Brazil’s fiscal stimulus measures won’t erode the government’s 2012 budget target, as tax revenue will rebound on stronger economic growth in the second half of the year, Treasury Secretary Arno Augustin said.
The administration of President Dilma Rousseff will fully meet its 139.8 billion reais ($69.9 billion) primary budget surplus target this year, which excludes interest payments, because it wants to allow room for more interest rate cuts, Augustin said in an interview in Brasilia. The government doesn’t intend to discount public investments in infrastructure from the target as allowed by law, he said.
“Meeting the target opens room for monetary policy,” Augustin said at the Finance Ministry in Brasilia. “The worst is over, tax income will grow.”
While the government has met 45 percent of its 2012 primary surplus target in the first five months of the year, its fiscal performance has shown signs of weakening as government expenditures grew faster than tax revenue. Brazil last week posted a May budget deficit of 16 billion reais ($7.9 billion), the largest for the month since the series began in 2001.
The bulk of the spending came from higher investments, while current expenditures fell, Augustin said. “That’s good, not bad,” he added.
Financial markets are questioning Brazil’s commitment to fiscal discipline because they want a higher Selic rate to boost profits, he said. Brazil made a strategic decision to maintain fiscal discipline and distinguish its economy during the current global crisis, Augustin said when asked what his message to the market was.
The government last week stepped up government purchases of vehicles and equipment by 6.6 billion reais and increased agricultural financing by 14.8 billion, the latest in a series of stimulus measures this year that include tax breaks on industrial and consumer goods to boost consumer demand.
Such measures have had a small impact on the budget and can be partially offset by stimulating demand that contributes to stronger tax revenues, Augustin said.
More worrisome are several bills in Congress that would increase salaries for police officers, teachers and civil servants in the judiciary, increasing expenditures mostly of state governments, he said. “There are some that are very worrying,” he added.
Policy makers have cut the benchmark Selic rate by 400 basis points since August to a record 8.5 percent. Traders are betting the central bank will cut the Selic to 7.5 percent this year.
The world’s sixth-largest economy has recovered more slowly than expected from a contraction in the third quarter of 2011, growing 0.8 percent in the first three months of this year on an annual basis. Economists have cut their 2012 economic growth forecast to 2.05 percent from 3.2 percent on May 11, according to a central bank survey published today.
With net public debt at a record low 35 percent of gross domestic product and borrowing needs met six months in advance, Brazil has never been in such a comfortable position to manage its debt, Augustin said.
“If the market tests us and asks for rates beyond what the fundamentals suggest, we won’t sell,” he said, adding that the government has not yet set a date to issue sovereign bonds this year.
Recent gains by the real have also eliminated the need to use Brazil’s sovereign wealth fund to control currency fluctuations, the Treasury Secretary added.