Brazil’s key 2012 budget goal in doubt

This may be another sign that a long stretch of economic stagnation is causing the government to relax its fiscal discipline.

The year-long slowdown in the once-booming economy of Brazil has impaired tax collection more than expected. President Dilma Rousseff's government has also granted 12.5 billion reais ($6.17 billion) in tax breaks so far this year in an effort to stimulate investment and consumer spending.

As a result, the government looks increasingly unlikely to meet its consolidated primary budget surplus target of 139.8 billion reais — or about 3.1 percent of gross domestic product — unless it resorts to different accounting methods, the three members of Rousseff's economic team said on condition of anonymity.

Missing the target could unsettle financial markets and impair Rousseff's goal of maintaining low interest rates in coming months. Some economists and ratings agencies have argued that her government has some latitude to ease fiscal policy without risks given Brazil's generally robust finances.

"The probability of the government not meeting the (primary surplus) goal is increasing greatly," one official said.

A spokesperson for the finance ministry declined to comment on the report, but noted the government is on track with its quarterly fiscal targets and has a good track record in meeting its primary surplus goals over the years.

The primary surplus — revenues minus expenditures, not including debt servicing costs — is considered the bellwether of Brazil's finances. Relatively large and consistent surpluses have allowed the country to win the confidence of investors and reduce debt over the past decade.

Reuters reported on Aug. 21 that Rousseff was already considering easing the primary surplus goal for 2013. Taken together, the reports indicate that her left-leaning government is increasingly willing to sacrifice a degree of fiscal rigor in order to stimulate an economy expected to grow just 1.6 percent this year.

The three officials said the government could still technically meet its surplus target for 2012 by excluding some infrastructure investments from the calculation — giving Brazil another 40 billion reais or so in wriggle room. That maneuver is permitted by Brazilian law, and was last used in 2010.

However, many outside auditors including the International Monetary Fund do not recognize the move. For example, in 2010 the IMF said Brazil's primary budget surplus was equal to 2.4 percent of GDP — short of the 3.1 percent goal.

BEHIND SCHEDULE

So far in 2012, the government has fallen slightly behind on its primary surplus goal, reaching 51 percent of the target in the first seven months of the year, central bank data showed. Between January and July the surplus was about 20 billion reais less than the government had in the same period last year.

In another worrisome sign, Brazil's federal tax collection fell for a second consecutive month in July — down 7.0 percent.

The government was counting on a stronger economy during the second half of the year to make up for lost revenue. However, the recovery has taken longer than expected to materialize.

Meanwhile, the government had also hoped to make up the difference with more dividends from state-run companies like Banco do Brasil and oil giant Petrobras. But that might not be enough either, officials acknowledge.

The country's tax authority estimates that tax breaks already announced could cost the government about 24 billion reais in additional tax relief next year. That bill could be even higher if the government keeps promises to unveil more tax exemptions in 2013.

Tight budget management has been critical to the recent success of a country where memories are still fresh of runaway inflation in the early 1990s. Standard & Poor's cited fiscal discipline as one of reasons for raising Brazil's sovereign debt rating last November.

However, some have said Brazil has accumulated enough credibility to relax its goals a bit. Even if the primary surplus came in at 2.4 percent of GDP this year, that would still be the best result among major Latin American economies, according to IMF projections.

Many private observers like Goldman Sachs and Raymond James had already predicted that the government may fall short of the surplus goal. Moody's told Reuters in July that Brazil could miss its fiscal target and still remain on track for a ratings upgrade as its debt metrics remain solid.

The second of the three government official said the administration is not too worried about missing the full primary surplus goal because the economy takes first priority now.

"I also don't think that the market is too worried about it because we have showed that our finances are in order," said the official.

The country's public sector net debt to GDP ratio has consistently fallen over the last decade from 60 percent in 2002 to 36 percent last year.

Missing the primary surplus goal could raise already high inflation expectations for next year, which directly impacts the central bank's monetary policy.