Brazil Budget Gap Widens More Than Forecast as Revenue Falls

  • Tax collection was the worst for month of August since 2009
  • Primary budget gap also widest on record for month of August

Brazil posted on Thursday its widest primary budget deficit on record for the month of August as the worst recession in over a century eroded tax revenue while expenses remained high.

The central government’s budget deficit before interest payments widened to 20.3 billion reais ($6.3 billion) last month, more than the 18.8 billion reais recorded in July and more than the 19 billion reais expected by economists in a Bloomberg survey. In the 12 months through August, the deficit that excludes states, municipalities and state controlled companies widened to 172 billion reais.

The main drag in the country’s fiscal performance was the pension system, whose deficit is expected to balloon to 149 billion reais this year, according to Treasury secretary Ana Paula Vescovi. “The economic crisis has caused contributions to fall and benefit payments to increase,” she told reporters in Brasilia. “That result underscores the need to discuss the pension system.”

The government is still working on a pension reform that, coupled with a constitutional amend to cap government spending in inflation-adjusted terms, will be the cornerstone of President Michel Temer’s efforts to bring public debt back to a sustainable path. The continued erosion of public finances renews the sense of urgency for those reforms.

Revenue Sinks

The government collected 91.8 billion reais ($29 billion) in taxes in August, the worst performance for that month since 2009. It was also less than the 107.4 billion reais obtained in July and less than the 95 billion reais expected by economists in a Bloomberg survey. All 25 economists who participated in the poll expected a stronger result last month.

The government is confident that the spending cap bill will be approved this year and falling revenues do not mean tax increases are needed right now, Meirelles said at an event in Sao Paulo. “What we are seeing today is the result of the very deep recession Brazil entered at the end of 2014,” Meirelles said. He forecast that tax revenue will only recover “some time after” economic activity begins to grow.

The central bank has said that progress on the government’s fiscal reform proposals is one of the conditions for it to start cutting the benchmark interest rate, currently at its highest level in a decade. The economy is expected to expand by 1.3 percent in 2017 after a contraction of more than 3 percent this year, according to the latest central bank survey of around 100 economists.

— With assistance by Gerson Freitas Jr

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