UPDATE 2-Brazil limits spending, aims to boost fiscal credibility

Mon Jul 22, 2013 5:13pm EDT

* Brazil government to freeze an extra $4.4 bln in budget

* Finance minister vows to meet fiscal target this year

BRASILIA, July 22 (Reuters) - Brazil will freeze an additional 10 billion reais ($4.4 billion) in budgeted spending this year, officials said on Monday, in an effort to bolster investor confidence in the government's commitment to fiscal austerity.

The new freeze, which was originally expected to reach up to 20 billion reais, is aimed at helping the central bank battle inflation, which hit a 20-month high in June. Brazil's planning ministry on Monday raised its projection for 2013 inflation to 5.7 percent from 5.2 percent previously.

The government had announced a budget freeze of 28 billion reais in May, bringing the total amount for this year to 38 billion reais, below last year's freeze of 55 billion reais.

After two years of aggressive spending President Dilma Rousseff is trying to convince investors her administration will stick to the tough fiscal rules that helped stabilize Latin America's largest economy after decades of crises.

Rousseff faces growing spending pressures after a recent wave of nationwide demonstrations to demand investments in health, education and other public services. The protests were sparked by bus fare hikes.

Rousseff's approval rating plummeted and her re-election chances haved dimmed since the protests, a recent poll showed..

"I'm confident we will meet our (fiscal) targets this year," Finance Minister Guido Mantega told reporters, reiterating the government aims for a primary budget surplus equal to 2.3 percent of gross domestic product this year. "Investors' confidence will be recovering soon."

BUDGET GOAL IN DOUBT

Still, many analysts expect the government to miss its primary target for the second year in a row.

"Despite the fact that we see the measures as insufficient to guarantee a primary result of 2.3 percent of GDP this year, they should help reduce uncertainty over fiscal policy," Brazilian economic consulting firm LCA wrote in a note to clients following the announcement on Monday.

Originally, the government had set the goal at 3.1 percent of GDP, later cutting the target after revenue fell due to a flurry of tax breaks aimed at sparking economic growth. The primary surplus represents the public sector's excess revenue over expenditures before debt payments.

The new budget freeze includes spending on travel, rent, electricity and the hiring of new public servants.

In rare comments on the country's fiscal strategy, central bank chief Alexandre Tombini told a local newspaper on Sunday the government needs to be clear in its next fiscal policy steps to bolster investors' confidence in an economy showing new signs of weakness.

The administration has relaxed tough fiscal rules in recent years, using "creative accounting" methods to bolster savings results that have been harshly criticized for lack of transparency. The government has brought forward dividends of state-owned companies and transferred cash from other funds to bolster state coffers.

Higher public spending tends to fuel inflation and add to the country's debt burden.

Although Brazil's debt levels are much lower than those of some European countries, its expansionary stance forced the central bank to lift interest rates from record lows and prompted warnings from debt rating agencies.

In June, Standard and Poor's cut Brazil's rating outlook to "negative" from "stable" due to weakening public finances.

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