Brazil lowers fiscal savings goal over low tax revenues

Brazil lowers fiscal savings goal over low tax revenues
Brazil lowers fiscal savings goal over low tax revenues

Brazil dramatically lowered its fiscal savings goals for 2015 and 2016 on Wednesday, due to plunging tax revenues, and announced new spending cuts to underscore its commitment to austerity amid a steep economic downturn.

The government cut its primary surplus goal for this year to 8.7 billion reais ($2.7 billion dollars) or 0.15 percent of gross domestic product from 66.3 billion reais ($20.6 billion dollars), the equivalent of 1.1 percent of GDP, originally budgeted.

The primary surplus, or revenue available to meet interest payments on debt, is closely watched by markets and credit rating agencies as a gauge of a country’s capacity to repay its debt.

The agencies have warned they may further downgrade Brazil, a move which could undermine investor confidence and raise borrowing costs.

“We know (the announcement) is a significant change and it is happening because of the evolution of the revenues, which we think is a temporary phenomenon, a phenomenon that’s the result of a series of factors, which would make it possible to meet this year’s goals,” Finance Minister Joaquim Levy told reporters during a presentation in Brasilia.

Levy added that the changes should not be taken as a sign Brazil is moving away from fiscal discipline.

The steeper-than-expected cuts in the primary surplus targets could complicate President Dilma Rousseff’s bid to regain the confidence of investors as Latin America’s largest economy heads into its worst recession in 25 years.

Until a few years ago Brazil maintained 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.

The government cut its 2016 primary surplus goal to 0.7 percent of GDP from 2 percent and to 1.3 percent for 2017.

Its original goal was to maintain a surplus rate at 2 percent of GDP for the next two years, a percentage that is now only expected to be met in 2018.

“It is part of a long-term fiscal policy. A responsible policy from a finance point of view. A policy that will make possible a faster recovery of economic growth and will first stabilise and then reduce public debt until 2018,” Planning Minister Nelson Barbosa said of the plan.

Rousseff is struggling with record-low popularity as the economy tanks and a widening corruption scandal at state-run oil giant Petrobras nears her inner circle of advisers.

She is also facing a rebellious alliance in Congress that has watered down many of her cost-cutting measures.

The government acknowledged that it was prepared to slash the savings goal further if revenues continue to disappoint.

With the target revisions the government now estimates that Brazil’s gross debt-to-GDP ratio will only start to fall by 2018 given the weaker fiscal results.

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