Thursday, January 24, 2013

Exclusive: Brazil unsure about lowering budget goal - sources

BRASILIA (Reuters) - Brazilian Finance Minister Guido Mantega does not want to reduce a key government savings goal this year, two administration sources told Reuters, highlighting the nation's dilemma over how to relax strict fiscal rules without triggering spending pressures.

President Dilma Rousseff's government has signaled it is willing to loosen decade-old budget restrictions to bolster the world's No. 6 economy, which seems impervious to more than a year of nonstop stimulus measures.

One option the authorities are discussing is a straight cut of the primary surplus target, which at 3.1 percent of the country's gross domestic product is considered extremely high for a major economy.

Any change in the target, though, is bound to raise concerns that the left-leaning Rousseff is tinkering with policies that have been the basis of Brazil's financial stability since 1994. Investors watch the primary surplus closely as they see it as a gauge of Brazil's fiscal discipline.

The primary surplus, or revenues minus expenditures excluding debt payments, is a measure of a country's ability to repay its obligations. A more relaxed goal allows the government to cut more taxes for industries in a bid to boost investment.

Mantega, a powerful member of Rousseff's economic team, prefers to stick with the target by excluding public investments and tax deductions from Brazil's primary surplus, an accounting maneuver allowed under the Brazilian law.

"The minister is leaning more in favor of raising the amount of investments that would be deducted from the primary goal," said a government official with knowledge of the talks. "Reducing the primary target raises spending pressures from public workers and legislators who want to increase current spending. We don't want that."

The government has said it could exclude about 25 billion reais out of 44 billion reais in projected investments and tax deductions to meet the target without cutting spending.

To be transparent, the government could publicly announce a larger deduction closer to the ceiling of projected investments, the official said. He added that no decision has been made on the matter.

A reduction of the primary target could trigger calls for higher wages by public workers as well as demands by lawmakers to increase spending in their home states, the official said.

Another official said lowering the fiscal goal would be difficult because the government would need to introduce legislation to make the change and revise other projections.

Whatever the government decides is unlikely to upset markets, which see Brazil's overall finances as solid at a time when Europe and the United States are struggling to cut their mounting debts. By comparison, Brazil nearly halved its public debt to a record low of 35 percent of GDP in the last decade.

The government missed its 2012 primary surplus goal of 139.8 billion reais by a long shot after a slowdown in tax revenues. At the last minute, officials tapped into the country's sovereign wealth fund and brought forward dividend payments from state-run companies to meet an already reduced primary goal.

INFLATION FEARS

Brazilian Treasury chief Arno Augustin told Reuters on January 9 that a lower primary target did not threaten an ongoing reduction of the country's debt burden.

Most private economists agree, but warn that a more relaxed fiscal policy could stoke already-high inflation in a country scarred by bouts of hyper-inflation only a few decades ago.

"The problem with lowering the primary target is that it would generate inflationary pressures, which are likely to put the central bank in a difficult position because the inflation outlook is not looking good," said Alessandro del Drago, chief economist with Kinea in Sao Paulo.

"The issue here is more about aggregate demand than about the sustainability of the debt."

The central bank has already warned of short-term inflation pressures that have led some analysts to predict an interest rate hike later this year.

The bank and other authorities see inflation peaking in the first two or three months of this year before easing toward 4.5 percent, the center of the official target range of 2.5 percent to 6.5 percent.

Inflation rose faster than expected in the month to mid-January, driven by higher costs for food and personal expenses, statistics agency IBGE said on Wednesday.

In the 12 months to mid-January, inflation accelerated to 6.02 percent, up sharply from 5.78 percent one month before.

A more benign inflation outlook seen by government officials for this year would give Rousseff some breathing room as she tries to revive Brazil's sputtering economy.

(Additional reporting by Luciana Otoni; Editing by Anthony Boadle and Lisa Von Ahn)

Source: http://news.yahoo.com/exclusive-brazil-unsure-lowering-budget-goal-sources-132000906--business.html

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