New Brazil Economic Team Downgrades Expectations for Budget

  • Primary gap could reach 170.5 billion reais, minister says
  • That would be the worst primary result in Brazil’s history

New Brazilian Finance Minister Henrique Meirelles speaks during a press conference to announce the names of the new members of the government's economic team in Brasilia on May 17, 2016.

Photographer: Evaristo Sa/AFP via Getty Images

Brazil’s new economic team projects the largest budget deficit before interest payments on record this year, underscoring the challenge Acting President Michel Temer will face in turning around Latin America’s biggest economy.

Temer’s administration will submit a bill that would allow it to report a primary budget gap of 170.5 billion reais ($48.4 billion) in 2016, Finance Minister Henrique Meirelles said Friday. The estimate is realistic and transparent, and doesn’t include possible spending cuts and revenue increases that require congressional approval, he said. It’s for the central government only, meaning it doesn’t take into consideration state or city budgets.

The previous administration, led by Dilma Rousseff, originally expected to post a primary surplus for the central government of 24 billion reais in 2016, though it asked Congress in March to reduce the target to a surplus of 2.8 billion reais. Rousseff said at the time the primary budget result could go as low as a deficit of 97 billion reais if revenue fell short of forecast.

Unlike the previous government, the Temer administration doesn’t expect to revise its fiscal target numerous times throughout the year, said Budget Minister Romero Juca. It will instead try to continuously improve the bottom line.

"This government’s stance will be different," he told reporters. "The budget target isn’t a soap opera that you release in episodes. It’s done in one fell swoop."

Investors use Brazil’s primary budget result to gauge the country’s fiscal health and its ability to service debt. The country last year lost its investment-grade status after the three major rating companies expressed growing concern over government finances. If lawmakers don’t approve the administration’s request, it would have to cut spending further or risk missing its target and violating fiscal laws. Meirelles said he expects Congress to approve the new target by May 25.

Friday’s announcement in effect says that Brazil’s public accounts are in worse shape than many had expected. The administration is betting that transparency will help revive investor confidence in the government, and that a clear picture of the country’s financial woes will motivate lawmakers to back spending cuts.

The administration is still developing strategies to shore up fiscal accounts, including policies designed to curtail pension payouts and raise revenue through the sale of state assets. It hasn’t yet decided whether to increase taxes, or revive an unpopular levy on financial transactions, known in Brazil as the CPMF tax. Meirelles said the government will announce new measures next week.

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