be impacted," said Everton Gomes, an economist with Santander based in São Paulo. "They will need time to catch up."

The economic recovery expected to start next year will probably be led by the South and the Southeast, where private manufacturers, exporters and retailers stand to benefit the most from lower interest rates and a potential increase in foreign investment.

Even assuming an optimistic 2-percent growth rate for Brazil in 2017, the North and the Northeast would grow no more than 1 percent, maybe even less, Gomes said.

Northern voters are overrepresented in Congress, strengthening a powerful lobby for state spending. Governors and mayors have demanded the federal government transfer a larger share of revenues from a recent tax amnesty program.

Most federal transfers to states and cities are mandated by the Constitution and will not be affected by Temer's proposal to limit spending growth to the inflation rate, which could be approved next month.

But another part, the voluntary transfers, will have to stay within the new limit.

The Northeast received the largest share, 36 percent, of the 12 billion reais transferred this year to states and cities mostly for public works, healthcare and disaster mitigation, finance ministry data shows.

SCORCHED LAND

A fiscal responsibility law approved in 2000 bars cities and states from taking loans without federal consent.

Tax hikes to finance more spending do not appear to be an option either. Brazil's tax burden of 33.4 percent is already the highest in Latin America, according to the Organisation for Economic Co-operation and Development.

Attracting private sector investment appears to be the last option for northern states and cities. In the state of Pará, a giant iron ore mine by Vale SA should help growth in 2017.

The federal government is also seeking to privatize utilities in Piauí, Acre and Alagoas, and is granting phosphate mining rights in Paraíba and Pernambuco.

But those projects may take time to mature and will not reach all corners of Brazil's vast countryside.

Meanwhile, high unemployment is discouraging retailers such as Wal-Mart Stores Inc. from expanding in the Northeast, while low education levels and poor infrastructure are an obstacle to high-tech industries.

"These regions still depend on incentives," said Frederico Cunha, an economist with national statistics bureau IBGE.

In drought-stricken Salgueiro, the future looks bleak.

The town lies close to two giant state-led projects conceived under the former Workers Party government that were meant to breathe life into the region.

The first is almost complete - a diversion of the São Francisco river meant to irrigate crops. The second, a railway crossing northern Brazil, has succumbed to lack of funds, amid accusations of corruption and bad planning.

Sipping coffee after seeking water for his skinny cattle, farmer José Moisés, 63, says life is harder since work on both projects stopped.

"Now we have no rain and no jobs."

($1 = 3.354 Brazilian reais)