BRASILIA Brazil's government faces a dilemma over how to free itself of the constraints of a strict budget surplus target to boost spending in a sluggish economy without sending out signals that its fiscal discipline is slipping, senior government sources told Reuters.
Economists agree Brazil's primary surplus target fixed at 3.1 percent of gross domestic product is very high for a major economy and could be lowered without harm. Brazil's finances are in healthy shape, it has reduced its public debt and brought interest rates down to historic lows.
So why not ease up on a fiscal target that it had trouble meeting last year? Two reasons.
Any change in the government savings target is bound to raise concerns that leftist President Dilma Rousseff is tinkering with policies that have been the basis of Brazil's financial stability since 1994. Investors watch the primary surplus closely as they see it as a gauge of fiscal discipline in the world's No. 6 economy.
Relaxing the target could also trigger spending pressures from state and local governments who might take it as a green light to spend more ahead of next year's general elections. That would fuel inflation which is already speeding up.
Rousseff's government has signaled it is willing to loosen budget restrictions to boost an economy that seems impervious to more than a year of stimulus measures.
The government is considering two options.
One is to go ahead and formally lower the primary surplus target to free up spending for investment. But that could lead to a slide in fiscal discipline in state and local governments that senior officials such as Finance Minister Guido Mantega want to avoid.
The primary surplus - or revenues minus expenditures excluding debt payments - is a measure of a country's ability to repay its obligations. A more relaxed goal allows the government to cut more taxes for industries in a bid to boost investment.
According to three administration sources, Mantega is opposed to reducing the fiscal target this year and would prefer to continue the creative accounting that Brazil has been using to meet the target on paper.
This second option involves excluding more investment of the national infrastructure program from the primary fiscal numbers so that the government can say it is still on track with its fiscal target. The accounting maneuver is allowed under Brazilian law, but the calculation is not recognized by the International Monetary Fund.
"The minister is leaning more in favor of raising the amount of investments that would be deducted from the primary goal," said a government official with knowledge of the talks. "Reducing the primary target raises spending pressures from public workers and legislators who want to increase current spending. We don't want that."
He added that no decision has been made on the matter.
News of Mantega's more austere stance helped lower Brazil's interest rate future contracts as traders saw fewer risks of inflation picking up too fast.
Rousseff's position is not known. Mantega, a powerful member of her economic team, is Latin America's longest serving finance minister, though there has been speculation that he may be on his way out after two years of disappointing economic growth.
Other members of the government blame the high fiscal surplus goal for once-booming Brazil's paltry economic growth.
"We are one of the few countries in the world that has such a high primary surplus target. That goal is restricting our investment, it is not allowing us to grow more," a senior government source told Reuters.
"Mantega has a very stubborn position on an issue that is making Brazil the laughingstock of the world," he said.
Financial markets see Brazil's overall finances as solid at a time when Europe and the United States are struggling to cut their mounting debts. Brazil nearly halved its public debt to a record low of 35 percent of GDP in the last decade.
The government missed its 2012 primary surplus goal of 139.8 billion reais by a long shot after a slowdown in tax revenues. At the last minute, officials tapped into the country's sovereign wealth fund and brought forward dividend payments from state-run companies to meet an already reduced primary goal.
Private economists warn that a more relaxed fiscal policy could stoke already-high inflation in a country that was scarred by bouts of hyper-inflation in the 20th century.
Inflation rose faster than expected in the month to mid-January, driven by higher costs for food and personal expenses, statistics agency IBGE said on Wednesday.
"The problem with lowering the primary target is that it would generate inflationary pressures, which are likely to put the central bank in a difficult position because the inflation outlook is not looking good," said Alessandro del Drago, chief economist with Kinea in Sao Paulo.
"The issue here is more about aggregate demand than about the sustainability of the debt."