UPDATE 2-Brazil 2012 budget assumes strong GDP growth

Wed Aug 31, 2011 5:21pm EDT

Related Topics

* 2012 budget sees 5 pct GDP growth, higher revenue growth

* Budget proposal sees 4.8 pct inflation in 2012

* Sets primary budget surplus target at 114 bln reais (Recasts, adds analyst, context, background)

By Raymond Colitt

BRASILIA, Aug 31 (Reuters) - Brazil's government presented a 2012 budget to Congress on Wednesday that foresees a rosy economic outlook and a lower budget surplus target, raising questions about its commitment to fiscal discipline.

The budget proposal assumes 5 percent GDP growth next year, far higher than economists' consensus forecast of 3.9 percent and a contrast with mounting signs of a sharp slowdown this year. An optimistic growth outlook risks overestimating tax revenues, which are expected to rise by 7 percent, and could force a new round of budget cuts next year.

The government also lowered its primary budget surplus target -- revenues in excess of spending before interest payments on public debt -- to 114 billion reais for next year from a revised 128 billion reais this year.

The proposal contrasts with the government's message of fiscal discipline in recent days. On Monday it said it would slow spending and increase its primary budget surplus target for this year by 10 billion reais. For more, see: [ID:nN1E77S0II].

"There are contradicting messages. They tell legislators there's no money to hike civil servants' salaries and then they propose spending hikes elsewhere," said Roberto Piscitelli, finance professor at the University of Brasilia.

Budget Minister Miriam Belchior insisted that the government's budget execution would be far more austere than its proposal.

"One thing is what we send (to Congress), another is the government's intention," she told a news conference, emphasizing that the primary budget target could be revised upward next year but that the government wanted to maintain "a margin" to maneuver.

She acknowledged that the budget proposal differed from the message of austerity the government was sending to the markets. "I understand there's an apparently mixed signal," she said.

Unlike many other countries, Brazil's budget is more of a guideline than an absolute spending mandate. The government is authorized to spend up to the amount authorized by Congress but is not obligated to do so.

As a result, governments often sends "inflated" budgets to Congress to have higher spending ceilings and more leeway in the implementation.

Some analysts said the administration of President Dilma Rousseff also wanted to avoid angering legislators with more austerity measures.

Spending cuts and the government's anti-corruption drive have upset many of her allies, who earlier this month openly boycotted Rousseff's legislative agenda.

Unruly legislators are now likely to further inflate expenditures, tacking on pork barrel spending for their own constituencies.

The government is budgeting 165.3 billion reais ($104.3 billion) of investment by ministries, agencies and state-controlled companies in 2012.

Some of the biggest winners in next year's budget are health, education and defense, whose spending will rise. The biggest losers include the ministry of industry and trade, as well as the foreign ministry, the budget proposal showed.

Gross domestic product is expected to grow by 3.8 percent this year, according to this week's central bank survey of leading financial institutions. Some economists say global financial turmoil could push growth even lower this year and next, following unsustainably fast growth of 7.5 percent last year. (Additional reporting by Isabel Versiani; Editing by Dan Grebler)

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