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Brazil delays budget freeze, says tax hikes possible
March 22, 2017 / 10:28 PM / in 7 months

Brazil delays budget freeze, says tax hikes possible

Brazil's Finance Minister Henrique Meirelles smiles at the Latin American Cities Conference in Brasilia, Brazil, March 21, 2017. REUTERS/Adriano Machado

BRASILIA (Reuters) - Brazil’s government on Wednesday postponed a much-awaited decision on potential budget freezes and tax hikes for this year, saying the final numbers depend on upcoming court rulings that are expected to help the government raise revenues.

The government sees a large possibility of tax increases, Finance Minister Henrique Meirelles told journalists.

He added that the government was likely to freeze some spending as it tries to meet its budget target. The budget freezes will be “substantially smaller,” however, than the 58.2 billion reais ($18.9 billion) shortfall the government just announced in its bimonthly mandatory budget report, he said.

Tax increases and budget cuts would likely make President Michel Temer even more unpopular as he tries to muster congressional support for deep cuts in welfare spending.

The government is required by law to take measures every two months to cover any unexpected budget gaps. The spending freezes could be undone later in the year if revenues increase more than expected.

Meirelles said court decisions to be taken by next Tuesday could result in 16 billion reais in additional revenues for the government. In a bid to avoid unnecessary tax hikes or budget freezes, the government took the “extraordinary” decision to delay the budget measures, he added.

“A 58 billion freeze is not feasible,” Planning Minister Dyogo Oliveira told the same news conference.

Brazil’s poor fiscal record cost it its investment-grade rating status in 2015 and contributed to the impeachment of former President Dilma Rousseff. In a bid to restore investors’ confidence in Brazil, Temer created a 20-year-long spending cap and pledged to take budget targets seriously.

The court decisions expected to generate additional revenues for the government include a Supreme Court ruling on Tuesday that revoked the license granting Brazil’s No. 3 power utility, Cia Energética de Minas Gerais SA (CMIG3.SA), the right to operate a power dam.

Brazil’s primary budget deficit target for this year is 139 billion reais, but a weaker economic recovery has shrunk revenue. Earlier on Wednesday, the government cut its growth estimate for 2017 to 0.5 percent from 1.0 percent previously.

“They will have to raise taxes, that is clear,” said André Perfeiro, chief economist at São Paulo-based brokerage Gradual Investimentos.

A Senate leader told Reuters on Tuesday that the tax increases under consideration included one on gasoline and another on financial operations.

Writing by Silvio Cascione; Editing by Lisa Shumaker and Peter Cooney

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