Brazil government announces bulk spending containment, tax hike

SAO PAULO/BRASILIA (Reuters) -Brazil's government announced on Thursday the need to contain 31.3 billion reais ($5.58 billion) in this year's budget to comply with the country's fiscal rules, according to its bimonthly revenue and expenditure report.

Before the document was released, Transport Minister Renan Filho had already disclosed the size of the strong cost-cutting effort at an event in Sao Paulo, adding that the government would also announce a hike in the financial transactions tax to help boost revenues this year.

According to the report, released by the Finance and Planning Ministries, the government will need to block 10.6 billion reais in expenses to meet a cap established by law of a 2.5% growth above inflation.

Additionally, it will have to freeze 20.7 billion reais to meet the government's zero primary deficit target, which allows for a tolerance margin of 0.25% of GDP above or below the goal.

In 2023, President Luiz Inacio Lula da Silva passed a new fiscal framework that combines a primary budget target with a limit on real expansion in public spending.

Under the new system, spending blocks are triggered by excessive expenditure growth, while spending freezes are usually imposed when revenues underperform.

Thursday's report drew close market attention as it provides the first detailed budget snapshot of the year. The March edition was not published due to delays in congressional approval of the annual budget bill, which was only greenlit that month, later than the usual year-end timeline.

With mandatory expenditures such as social benefits and pensions growing well above the framework's overall spending cap, available room for discretionary outlays - like investments and public administration - has become increasingly tight.

Many analysts argue this trend could render the new fiscal rules unsustainable over a few years.

Finance Minister Fernando Haddad's team has repeatedly stated it will take all necessary measures to meet the fiscal target.

($1 = 5.6056 reais)

(Reporting by Alberto Alerigi and Marcela Ayres; Editing by Gabriel Araujo and Aurora Ellis)

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