(Adds president's quotes, tax reform, union protests planned)
By Anthony Boadle
BRASILIA, Jan 27 (Reuters) - Brazil's President Dilma Rousseff urged her cabinet on Tuesday to embrace fiscal belt-tightening and other measures aimed at restoring business confidence and growth in her second term.
Rousseff stressed the need to rein in wasteful spending and to do more with less, a change of policy that investors want to see but that has caused frictions within the ruling Workers' Party.
"We need a fiscal rebalancing to recover economic growth as soon as possible so we can bring down inflation and interest rates and, thus, guarantee jobs and incomes," she said at her first cabinet meeting since being sworn in on Jan. 1 for a new term.
She vowed to preserve social programs that have reduced poverty, but said pension and unemployment benefits will have to be trimmed.
Labor unions plan protests on Wednesday against the policy changes, a first show of opposition to the belt-tightening from within the ranks of traditional allies of her Workers' Party.
The leftist leader said the adjustment will be "gradual" and started with budget cuts for all ministries. Steps will be taken to cut red tape and encourage investment by expanding private concessions in infrastructure projects.
Taxes will be simplified to ease the burden on companies and make them more competitive to boost exports, she said.
Rousseff's new finance minister, hawkish banker Joaquim Levy, has already raised taxes on fuel, imports and cosmetics to make up for a widening fiscal shortfall that has soured the mood of investors.
Rousseff said her government was committed to establishing rigorous corporate governance at state-run oil company Petroleo Brasileiro SA, which is at the center of a corruption scandal that threatens to implicate members of her party and its coalition allies.
Prosecutors investigating the suspected multibillion-dollar graft and bribery racket have arrested two former Petrobras directors and scores of executives at Brazil's top construction companies charged with paying kickbacks that were funneled to politicians.
Rousseff called for the punishment of those involved without damaging the private engineering companies building many of the country's big infrastructure projects that risk coming to a halt and further depressing a stagnant economy.
"We should punish the people and not destroy the companies. They are vital for Brazil," she told her cabinet. "Brazilians expect ethical behavior from us. This new administration will be totally committed to austerity and honesty." (Reporting by Anthony Boadle; Editing by Bernard Orr and Alan Crosby)