Brazil to Reduce Savings Effort in 2012 As Minimum Wage Set to Rise 13%

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  • Posted on April 15, 2011


    Brazil’s government will reduce its fiscal savings effort next year as it raises by 13 percent the wage used to set pension payments.

    Brazil’s public sector, including regional governments and state companies, will save 139.8 billion reais before interest payments next year, equal to 3.1 percent of gross domestic product, according to the budget framework being submitted to Congress.

    The government may use special rules allowing it to discount up to 40.6 billion reais in investments to meet the so- called primary surplus target, Planning Minister Miriam Belchior told reporters today in Brasilia while presenting the budget. This year, the government is targeting a savings of 117.9 billion reais, equal to 2.9 percent of GDP, without relying on any accounting changes.

    “We’re making a strong fiscal effort,” Belchior told reporters in Brasilia.

    President Dilma Rousseff is trying to boost investor confidence that her government can restrain spending sufficiently to reduce inflation and the highest real interest rates in the Group of 20 nations. Since taking office Jan. 1, she’s announced 50.7 billion reais in budget cuts.

    According to the budget bill, Latin America’s biggest economy will expand at a minimum 5 percent pace over the next four years with inflation under control and a gradual reduction of the benchmark interest rate to a record low 8.5 percent.

    Minimum Wage

    At the same time the government is trying to keep a lid on its deficit, Rousseff plans to increase the country’s minimum wage next year by 13 percent to 616.34 reais, according to the budget report. This year, the wage was increased 6.8 percent to 545 reais.

    Boosting the minimum wage has a ripple effect throughout the budget because it’s used to annually adjust pension payments and some welfare benefits. This year’s increase generated additional spending of 10 billion reais.

    Brazil’s economy will expand 5 percent next year and 5.5 percent in 2013 and 2014, the budget report said. Inflation will stay at 4.5 percent, the current mid-point of the government’s target range, while the benchmark interest rate will fall to 10.75 percent next year, then to 10 percent in 2013 and 8.5 percent by 2014, the report showed.

    Brazil reduced the so-called Selic rate to a record low 8.75 percent in 2009 to pull the economy out of the global financial crisis. Borrowing costs have since risen, to 11.75 percent, as inflation accelerated to 6.3 percent in March, the highest annual rate in 28 months.

    Inflation

    Brazil’s spending cuts and measures to curb credit coupled with interest rate increases will help tame inflation that is threatening to breach the upper limit of the government’s target range, policy makers said in their quarterly inflation report March 30.

    The central bank will “seek a smoother convergence of inflation to its target” by the end of 2012, as the cost of slowing consumer prices to the target this year would be “too high,” policy makers said in the report.

    Brazil is still addressing the emergence of inflation and is in the middle of a tightening monetary policy cycle, central bank President Alexandre Tombini said in Washington today.

    “We have a situation now where we are still addressing the issue of the emergence of inflation,” Tombini said. “We are addressing monetary stability, we are in the middle of a tightening cycle in Brazil.”

    Economic growth will slow to 4 percent this year, after expanding 7.5 percent in 2010, the fastest in more than two decades, according to a weekly central bank survey of about 100 economists published this week. Growth will accelerate to 4.24 percent next year, the survey showed.

    Brazilian economists expect inflation to decelerate to 5 percent by the end of next year, after ending 2011 at 6.26 percent, the same survey showed.

    To contact the reporter on this story: Iuri Dantas in Brasilia at idantas@bloomberg.net; Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net;

    To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

    Bloomberg/AC