World Economy

Brazil Raises Taxes, Freezes Spending to Meet Target

Brazil Raises Taxes, Freezes Spending to Meet TargetBrazil Raises Taxes, Freezes Spending to Meet Target

Brazil’s government on Thursday increased a spending freeze and raised taxes to cover a budget gap this year, reinforcing its commitment to fiscal discipline but dealing a potential blow to fragile economic growth.

In a statement by the finance and planning ministries, the government said it will freeze an additional 5.9 billion reais ($1.9 billion) in federal spending this year, Reuters reported.

It will also raise the federal PIS/Cofins social contribution tax on gasoline, diesel and ethanol in order to raise an estimated 10.4 billion reais in additional revenues. The tax increase “is absolutely necessary to preserve the fiscal adjustment and maintain the economy’s trajectory towards recovery,” the statement said.

Brazil lost its investment-grade rating in 2015 after missing budget targets for years.

The country’s renewed austerity effort has weighed on public investments in infrastructure and disrupted services such as passport issuance, but has been justified by President Michel Temer’s year-long administration as a necessary step to rebuild trust with investors and curb the growth of public debt.

Officials had previously said they planned to reduce the spending freeze, currently at 39 billion reais, as tax revenues were expected to increase.

Finance Minister Henrique Meirelles on Wednesday said in an interview with GloboNews TV that the budget restrictions were reaching excessive levels and could be reduced within 60 days.

Brazil targets a budget deficit of 139 billion reais this year before interest payments. The deficit in the 12 months through May reached 167.6 billion reais, equivalent to 2.59% of gross domestic product.

Brazil’s economy is expected to grow 0.3% in 2017 after contracting by more than 3% in each of the past two years, according to a weekly central bank poll of economists.

Meanwhile, scanning the Latin American newspapers, it is hard to find much sign of a convincing economic recovery. Mexico’s energy reform is starting to pay off, at last, with a big new oil discovery by an international consortium.

After five years of deceleration and one of recession, Latin America should register modest economic growth of 1-1.5% this year, according to forecasters. The picture varies from country to country. The return to aggregate growth is largely thanks to Brazil and Argentina, which are coming out of recession. Venezuela’s economy is collapsing. Mexico, Chile, Colombia and Peru are expanding at a sluggish rate of 2-3%. Only in Central America, the Dominican Republic and Bolivia is growth a respectable 4% or so.

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