Brazilian policy makers are considering cutting the 2012 budget by less than 50 billion reais ($29 billion), two people familiar with the plan said. The amount is less than some local economists expect, prompting yields on long-term interest rate futures to rise.
The government is trying to balance the need to contain spending while it increases public investment to spur growth, said the two people, who spoke on condition of anonymity because the proposal must be approved by President Dilma Rousseff.
Finance Minister Guido Mantega said last month the budget cut would be enough to ensure the government would fully meet this year’s fiscal target. The plan, he said, was to keep in place a “solid” fiscal policy to make room for lower interest rates. On Jan. 26, the central bank said there was a high probability it would cut the benchmark interest rate to less than 10 percent from 10.5 percent.
To fully meet its target for a budget surplus before interest payments of 139.8 billion reais, the government would need to reduce the budget by about 60 billion reais, said Roberto Padovani, chief economist at Votorantim Corretora, in a telephone interview from Sao Paulo.
Room for Maneuver
“A smaller budget cut reduces the government’s ability to convince people inflation will converge to target this year,” Padovani said. “The debate over whether Brazil has room to keep interest rates at one digit will only increase.”
The yields on interest rate futures contracts maturing January 2021 reversed earlier losses and rose 2 basis points, or 0.02 percentage point, to 11.39 percent.
Most analysts are expecting a budget cut of 60 billion reais, Jankiel Santos, chief economist at Espirito Santo Investment Bank.
“The government will have to explain how less than 50 billion reais can be enough,” he said.
The size of the budget cut hasn’t been decided yet, Mantega told reporters in Brasilia today.
Credit Suisse said in a Feb. 3 report the government would be more likely to meet its fiscal target if it reduced the 2012 budget by 60 billion reais.
Inflation will slow back to its 4.5 percent target this year from 6.44 percent in the 12 months through mid-January, central bank President Alexandre Tombini said Feb. 2 in Mumbai.
Brazil’s consumer prices will rise 5.3 percent this year, according to the median forecast in a Feb. 3 central bank survey of about 100 economists published yesterday.