International Business : Brazil Announces Plan to Slash Inflation, Cut Spending : Austerity: Innovative price index would evolve into a new currency. Despite denials, analysts see it as a link to dollar.

RIO DE JANEIRO, Brazil —  Finance Minister Fernando Henrique Cardoso announced an economic stabilization plan Tuesday that he says can slash Brazil’s inflation rate, one of the highest in the world, from 36% a month to 3% or 4% by late 1994.

The innovative plan includes deep cuts in government spending, a tax increase and a new inflation index designed to replace several other measurements now in use. After a few months, when the new index has been adopted widely for price increases and pay raises, it would replace the national currency itself, Cardoso said in a televised explanation of his plan.

Then, he said, Brazil will have a balanced budget, a “strong currency and the end of inflation.”

Cardoso’s announcement was the government’s long-awaited proposal for pulling Latin America’s biggest economy out of a vicious cycle of deficit spending, high interest rates and “inertial inflation” that has been racing at more than 25% a month all year. Even if the plan doesn’t fully accomplish its goals, some commentators observed, it may save the country from uncontrolled hyper-inflation.

“In general lines, I think it signals a good road, and we’re coming out of the paralysis that worried us so much,” said Carlos Moreira, president of the influential Sao Paulo State Industrial Federation. Cardoso’s plan is the first comprehensive anti-inflation package to be proposed by the government since President Itamar Franco succeeded impeached President Fernando Collor last year.

Cardoso emphasized that the success of the plan will depend on congressional approval of constitutional amendments and other laws to allow budget and administrative changes. But Cardoso, a member of the Brazilian Social Democratic Party and a possible contender for president next year, may see opposition from rival parties.

The most innovative part of the plan is its proposal to create an index that Cardoso called the “real value unit.” Adoption of the index will be voluntary in the private sector, he said, but the government will use it for setting values of bills it collects and payments it makes. He said he expects the unit to become Brazil’s standard index within a few months.

The index would change daily and its value in the cruzeiros reales, now the national currency, would be based on technical estimates of current rather than past inflation. Many businesses now raise their prices based on the previous month’s cost of living index, often adding a safety margin. The new index “will have the property of not remembering previous inflation,” Cardoso said on television.

With the real value unit, he said, inflation would tend to be about the same as increases in exchange rates for hard currencies such as the dollar. But he insisted that the Brazilian economy would not be “dollarized” by fixing a parity with the U.S. currency, as Argentina has done.

“It is dollarization,” said political analyst Amaury de Souza. “You can call it anything you want, but that’s what it is.”

When the real value unit--under another name--replaces the cruzeiro reales as Brazil’s currency, monetary stabilization will be complete, Cardoso said.

Before the currency can be stabilized, Cardoso said, the government budget must be balanced with tough belt-tightening. “There will be a sacrifice, unquestionably, by everyone, everyone,” he said.

But he said his austerity measures would not keep the Brazilian economy from continuing to grow. This year’s estimated 4% growth is up from a 0.9% decline last year.

In addition to spending cuts, Cardoso’s proposals include increasing federal taxes by 5%.

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Cardoso said the budget must be balanced to eliminate multibillion-dollar deficits financed by printing money or borrowing at inflationary interest rates, which are now running at about 20% a year in real terms. “The government is on its knees before the banks because it doesn’t have money,” he said in a television interview after his announcement. “That is going to stop.”