MercoPress. South Atlantic News Agency

Brazil's budget targets ignored by Congress; Finance minister could resign

Lawmakers approved a budget targeting a primary surplus of 0.5% of GDP, which was below the 0.7% target sought by Finance minister Levy

Brazil’s Congress on Thursday approved a 2016 budget with surplus targets lower than what Finance Minister Joaquim Levy wanted, a day after the country lost an investment-grade credit rating on concerns about fiscal restraint.

 Lawmakers approved a budget targeting a primary surplus of 0.5% of GDP, which was below the 0.7% target sought by Levy and far from the surplus of 2% of GDP that the Rousseff administration promised earlier this year.

Stimulus policies and a sharp economic downturn that has diminished tax revenue have caused Brazil’s debt load to balloon to worrisome levels. Economists who agree with Levy’s austerity push have said that Brazil needs to dramatically cut public spending and raise taxes to keep debt from spinning out of control.

But austerity measures have stalled in a divided Congress, which Thursday coalesced around weaker fiscal targets and continued spending on treasured social programs.

Fitch Ratings on Wednesday cut Brazil's sovereign debt to junk status, citing the government’s hesitation to embrace sound budget policies. Levy, who took his job in January, promised to cut spending and raise taxes to deliver a primary surplus of 1.1% of GDP in 2015.

But that was upended by President Dilma Rousseff and other officials of her populist administration who aimed to protect public-service benefits and other spending from Levy’s sights, according to government officials and lawmakers. By midyear the 2015 fiscal target changed to 0.5% of GDP and estimates are now for a primary deficit as large as 2% of GDP.

“The repeated changes in fiscal targets have undermined the credibility of fiscal policy,” Fitch said in a statement explaining its decision.

The new budget could weaken Mr. Levy’s standing in the government and possibly lead to his exit, analysts say. Indeed, rumors of his ouster or resignation have swirled for months, something that Mr. Levy has usually denied emphatically. But on Wednesday a stoic Mr. Levy chose not to discuss his future with reporters.

Moody’s Investors Service still has Brazil one notch into investment grade but has put Brazil under review for a downgrade.

Brazil’s economy is forecast to contract by 3.5% this year and almost as much in 2016, with growing unemployment and a total budget gap as large as 9.5% of GDP.