Exclusive: Brazil debates lowering budget surplus goal - sources

Wed Jan 23, 2013 3:37pm EST
 
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By Alonso Soto

BRASILIA (Reuters) - Brazil's government faces a dilemma over how to free itself of the constraints of a strict budget surplus target to boost spending in a sluggish economy without sending out signals that its fiscal discipline is slipping, senior government sources told Reuters.

Economists agree Brazil's primary surplus target fixed at 3.1 percent of gross domestic product is very high for a major economy and could be lowered without harm. Brazil's finances are in healthy shape, it has reduced its public debt and brought interest rates down to historic lows.

So why not ease up on a fiscal target that it had trouble meeting last year? Two reasons.

Any change in the government savings target is bound to raise concerns that leftist President Dilma Rousseff is tinkering with policies that have been the basis of Brazil's financial stability since 1994. Investors watch the primary surplus closely as they see it as a gauge of fiscal discipline in the world's No. 6 economy.

Relaxing the target could also trigger spending pressures from state and local governments who might take it as a green light to spend more ahead of next year's general elections. That would fuel inflation which is already speeding up.

Rousseff's government has signaled it is willing to loosen budget restrictions to boost an economy that seems impervious to more than a year of stimulus measures.

The government is considering two options.

One is to go ahead and formally lower the primary surplus target to free up spending for investment. But that could lead to a slide in fiscal discipline in state and local governments that senior officials such as Finance Minister Guido Mantega want to avoid.   Continued...