Brazil enacts bigger-than-expected spending freeze to meet fiscal goal

BRASILIA (Reuters) - The Brazilian government on Wednesday enacted a bigger spending freeze than anticipated while keeping tax hikes to a minimum as it seeks to reach a fiscal deficit target key to regaining the country’s investment-grade rating.

Brazil's Finance Minister Henrique Meirelles reacts during a news conference to announce tax hikes and spending cuts, in Brasilia, Brazil March 29, 2017. REUTERS/Ueslei Marcelino

Finance Minister Henrique Meirelles told a news briefing the government would freeze 42.1 billion reais ($13.48 billion) in spending to meet its primary budget deficit goal of 139 billion reais. Government officials initially expected a freeze of about 30 billion reais.

He said the freeze was larger than expected because the government decided to temporarily drop plans to correct the calculation of debts owed by the federal government, which would have saved it about 8.7 billion reais.

Meirelles added the government would end payroll tax breaks for dozens of sectors, which would yield the government nearly 5 billion reais in revenues. He said that urban passenger transportation companies, railway and metro companies as well communications and construction companies, which are big employers, would keep the tax breaks.

Under pressure by his allies in Congress and business groups to adopt pro-growth reforms that could snap the economy out of a deep recession, President Michel Temer chose to keep tax hikes to a minimum.

Temer will issue a decree to end the tax breaks, but the measure needs congressional approval to become effective. Meirelles said he expected the tax breaks to be eliminated early in the second half of the year.

Some lawmakers from Temer’s diverse alliance of more than 12 parties have said eliminating the tax breaks could face same resistance.

The tax exemptions implemented by former President Dilma Rousseff, who was impeached last year on accusation of doctoring the fiscal accounts, cost the country about 18 billion reais a year.

Some of the major Brazilian companies that have benefited from the tax breaks include poultry producer BRF SA, pulp producer Fibria and planemaker Embraer , according to a Merrill Lynch research note.

Those hefty tax breaks and years of heavy spending caused deterioration in Brazil’s fiscal accounts, helping push the economy into its worst recession in a century.

A ballooning overall fiscal deficit, which accounts for about 10 percent of the country’s gross domestic product, led major rating agencies to strip Brazil of its coveted investment- grade rating in 2015.

Reporting by Alonso Soto; Editing by Paul Simao and Peter Cooney