SÃO PAULO, Brazil—The federal government vowed to continue curbing spending for the remainder of 2011, hoping a halt in the huge rises in expenditures of recent years will ease inflation in Latin America's biggest economy and give its central bank more leeway to lower the towering interest rates.
Finance Minister Guido Mantega on Monday said the government would put aside $6.3 billion of tax revenue in an effort to curtail government spending through December.
While not a budget cut per se—most of Brazil's annual outlays are locked in through legislation—the move keeps the government from taking advantage of growing tax revenue to boost spending even further.
The measure, the government said, would strengthen government coffers and give the country more tools to respond if a renewed global downturn further undermines Brazil's economy.
Citing Brazil's success in avoiding the worst of the global crisis after its onset in 2008, Mr. Mantega said Brazil "wants to be even more prepared now."
By seeking to stem greater government outlays, and thereby ease one of the biggest factors behind Brazil's longstanding battle with inflation, the government hopes to "open space for a reduction in interest rates," he added.
Brazil's high rates contribute to economic problems, including heavy inflows of foreign capital that have driven up the value of the country's currency, crippling local industry and exporters.
The measure comes just two days before a meeting at which Brazil's central bank is expected to maintain the country's benchmark interest rate, the highest of any major economy, at 12.5%. It also comes amid renewed debate over conflicting economic policies that in essence give Brazil's government carte blanche to spend heavily while forcing the central bank to keep rates high as a buffer against price increases.
The debate gained steam in recent weeks along with the possibility of a second global downturn.
Brazil's first response to the crisis of recent years was to open the taps on public spending. That spurred economic activity and helped Brazil, after a lull in 2009, bounce back and post growth of 7.5% in 2010. With the growth, however, came massive price increases and the threat of overheating, which forced central bankers to raise rates five times so far this year.
Meanwhile, economic projections for 2011 have steadily fallen. Many economists now forecast growth of about 3%—half what the government had predicted early in the year.
If the economy were to require stimulus again, then, economists are urging the government to take the opposite course—to slash spending and give rates room to fall. That would stimulate the private sector, they argue, and give Brazil a long-sought chance to bring interest rates in line with those of other major economies.
Though investors welcomed the announcement on Monday, most economists said rates were unlikely to come down permanently until the government pursues major fiscal reforms that would slash government spending in the long term. "We do not see the announcement as the necessary condition that would allow for a new leg of sustained real interest-rate contraction in Brazil," wrote Marcelo Salomon, an economist at Barclay's Global Research, in a report. "If this tighter fiscal stance is only based on short-run adjustments... the period of lower interest rates could be short-lived."-WSJ
Finance Minister Guido Mantega on Monday said the government would put aside $6.3 billion of tax revenue in an effort to curtail government spending through December.
While not a budget cut per se—most of Brazil's annual outlays are locked in through legislation—the move keeps the government from taking advantage of growing tax revenue to boost spending even further.
The measure, the government said, would strengthen government coffers and give the country more tools to respond if a renewed global downturn further undermines Brazil's economy.
Citing Brazil's success in avoiding the worst of the global crisis after its onset in 2008, Mr. Mantega said Brazil "wants to be even more prepared now."
By seeking to stem greater government outlays, and thereby ease one of the biggest factors behind Brazil's longstanding battle with inflation, the government hopes to "open space for a reduction in interest rates," he added.
Brazil's high rates contribute to economic problems, including heavy inflows of foreign capital that have driven up the value of the country's currency, crippling local industry and exporters.
The measure comes just two days before a meeting at which Brazil's central bank is expected to maintain the country's benchmark interest rate, the highest of any major economy, at 12.5%. It also comes amid renewed debate over conflicting economic policies that in essence give Brazil's government carte blanche to spend heavily while forcing the central bank to keep rates high as a buffer against price increases.
The debate gained steam in recent weeks along with the possibility of a second global downturn.
Brazil's first response to the crisis of recent years was to open the taps on public spending. That spurred economic activity and helped Brazil, after a lull in 2009, bounce back and post growth of 7.5% in 2010. With the growth, however, came massive price increases and the threat of overheating, which forced central bankers to raise rates five times so far this year.
Meanwhile, economic projections for 2011 have steadily fallen. Many economists now forecast growth of about 3%—half what the government had predicted early in the year.
If the economy were to require stimulus again, then, economists are urging the government to take the opposite course—to slash spending and give rates room to fall. That would stimulate the private sector, they argue, and give Brazil a long-sought chance to bring interest rates in line with those of other major economies.
Though investors welcomed the announcement on Monday, most economists said rates were unlikely to come down permanently until the government pursues major fiscal reforms that would slash government spending in the long term. "We do not see the announcement as the necessary condition that would allow for a new leg of sustained real interest-rate contraction in Brazil," wrote Marcelo Salomon, an economist at Barclay's Global Research, in a report. "If this tighter fiscal stance is only based on short-run adjustments... the period of lower interest rates could be short-lived."-WSJ
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