Brazil Unwinding Tax Breaks to Offset $21 Billion Shortfall

Brazil’s government will roll back payroll tax breaks to help offset an estimated 60 billion reais ($21 billion) in revenue shortfall this year, Finance Minister Joaquim Levy said.

The government will save 5.3 billion reais in 2015 and 12.8 billion reais next year by unwinding reductions in payroll taxes, he told reporters in Brasilia on Friday. The measure requires congressional approval. President Dilma Rousseff reduced the taxes during her first term, costing the government 25 billion reais a year.

Rousseff’s new economic team has pledged increased fiscal discipline, even as economists forecast gross domestic product will shrink this year. The administration on Thursday set limits on the amount that ministries may spend through April and in January increased taxes on fuel, cosmetics and imports.

“With the end of the commodities boom, we’ll have to make an effort,” Levy said. “Today, we’re on the right path,” he said, adding that additional measures may be taken to meet the budget target.

The exact size of spending cuts will be defined after Congress approves the 2015 budget, Levy said. The budget proposal sent to lawmakers last year was based on revenue estimates that are 60 billion reais higher than current calculations, he said.

A report Friday showed that Brazil in January posted its first monthly budget surplus in two years, indicating the government is heading in the right direction, said Jankiel Santos, chief economist at BESI Brasil.

‘First Brick’

“It’s the first brick in the reconstruction of credibility,” Santos said by phone from Sao Paulo. “From here on it’ll be looking at each month -- every frustration will be negative, every positive number will be celebrated.”

Swap rates on the contract due in January 2017, the most traded in Sao Paulo Friday, fell 18 basis points, or 0.18 percentage point, to 12.76 percent at 5:50 p.m. local time. The real strengthened 1.9 percent to 2.8500 per U.S. dollar.

Brazil posted a nominal budget surplus in January of 3 billion reais, the central bank said in a report Friday. The median estimate of analysts surveyed by Bloomberg was a deficit of 15 billion reais.

The primary surplus, which excludes interest payments, in January was 21.1 billion reais, above the median forecast of a 14.8 billion-reais surplus from 16 economists surveyed.

Government Savings

Larger-than-expected savings from city and state governments as well as reduced interest payments on the stock of dollar swaps helped the budget, Tulio Maciel, the central bank’s head of economic research, told reporters in Brasilia Friday.

“It was very good for the start of the year,” Maciel said, adding that the effect of spending cuts taken by the government will start impacting budget results from February.

Levy this week held meetings with lawmakers from parties in the ruling coalition seeking support for austerity measures, including cuts in some unemployment and pensions benefits.

Brazil’s economy grew 0.1 percent in the third quarter of 2014 over the three previous months, after contracting 0.6 percent in the second quarter. Economists surveyed by the central bank forecast GDP will contract 0.5 percent this year and inflation will top the 6.5 percent upper ceiling of the target range for the first time since 2003.

Increased spending in an election year, and shrinking tax revenue due to a flagging economy, brought Brazil the worst budget deficit ever recorded in 2014. That led Standard & Poor’s in March to downgrade Brazil’s credit rating to one level above junk.

Moody’s Investors Service six months later lowered the outlook on its Baa2 rating to negative. That is the second-lowest investment grade. This week, Moody’s cut state-controlled Petroleo Brasileiro SA’s rating to junk.

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