I: ECONOMICS: LATIN AMERICA PERSPECTIVES SEP 0918 2015 BRAZIL: A NEW (UPHILL) FISCAL BATTLE + Fernando J. Losada, Senior Economist—Latin America Research. S&P's decision to downgrade Brazil to junk status this month prompted the government to announce a more ambitious fiscal plan. But politicians' reaction to the proposal was lukewarm at best, suggesting the government may not be able to put it fully into action. After the Downgrade, a Swift Reaction Shortly after S&P became the first of the big three ratings agencies to cut Brazil's sovereign credit rating to junk status, the government ditched an earlier budget proposal and recommitted itself to fiscal discipline. President Dilma Rousseff rallied around her finance minister, Joaquim Levy, and announced a primary surplus target of 0.7% of gross domestic product (GDP) for fiscal year 2016. It was the government's recent decision to backpedal on its fiscal promises by reducing its primary surplus targets and increasing its expected primary fiscal deficit that cost Brazil its investment-grade rating. As S&P correctly pointed out, the backpedaling would have caused Brazil's debt ratios to deteriorate sharply over the next couple of years. What's more, there appeared to be a lack of widespread support for fiscal discipline as a way to address the country's econom- ic malaise. As a result, the S&P kept the rating on negative outlook, suggesting that the rating agency's next move is more likely to be another downgrade rather than a move back into investment-grade territory. To forestall this, the government has called for a combination of revenue increases and spending cuts worth some BRL60 billion (US$16 billion). The cornerstone of the revenue increases is the reenactment of a financial transactions tax, known as the CPMF, which is expected to generate more than 93% of the projected BRL34 billion incremental revenue. The idea is to maintain the CPMF at a rate of at least 0.