Rousseff Cuts Spending By $32 Billion to Meet Brazil’s 2012 Budget Targets
Brazil will cut 55 billion reais ($32 billion) from this year’s budget to allow interest rates to fall, while increasing investment to boost growth in the world’s second-biggest emerging market.
The Planning Ministry, in a statement, said that the spending cuts from the 2012 budget approved by Congress would be spread across several ministries including a 3.3 billion reais reduction on defense and a 5.5 billion reais decrease on health care. Anti-poverty programs and public investment projects, including construction of low-income housing, will not be affected, the ministry said.
The size of the cut will allow interest rates to fall and enable President Dilma Rousseff to meet the targeted budget surplus before interest payments this year of 139.8 billion reais without sacrificing public investment, Finance Minister Guido Mantega said.
“With lower rates, the country will grow more,” Mantega said at a press conference to announce the spending reductions. “It is a big cut that allows us to meet the fiscal target with ease.”
Yields on interest rate futures contract maturing in January 2013 fell four basis points to 9.27 percent at 4:16 p.m. local time. The real strengthened 0.2 percent to 1.7215 per U.S. dollar.
The revised budget assumes economic growth of 4.5 percent and inflation of 4.7 percent this year, Mantega said.
World Cup
The government aims to fuel growth by boosting spending on infrastructure ahead of the 2014 World Cup, coupled with tax breaks and lower interest rates. Investments this year will rise 11 percent over 2011, Mantega said.
The cut was in line with expectations and should be sufficient to meet budget targets, Carlos Kawall, chief economist with Banco J. Safra SA, said.
“It’s coherent with the government’s objective of a primary surplus within the target,” Kawall said by telephone from Sao Paulo. “What’s important is that current expenditure remains under control. That’s the main point, in terms of the quality of the fiscal result.”
The central bank said last month there is a “high probability” the overnight rate will fall below 10 percent this year. The bank’s interest rate outlook assumes the government will meet its primary surplus target. Since August, policy makers have reduced the Selic rate by 200 basis points to 10.50 percent.
Brazilian consumer prices rose by 0.56 percent in January, the fastest pace in nine months, while annual inflation slowed to 6.22 percent.
Fiscal Restraint
Last year, the government met its primary surplus target, equal to about 3.1 percent of gross domestic product, after Rousseff froze federal hiring and cut 50 billion reais from her initial budget proposal.
Credit Suisse said in a Feb. 3 report it was more probable that the government would meet its fiscal target if it reduced the 2012 budget by 60 billion reais.
The government has said infrastructure investment of 140 billion reais will be needed to host the World Cup and the 2016 Olympics.
The Finance Ministry estimates that GDP grew 3 percent last year despite a contraction in the third quarter that was the first in more than two years.
Rousseff’s spending plans, coupled with additional rate cuts, will push inflation over the 4.5 percent target this year, a central bank survey of economists shows.
Consumer prices will rise 5.29 percent this year and 5 percent in 2013, according to the median estimate of about 100 analysts in a Feb. 10 bank survey.
Traders are wagering policy makers will reduce the benchmark rate to 10 percent next month and to at least 9.25 percent by August, interest rate futures show.
To contact the reporters on this story: Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net; Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
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