June 12, 2017 / 4:29 PM / a month ago

Acquittal emboldens Brazil's Temer in austerity drive -officials

BRASILIA, June 12 (Reuters) - The acquittal of Brazilian President Michel Temer last week on charges of illegal campaign funding in the 2014 election has emboldened the center-right leader to offer no more concessions to Congress that would weaken his austerity package, a senior member of the economic team and an aide told Reuters.

Brazil's top electoral court dismissed a case that could have removed Temer from office, but the president is still threatened by a separate corruption investigation.

Temer and his economic team, despite the uncertainty, are confident the government's coalition will approve a pension overhaul to avoid a fiscal crisis in Brazil, which is struggling to rebound from a two-year recession.

Temer, who became president a year ago when his leftist 2014 running mate Dilma Rousseff was impeached, has refused to resign but has said he would not run for re-election next year.

Members of the coalition government fear that failure to set the economy on the road to recovery will damage their election campaigns and the chance that a member of their own party could take the presidency.

"The government has yet to see how the alliance reacts in the next few weeks," the economic team official said. "But it is not rational not to approve the reforms now ... if congressmen dilute the reform they will shoot themselves in the foot."

Temer's team will not budge on the proposal that sets a minimum retirement age and cuts pension benefits, a deeply unpopular measure, the official and a Temer aide said.

Both spoke on condition of anonymity.

The government is also sticking to plans to streamline tax rules in the second half of the year, the official said.

He added that the relative stability of Brazilian assets mirrors market confidence that Latin America's biggest economy will pass the pension proposal that was put on ice after Temer was placed under investigation for corruption by the Supreme Court last month.

After nearly splitting with Temer, his main allies are poised to stay put after his acquittal and have vowed to endorse the reforms. Last week, Temer's proposal to modernize labor rules was approved by a Senate committee.

"We cannot undermine a government plan that is crucial for the economic recovery," said Jose Anibal, a leader with Temer's main ally, the Brazilian Social Democracy Party (PSDB).

Some PSDB lawmakers and other members of the coalition, however, have told Reuters the government will need to water down the pension proposal, as it needs approval by three-fifths of congress to pass.

The president's economic team led by Finance Minister Henrique Meirelles, a former central bank chief widely praised by markets, plans to remain even if Temer is forced out.

"We believe the president will stay in office until the end of his term. But if something happens we are all committed with the reforms," the official said.

To show that commitment the economic team will push for a few changes to the tax system that they believe would make the economy more efficient without giving up revenues.

Tax measures under consideration include changes to value-added federal and state duties such as PIS/COFINS and ICMS. Taxation of financial products such as asset-backed securities LCA and LCI are also being discussed, the official said. (Reporting by Silvio Cascione and Alonso Soto; editing by Grant McCool)

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