Brazil Cuts Budget Plan by R$55 Billion

By Sarah de Sainte Croix, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – The Brazilian government has an announced an aggressive program of budget cuts totaling R$55 billion for 2012. The aim is to allow inflation to fall and to boost growth at a time of global economic slowdown, as the Minister for Planning, Miriam Belchior, and the Minister for Finance, Guido Mantega, announced last week.

Around R$14 billion in total will be shaved off the budgets for the Ministries of Health, Defense, Education and Cities (R$5.4 billion from Health, and R$3.3 billion from each of Defense and Cities, and R$1.9 billion from Education).

The government was quick to announce that the cuts would be stripped from administration budgets and would not impinge on the Ministries’ programs such as the anti-poverty program, Brasil Sem Miséria (Brazil Without Misery), the social housing scheme, Minha Casa, Minha Vida (My House, My Life) and the Program for Accelerated Growth (PAC).

Mantega explained that the austerity measures would stimulate a drop in interest rates, allowing the government to meet its primary surplus target of R$139.8 billion while protecting priority public spending in social care and growth sectors.

This year’s cuts were up from R$50.6 billion last year. However market analysts responded positively to the announcement, saying that is in line to meet the primary surplus target which Brazil sets annually as part of a long term priority plan to pay off its public sector debt. At the close of 2011 the debt stood at R$1.5 trillion (around 36.5 percent of GDP).

Mantega emphasized, “We want to boost growth… In spite of difficulties around the world, with various countries slowing down, including some emerging nations, Brazil has the ability to grow faster. The budget we are implanting will make vigorous growth in Brazil possible.”

However, the government simultaneously revised down revenue predictions for the year by R$36.4 billion, to R$1.9 trillion, compared to the predictions laid out in the preliminary budget approved in December last year.

Mantega said that the government’s priority was to increase public spending, saying it would be the “locomotive” of Brazil’s growth.

He declared, “Increased public spending will foment higher levels of private spending.”

But while Mantega is expecting growth of around 4.5 percent in 2012, other forecasters are more conservative. The UN pegged Brazil’s GDP growth at a pessimistic 2.7 percent at the end of January, while estimates from Brazil’s financial institutions hover around the 3.5 percent mark.

But despite weaker growth forecasts compared to last year, expansion in the infrastructure sector – which is becoming increasingly urgent if it is not to start seriously hindering Brazil’s capacity to do business – looks set to prop up the economy.

Analysts are expecting significant revenue to be generated from the airport privatization plan which kicked off in earnest this month. At the same time, the government enacted a previously dormant law (no. 12.431) which grants tax breaks to private and foreign investors to invest in infrastructure projects in Brazil, with the aim of creating a pool of private money to boost growth in sector ahead of the 2014 World Cup and Olympic Games in 2016.