The Wall Street Journal reports, "Finance Minister Guido Mantega on Friday reinforced his message that the government wants to rein in spending to help tame inflation. Prices are rising at a pace that is a full percentage point above the official target of 4.5% and in response the central bank has raised its key rate to 10.5% per year. That, however, acts as a further drag on economic growth, which has been unusually weak for the last three years''.
The government has set a target for savings next year of 99 billion reais, compared with 91 billion reais in 2013. That figure is equivalent to 1.9% of projected gross domestic product. A primary surplus is seen by analysts as an indicator of a government’s willingness to live within its means.
But Mr. Mantega has become known for providing rosy forecasts at the beginning of the year. By the end of the year, the government often has to resort to confusing scrambles to meet targets, sometimes by engaging in what economists describe as accounting tricks–albeit entirely legal. That has heavily eroded confidence in the minister.
“The announcement wasn’t enough to restore credibility,” João Augusto de Castro Neves, an analyst with the Eurasia Group consulting firm in Washington, said in an interview. Still, Mr. Neves acknowledged that the goal for 2014 was more realistic and that there had been “some steps towards more transparency.”
Some economists believe the government is simply providing some cover for the central bank to be able to slow or even halt its interest-rate hikes. The economy may have dipped into a technical recession in the second half of 2013, and the outlook for 2014 is growth of around 1.5%, according to current market estimates.
One of the biggest threats to the fiscal target is the possibility that the government may have to provide billions of reais in subsidies for the electric power industry. Severe droughts have hampered Brazil’s production of cheap hydroelectric power, meaning power companies may have to resort to more expensive natural-gas-fired thermoelectric power.
Rather than pass the costs on directly to the consumer, the government last year opted to provide 9 billion reais in subsidies. This year, the figure could be even higher, economists said.
Mr. Mantega on Friday acknowledged the possibility of nasty surprises. He said more spending cuts and more sources of revenue could be found if needed. He didn’t even rule out tax increases.
“The government is prepared to cover additional spending,” Mr. Mantega said
