UPDATE 2-Brazil relaxes budget target and spending cuts

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By Isabel Versiani and Raymond Colitt

BRASILIA, March 19 (Reuters) - Brazil's government said on Thursday it will reduce its primary budget surplus target in 2009 and freeze less spending than initially planned even after a sharply slowing economy caused tax income to tumble.

Some analysts said Brazil was beginning to abandon an ultra-conservative fiscal position and boost counter-cyclical spending to help combat the crisis.

The government intends to reduce its primary budget surplus target, which excludes debt payments, by 0.5 percent of gross domestic product to 3.3 percent of GDP, Planning Minister Paulo Bernardo said.

It is the first time Brazil would not consider some priority spending, worth 0.5 percent of GDP, as part of the primary budget surplus under an agreement with the International Monetary Fund.

The primary budget surplus, which excludes interest rates, is closely watched by investors as a gauge of a country's ability to service its debt.

At the same time, the government would freeze only 21.6 billion reais ($9.61 billion) in spending, compared with a temporary freeze of 37.2 billion reais it had announced in January.

The government will essentially tighten spending by less than it had projected in January.

"In January we didn't know what was going to happen with the revenues and the 37 billion was a cautious, conservative calculation," Bernardo told a news conference.

LATE REACTION TO CRISIS

Some analysts said the government was unable to implement the draconian cuts it had announced in January.

"The fall of tax revenue was so abrupt, that they can't cut spending at the same rate," said Alexandre Lintz, chief-economist with BNP Paribas.

But others said the government realized continued orthodox fiscal discipline would only deepen an already quickly worsening economic scenario.

"Brazil is far behind other countries in cutting interest rates and boosting spending. They began to realize this today," said Jose Luciano Dias, a Brasilia-based political consultant.

"Without a doubt it's a change in attitude," Dias said.

Tax income, adjusted for inflation, fell 11.53 percent to 45.1 billion reais in February from a year ago, the national tax authority said on Thursday. Compared with January, the figure slumped 27 percent.

Analysts expect the economy to expand by 0.6 percent this year from 5.1 percent last year, according to the latest weekly central bank survey.

The government still expected economic growth of 2 percent this year, Bernardo said. That would translate into tax revenue of 756.9 billion reais this year, down by 48.3 billion reais from earlier budget forecasts.

But Bernardo also warned the government could announce further changes to its spending cuts or the primary budget surplus target.

"In a situation as volatile as this, it is very risky to say this isn't going to change."

($1=2.247)

(Additional reporting by Ana Nicolaci daCosta; Writing by Raymond Colitt; Editing by Kenneth Barry)