Brazil Abandons Fiscal Targets for This Year and 2018 -- Update

BRASÍLIA -- Brazil abandoned its fiscal targets for this year and next, after a bribery scandal crippled President Michel Temer's ability to push economic reforms through Congress and left the public sector with gaping budget hole.

Finance Minister Henrique Meirelles said Tuesday that lower-than-expected inflation and tax revenues forced the government to loosen its goal for the primary budget deficit, or the public-sector shortfall before debt payments, from 2017 through 2020.

That means Brazil's government debt burden, already the heaviest of any major Latin American economy at 73.1% of gross domestic product, is set to continue rising fast in coming years.

"What happened was a substantial drop in revenue so far in 2017," Mr. Meirelles said in a press conference. "In addition to that, we have projections for [corporate] losses at a higher level and, therefore, greater problems...companies' ability to pay taxes."

Mr. Meirelles' decision, which has been the subject of intense media coverage in recent days, amounts to a high-profile shortcoming in the government's effort to pull the economy out of a two-year recession.

Policy makers had scrambled in recent weeks to shore up public finances in a bid to meet the deficit targets set last year. The Finance Ministry in July attempted to double certain taxes on gasoline and diesel fuel. Authorities last week admitted they were weighing the creation of a new income-tax bracket above the current top rate of 27.5%.

Such measures sparked an outcry from interest groups and legislators, many of whom say Brazil's taxes are already too high and have promised to vote against further increases. A federal judge issued a nationwide stay on the fuel-tax hike, while Mr. Temer was forced to publicly disavow the income-tax idea.

The problem is that, with revenue falling below projections, the government is running out of places to cut spending, which is dominated by social-security and personnel outlays that largely can't be touched without changes to Brazil's constitution. Discretionary spending makes up less than 10% of the federal budget.

Since taking office after last year's impeachment of President Dilma Rousseff, Mr. Temer's administration has focused on market-friendly management of the economy. The centerpiece of his platform was a social-security reform intended to put Brazil's public finances on a sustainable path.

But in the wake of a graft scandal that erupted in May, when the president was accused of taking bribes from a businessman, Mr. Temer has instead been consumed with keeping his base in Congress together. Rather than pushing for the social-security overhaul, Mr. Temer spent much of the past three months horse-trading with legislators ahead of a vote by Congress to allow corruption charges against him to proceed.

Political analysts say the social-security reform is now a long-shot.

"Keeping Temer in power comes at a high cost to the country," said political consultant Leonardo Barreto, noting that Brazil's fiscal adjustment is likely to take longer than expected.

Mr. Meirelles said Tuesday that the government now expects primary deficits from 2017 through 2020 to total 522 billion reais ($164.7 billion), up from a previous forecast of 323 billion.

The costs of Brazil's large and high-interest debt burden will likely add considerably to that figure. In the 12 months through June, the public sector ran a 167.2-billion-real primary deficit. Including interest payments, the shortfall rose to 607.5 billion reais, or 9.5% of gross domestic product -- the largest deficit of any economy Brazil's size.

"The path ahead isn't very positive," said Ignácio Crespo, an economist at brokerage firm Guide Investimentos. "There could be tax increases...the deficit will remain a problem. That makes a recovery much harder," he said.

--Priscilla Oliveira contributed to this article

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

August 15, 2017 20:00 ET (00:00 GMT)