December 15, 2015 / 3:57 PM / 4 years ago

UPDATE 3-Brazil's Rousseff to cut key fiscal goal against Levy's warning - lawmaker

(Adds comments from lawmaker that will propose goal reduction)

By Lisandra Paraguassu and Alonso Soto

BRASILIA, Dec 15 (Reuters) - Brazil’s President Dilma Rousseff will cut a key fiscal savings goal for next year to safeguard an iconic welfare program, a senior lawmaker with knowledge of the matter said on Tuesday, a move that could raise tensions in her economic team.

Congressman Ricardo Teobaldo said the government asked him to alter the budget guidelines bill to reduce the 2016 primary surplus goal to 0.5 percent of the gross domestic product (GDP) from 0.7 percent.

The target measures the balance of government revenues versus spending excluding debt servicing payments, and is considered a key measure of debt sustainability and fiscal health.

Teobaldo said the changes in the bill would allow the government to reduce the goal to zero if tax collection falters, with Latin America’s largest economy mired in its worst recession in 25 years.

Although most investors believe the administration will struggle to even eke out a surplus next year, the lower target raises fears that Rousseff is relaxing efforts to plug a widening fiscal deficit.

Highlighting divisions within the government, Finance Minister Joaquim Levy said on Tuesday it would be a “mistake” to reduce the goal, which aims to boost investor confidence in the once-booming economy.

Local media has reported that Levy has threatened to quit if the original target is not maintained, but he has publicly denied doing so.

For Rousseff the return to economic growth is more important than the fiscal target, her spokesman Edinho Silva told reporters later on Tuesday.

“We cannot fall into the trap of believing that the fiscal surplus (goal) is at the center of out actions - because it is not,” said Silva, adding that Rousseff is a leftist economist who prioritizes economic growth.

Brazil’s overall budget deficit, which includes interest payments, soared to 9.5 percent of GDP in October from 5 percent in the same month a year ago.

The rapid deterioration of fiscal accounts after a jump in public spending during Rousseff’s first term prompted Standard & Poor’s to strip Brazil of its investment grade ratings this year.

In a victory for Rousseff, the Senate approved a bill that could raise 11 billion reais ($2.8 billion) by giving an amnesty from prosecution to Brazilians holding unreported assets abroad in exchange for a fine.

Markets expect another rating agency to downgrade Brazil in the coming months, which could force foreign investment funds to withdraw their money from the country.

The welfare program, known as Bolsa Familia, is wildly popular among poor Brazilians, a key constituency for the left-leaning Rousseff, who is facing impeachment proceedings for allegedly manipulating public accounts to boost her re-election last year. (Additional reporting by Brad Haynes in Sao Paulo; Writing by Alonso Soto; Editing by Dan Grebler and Chizu Nomiyama)

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