Brazil Eases Fiscal Policy as It Plans to Increase Spending

Brazil’s government will ease rules that forced it to account for higher spending by states and cities to ensure the country’s fiscal target were met, Treasury Secretary Arno Augustin said today. The measure allows increased spending by federal and local governments.

The government’s guidelines for its 2014 budget targets a surplus before interest payments of 167.4 billion reais ($83.65 billion), or 3.1 percent of gross domestic product, the government announced today. Of that total, 116.1 billion reais is the central government’s surplus target while 51.2 billion reais corresponds to the surplus expected from states and municipalities. Currently, if states don’t meet their target, the federal government’s target is affected.

“We’re suggesting the hypothesis of reducing the target for some functions, which are those that the country understands as being more important, such as investments and tax cuts,” Augustin told reporters in Brasilia today. “The target is there, but it doesn’t necessarily need to be accounted for by the federal government if, eventually, it’s not met,” he said.

For Newton Rosa, chief economist at Sul America Investimentos, the relaxation means more public spending. Sul America sees Brazil’s central bank increasing the Selic rate 0.5 percentage point this week.

“It’s a sign that the government will continue to reduce its primary surplus, it will work with a smaller target,” he said in a telephone interview from Sao Paulo. “If you’re already in a scenario of increasing rates, the onus on monetary policy becomes heavier.”

Latin America’s largest economy expanded 0.9 percent last year, the slowest pace in three years. Growth will rebound to at least 3 percent this year, Finance Minister Guido Mantega said last month.

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