Mantega Refuses to Commit to Tightening Amid Downgrade Alert

Brazilian Finance Minister Guido Mantega failed to commit to tightening fiscal policy when presenting the 2014 budget, overlooking a warning by Standard & Poor’s that deteriorating government accounts may result in a downgrade.

Mantega said it was too early to define the government’s primary surplus goal, a gauge for the level of spending. The minister said he could cut as much as 58 billion reais ($25 billion) from the primary budget surplus target, which excludes interest payments and could fluctuate from 2.1 percent of gross domestic product to 3.2 percent for 2014. The government may reduce the target if states and cities failed to meet their share, he said.

“We will come up with the best possible fiscal result,” Mantega said when asked by reporters whether he could ensure primary surplus of at least 2.1 percent of GDP. “We are committed with the best possible primary.”

Standard & Poor’s put Brazil’s BBB credit rating on negative outlook in June, saying the move was triggered by a third year of “modest” economic growth, “weaker” fiscal policy and a deterioration in the government’s credibility.

President Dilma Rousseff’s government has reduced taxes, granted off-budget loans to state banks to boost lending, and increased public works in a bid to buoy a slowing economy. GDP expanded 0.55 percent in the first quarter from the end of 2012, down from 0.64 percent growth in the fourth quarter.

Tapped Dividends

Last year, the government tapped dividends of state companies and its sovereign wealth fund and discounted some investments from its fiscal goal to meet its target. Mantega was called to appear before Congress to explain the use of so-called creative accounting.

Brazil’s government estimates it will spend 1.04 trillion reais next year and collect 1.32 trillion reais in revenue, according to the budget bill sent to Congress today that takes into account a primary surplus of 3.2 percent of GDP. The data doesn’t include interest payments or earnings.

That compares to spending of 928 billion reais this year on revenue of 1.19 trillion reais, according to the 2013 budget approved by lawmakers. The 12 percent increase in spending forecast for next year is almost twice the pace of annual inflation, which was 6.27 percent in July.

Mantega’s 2014 budget forecast displays the same lack of transparency as the past, showing the government is not responding to the threat of a sovereign ratings downgrade, according to Mansueto Almeida, an economist at the government institute for applied economics, IPEA.

‘Same Measures’

“The government’s maintaining the exact same measures, and not reacting at all,” Almeida said by phone from Brasilia. “Absolutely nothing changed. I’d prefer a clear, credible goal rather than giving 3.2 percent and saying they could discount.”

The central bank in the minutes to its July meeting said government spending was expansionary.

Policy makers are implementing the biggest interest rate increase among major economies tracked by Bloomberg in a bid to slow inflation that twice this year has breached the 2.5 percent to 6.5 percent target range. Policy makers lifted borrowing costs by 50 basis points to 9 percent yesterday.

The real, which has declined 10.6 percent in the past three months, weakened 0.6 percent today to 2.3595 per U.S. dollar.

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