BRASILIA: Brazil will drastically slash its key fiscal savings goal for this year due to falling tax revenues but plans new spending cuts to show its commitment to austerity, three government officials familiar with the decision told on the other day.
The government will announce later on Wednesday a new primary surplus goal of 0.15 percent of gross domestic product, down from 1.1 percent originally budgeted, the officials said, asking for anonymity because the decision was not yet public.
The primary surplus, or revenue available to meet interest debt payments, is closely watched by the market and credit rating agencies. The agencies have warned they may further downgrade Brazil, a move which could undermine investor confidence and raise borrowing costs.
“The reduction of the target will be consistent with the current situation,” said one of the officials.
The officials said the additional budget cuts could be between 8 and 15 billion reais, signaling to markets that the fiscal belt-tightening begun this year will continue.
Reducing the primary surplus goal could complicate President Dilma Rousseff’s bid to retain Brazil’s coveted investment grade rating amid an economic downturn following years of profligate spending.
“Brazil’s fiscal position will remain pretty grim for a while,” Edward Glossop, economist with Capital Economics. “A modest primary surplus is not going to be sufficient to keep Brazil’s debt burden from rising.”
The government will have to reduce its 2016 fiscal savings target of 2 percent of GDP because the economic downturn is worse than expected, one of the officials said.
Finance Minister Joaquim Levy was initially resistant to lowering the 2015 target because he feared it could send markets the wrong signal about the governments’ commitment to the fiscal adjustment.
In May, the government vowed to cut 70 billion reais in expenditures to restore its credibility with investors.
Levy, who has a reputation as a fiscal hawk, said on Tuesday a possible reduction of the target was not the end of the adjustment.
For most of the past decade Brazil raked up primary surpluses above 3 percent of GDP as tighter spending controls and a commodities bonanza filled public coffers.
That changed when Rousseff took office in 2011 and granted billions of dollars worth of tax breaks to businesses in a failed attempt to restart a stagnant economy.
Since her narrow re-election in October, Rousseff has adopted more market-friendly policies and vowed to rebalance government accounts to recover the confidence of investors.
