By the Blouin News Business staff

Austerity knocks on Brazil’s door

by in Americas.

Brazilian President Dilma Rousseff delivers a speech, in Brasilia, on October 30, 2013. Photo: AFP/Getty Images

Brazilian President Dilma Rousseff delivers a speech, in Brasilia, on October 30, 2013. Photo: AFP/Getty Images

Brazil’s solution to meeting its budget target is spending cuts, the country’s latest economic move after months of uproar. The government’s reaction, spearheaded by Finance Minister Guido Mantenga, to the economic problems was foreseeable. But it also marks a new blow. Brazil has promised to cut $18.5 billion (44 billion reais) in public spending from the 2014 federal budget.

The motives are evident: maintain the primary budget surplus at 1.9% of the gross domestic product – something that many predict will not occur. (Twenty-two of 35 economists surveyed by Reuters said the primary surplus goal is out of reach). The median forecast for Brazil’s 2014 primary surplus in the same poll was 1.5%. On the other hand the country intends to paint the economic picture as bright as possible to lure investors back and regain the position it had achieved in the global economy in recent years.

Even if the cuts focus on discretionary spending in Congress, and aren’t extended to the health, education, social services and technology sectors, the move indicates that austerity is gaining presence in President Dilma Rousseff’s government.

This year’s cuts are larger than the ones approved  in 2013, which reached $15.9 billion (38 billion reais). Mantenga’s announcement also hinted at an increase in taxes as “a type of backup we have in case we need to improve revenue.”

Back in July 2012 President Rousseff said that Brazil wouldn’t adopt E.U.-style austerity measures to tackle its economic crisis and would instead cut taxes and maintain social programs. The world’s sixth largest economy is at a much lower point now with high inflation being a core problem. Brazil’s consumer price index rose 5.65% in the 12 months through Feb. 15, up from 5.63% in January statistics agency IBGE announced on Friday.

The large infrastructure investment ahead of the summer World Cup — launched when Brazil’s economy was stronger — is hitting the country’s coffers hard. Here, Brazil’s main error lies in maintaining its high spending amounts even as the economy decelerates.  And as the soccer event is still months away, more spending still lies ahead.

Meeting fiscal goals and reducing public expenditures is a mantra popular among many governments but it must be pursued in a coherent manner. It’s becoming more clear that Brazil hasn’t done that — and that investors are aware of it.