BRASILIA, Feb 13 (Reuters) - President Dilma Rousseff's austerity push has run into stiff opposition from her own allies in Congress that could derail her efforts to restore Brazil's fiscal credibility and avoid a damaging credit rating downgrade.
The leftist leader's allies, including members of her own Workers' Party, are seeking to water down a first batch of unpopular bills that trim unemployment and pension benefits and save some 18 billion reais ($6.32 billion).
The bills are part of an austerity drive led by Finance Minister Joaquim Levy, a fiscal conservative picked by Rousseff to plug a growing public-sector deficit with spending cuts and tax hikes aimed at saving the once booming economy's coveted investment grade.
If Brazil can't get its fiscal house in order, it could suffer additional credit rating downgrades pushing its debt into junk territory - a move that would be devastating for an economy that badly needs to woo investment to bounce back from an economic slump now in its fifth year.
Labor unions, which have been loyal partners of Workers' Party governments since 2003, feel the Rousseff administration has betrayed its leftist ideals and are planning demonstrations in March to stop approval of the bills.
"We're going to take to the streets. Nobody wants to lose rights," Miguel Torres, the head of the 14-million-strong Força Sindical labor federation, told Reuters. He said Levy should tax wealth and capital repatriation by foreign companies instead.
To recover investor confidence, Rousseff faces the difficult task of tightening purse strings just as Brazil's economy is sliding toward recession and industries are increasing layoffs. The downturn, along with a massive corruption scandal at state-run oil giant Petrobras, has pushed Rousseff's approval rating to an all-time low, weakening her position in Congress.
Lindbergh Farias, a Worker's Party senator, said chipping away at labor benefits amounts to political suicide at a time when Rousseff could need workers' support on the streets to fend off any effort to impeach her over the scandal at Petrobras , whose board she presided over from 2003-2010.
The opposition is enjoying the moment as Rousseff faces an open revolt from her base.
"The fiscal adjustment risks failure even before it gets to the floor of Congress because the governing coalition is in disarray," said Carlos Sampaio, leader of the main opposition party, the PSDB, in the lower chamber of Congress.
Sampaio said Rousseff should have begun by cutting bloated government spending, like eliminating some of the 39 ministries in Brasilia, instead of going after workers' rights. He said the PSDB will seek to reduce the measures' impact on labor benefits.
Rousseff's minister in charge of relations with Congress, Pepe Vargas, said allies in her 10-party coalition would be shooting themselves in the foot if they don't back the austerity drive.
"All the parties will have to help in the fiscal adjustment, because they are in the government too. If they don't, the ministries they have will run out of funding," Vargas told Reuters.
He said the government is ready to sit down with lawmakers to iron out differences, but it will insist cutbacks are needed.
The government's proposal to modify labor laws would require Brazilians to have held a job for 18 months before seeking unemployment benefits. Critics want to change that back to six months, or are proposing a compromise of 12 months.
Another measure will reduce by half social security pensions received by spouses of deceased workers and tighten conditions under which they qualify, such as a minimum requirement of two years of marriage.
Some ruling party lawmakers believe the austerity drive is excessive and will erode the government's political capital at a time when its popularity is sliding along with the economy.
"You are applying an injection that cures the disease but ends up killing the patient," said a senior Workers' Party senator who asked for anonymity to speak freely. "As it stands, this package of measures will not be approved in Congress."
Some of the changes proposed by lawmakers could reduce by nearly half the estimated 18 billion reais in savings from the labor bills, congressional aides told Reuters.
Even if the government's proposals are approved by Congress, economists say the savings won't be enough to meet this year's primary budget surplus goal of 1.2 percent of gross domestic product and that more spending cuts will be needed.
The government has so far announced a series of measures that, taken together, would save about 40 billion reais.
Given the likely drop in tax revenues as the economy slows, it needs around 55 billion reais in budget cuts and tax increases to meet its fiscal savings target of 66 billion reais, according to economists at Itaú Unibanco.
Much of those savings are likely to come from a reduction in investments, which Rousseff had vowed to maintain at all costs during her successful re-election campaign last year.
To make up for any loss of revenue resulting from changes to the unemployment and pension bills, Levy's team is preparing additional measures to trim past tax benefits for businesses and exporters, a finance ministry official told Reuters.
The planned measures have already caused tensions within Rousseff's cabinet. Trade Minister Armando Monteiro publicly defended the programs that give tax benefits and cheap loans to Brazilian exporters as key to keeping industries competitive.
Monteiro also rejected a proposal to close the offices that Brazil's trade promotion department APEX has in a dozen cities from Dubai to Beijing and Moscow to save money by moving staff to the Brazilian embassies there, a trade ministry source said. ($1 = 2.8499 Brazilian reais) (Editing by Todd Benson and Kieran Murray)