MercoPress. South Atlantic News Agency

Sound fiscal policy is new target of Brazilian economy: subsidies to be lessened

Rousseff and her re-election bid fear a sovereign debt downgrading next year

Brazilian Finance Minister Guido Mantega said on Tuesday the government will remove some subsidies and delay tax breaks to keep the country's fiscal policy sound. Likewise the state development bank, BNDES, will stop funding lines for regional government next year.

 A rapid erosion of the government's fiscal accounts have raised fears of a sovereign rating downgrade next year, which could scare off investors and undermine a timid recovery in Latin America's largest economy.

Mantega said the central government will reach its 2013 primary budget surplus goal of 73 billion Reais (31.85 billion dollars) while states and municipalities will save between 23 billion and 26 billion Reais. That means that the government will fall short of its already reduced overall primary surplus goal of about 111 billion Reais.

But analysts have said they doubt the government will be able to rein in spending next year, during which President Dilma Rousseff is expected to run for re-election.

Failure to meet its fiscal goals in the last two years has eroded Rousseff's credibility and raised inflation expectations for coming years.

Mantega added that the government should be careful when creating a new formula to adjust domestic fuel prices to be more in line with international ones.

“The formula cannot be improvised, it is something that has to be done carefully in order to have a methodology that is not inflationary,” Mantega told reporters in Brasilia.

In related news Brazil's central bank is set to hike its base rate half a percentage point Wednesday to tame high inflation against a background of sluggish economic growth, according to market analysts.

The decision to push the rate to 10% is to be announced at the end of a two-day meeting of the bank's Monetary Policy Committee -- its last this year -- which opened Tuesday. The rise will come barely 11 months before presidential elections in which President Dilma Rousseff is tipped to win re-election.

It will mark the sixth consecutive rate increase this year in an adjustment cycle begun last April. The bank's priority is to keep the lid on inflation, which in June reached 6.7% on an annualized basis, above the 6.5% upper limit of the official range.

Rousseff had pushed for lowering the rates, among the highest in the world, but the central bank was forced to bring them back up in the face of soaring inflation.