Brazil Public Finances Need Growth and Friendly Politicians

(Bloomberg) -- If Brazil’s top economic policy makers want to hit their new budget targets, they will need a little help from their friends in Congress.

President Michel Temer’s administration has committed itself to a 2018 fiscal goal that depends on Congress passing measures to rake in 18 billion reais ($5.7 billion) in much-needed revenue. Officials are also betting heavily that an underwhelming recovery from recession will finally gain traction, with expected growth accelerating six-fold between this year and next.

So far the signs aren’t great. Growth in the second quarter of this year expanded by less than forecast as the government’s plans to push through its reform agenda were sidetracked by Temer’s battle against corruption charges, central bank data showed on Thursday.

Hitting next year’s eye-popping 159 billion reais primary deficit target will also require Congress to approve legislation proposed by a president long dogged by record-low approval ratings and recently rattled by a corruption charge. In the wake of disappointing tax revenues and difficulty in cutting spending, the government acknowledged on Tuesday that its fiscal deficits will be billions of dollars larger than previously forecast. The finance ministry did not wish to comment for this article.

"The government didn’t have the political crisis on its radar, nor the impact it would have on the economy," Romero Juca, Temer’s leader in the Senate, said in an interview. "So it ended up setting a target based on the most positive scenario."

Brazil’s government will need lawmakers to pass measures that include legislation ending tax breaks for some companies in an effort to raise 4 billion reais, as well as a proposal changing taxation on investment funds that would generate 6 billion reais. Stiff opposition will come on a proposal to postpone civil servants’ salary increases until 2019, a move worth around 5.1 billion reais.

"The government has no chance of getting these measures approved," said Rogerio Rosso, a federal deputy from the Social Democratic Party, or PSD, nominally a government ally. "You have the question of elections next year and you have an environment in no way suited to votes which hit parts of the economy, including workers’ themselves." Civil servant groups have vowed to protest the measure.

The government also hasn’t given up on pushing what may the most difficult of all tasks --garnering a 60-percent majority to change the constitution so that Brazilians work longer and obtain fewer pension benefits.

"Congress can’t run away from approving something that is essential to fix the country," Juca said about the proposal.

To help hit the target, the government will also need the pace of economic growth to pick up from the 0.34 percent consensus rate this year to 2 percent next year. That may be a tough ask, given that over 13 million people are still jobless and household debt is falling slowly.

Brazil will aim for a budget gap before interest payments of 159 billion reais in both 2017 and 2018, Finance Minister Henrique Meirelles announced in a press conference alongside Planning Minister Dyogo Oliveira on Tuesday evening. Previously, the government’s deficit targets were 139 billion reais for this year and 129 billion reais for the next.

--With assistance from Samy Adghirni and Matthew Malinowski

To contact the reporters on this story: Rachel Gamarski in Brasilia at rgamarski@bloomberg.net, Simone Iglesias in Brasília at spiglesias@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Bruce Douglas, Raymond Colitt