Brazil announced on Friday it will immediately cut government spending by 6.65 billion dollars to balance the budget and achieve the goal of a primary fiscal surplus of 2.3% of GDP. The decision is seen as a strong signal to recover investors’ confidence following weeks of turmoil and poor performance of the economy.
”Initially, the cut will amount to 15 billion Reais (6.65bn at the current exchange rate), but we will see during the year if new cuts are needed, Finance Minister Guido Mantega told Globo television.
The announcement was meant to reassure financial markets by signalling that Brasilia can maintain fiscal discipline. The important thing is to meet the target of 2.3%. This target will be met whatever the cost,” Mantega said.
The primary surplus, (contrary to fiscal surplus) corresponds to savings in public spending but does not include paying interest on the debt.
The cuts will be outlined in detail next week, said Mantega, who added that they will not affect operating costs, investment and the government's social programs.
The cuts will be made via the reduction in expenses such as air fares, materials, among other things added Mantega who insisted the government will look at the country's economic performance during the year to decide if it needs more cuts in the budget
Brazil, which has seen two years of weak economic growth and rising inflation, was rocked by weeks of mass protests last month as citizens demanded better public services and an end to rampant corruption
In May, the government froze 28 billion Reais in spending from this year's budget, largely a result of weaker-than-expected economic growth. Then, the government said it's expecting a shortfall of 47.5 billion Reais in revenue this year, compared with the original budget law.
On a 12-month basis, the public sector primary budget surplus increased to 88.8bn Reais, or the equivalent of 1.95% of GDP in May, the most recent figure available, wider than 85.8bn, or the equivalent of 1.89% of GDP, in April.
The Brazilian central bank is scheduled to meet 10 July and experts’ opinions are divided almost equal as to whether it will decide to increase the basic rate or leave things unchanged.
In what seems a change of ‘policy tone’, the government of President Dilma Rousseff now seems prepared to contain expenditure, even increase taxes to achieve fiscal target in 2013, following two years of aggressive incentives to prop a anaemic economy.
Despite the positive reaction to Mantega’s announcement, market analysts insist that the Rousseff administration needs an aggressive long term fiscal plan to fully recover investors’ confidence.