Brazil delivers big spending freeze to regain credibility

By Luciana Otoni and Alonso Soto

BRASILIA/RIO DE JANEIRO (Reuters) – Brazil will freeze 69.9 billion reais ($22.58 billion) worth of spending on investment, education and health programs this year, limiting outlays in a bid to convince investors that President Dilma Rousseff is committed to saving the nation’s investment-grade rating.

In addition to cutting the budget, Rousseff earlier on Friday raised the income tax for banks, another sign that her government is ready to push ahead with austerity despite stiff political opposition.

The budget freeze, which was in line with market expectations, was the largest since Rousseff took office in 2011 and will bring discretionary government spending back to levels of 2012.

“This is a big effort that indicates the government willingness to meet our goal,” Planning Minister Nelson Barbosa told reporters in Brasilia. “This is the first step for Brazil to return to growth.”

Still, most analysts believe the freeze will not be enough to meet Brazil’s fiscal surplus goal of 1.1 percent of gross domestic product. The government lowered the goal from 1.2 percent after a revision to GDP figures of recent years.

Last year’s freeze, which is an annual commitment not to spend on already budgeted items, was 44 billion reais.

Barbosa said the government will freeze a total of 21.2 billion reais for education and health, but that priority social programs will be preserved.

Since winning a close re-election in October, Rousseff has raised taxes on everything from cosmetics to cars and limited spending to rebalance public accounts and shield Brazil’s credit rating after years of lavish spending.

That austerity faces fierce resistance from Rousseff’s allies in Congress, who believe more tightening will only worsen an expected recession. Lawmakers have watered down two measures cutting pension and unemployment benefits.

To make up for the losses, Rousseff raised the income tax rate for banks to 20 percent from 15 percent to collect 4 billion reais in revenues annually.

International Monetary Fund chief Christine Lagarde, visiting Rio for a central bank event, applauded Rousseff’s austerity drive, saying the freeze “demonstrates the political courage and the determination” to hit the government’s target.

As in Europe, fiscal austerity is raising political tensions and starting to weigh on Brazil’s once-booming economy.

Economic activity tumbled in the first quarter and unemployment surged to a four-year high, official data showed. Economists expect the Brazilian economy will shrink 1.2 percent this year, according to a central bank poll.

($1 = 3.0952 Brazilian reais)

(Additional reporting by Walter Bradimarte; Writing by Alonso Soto; Editing by Ruth Pitchford and Dan Grebler)

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