Brazil's Rousseff to cut key fiscal goal against Levy's warning

BRASILIA: Brazil's President Dilma Rousseff will cut a key fiscal savings goal for next year to safeguard a landmark welfare program, a government source with direct knowledge of the matter said on Tuesday, a move that could raise tensions in her economic team.

The 2016 primary surplus target, which excludes debt servicing payments, will be cut to below 0.5 percent of gross domestic product from the original goal of 0.7 percent, the source told Reuters.

Highlighting divisions within the government, Finance Minister Joaquim Levy said on Tuesday it would be a "mistake" to reduce the goal, which aims to boost investor confidence as Brazil struggles to plug a widening fiscal deficit.

Local media has reported that Levy has threatened to quit if the original target is not maintained, but he has publicly denied doing so.

For Rousseff the return to economic growth is more important than the fiscal target, her spokesman Edinho Silva told reporters later on Tuesday.

"We cannot fall into the trap of believing that the fiscal surplus (goal) is at the center of out actions - because it is not," said Silva, adding that Rousseff is a leftist economist who prioritizes economic growth.

Brazil's overall budget deficit, which includes interest payments, soared to 9.5 percent of GDP in October from 5 percent in the same month a year ago.

The rapid deterioration of fiscal accounts after a jump in public spending during Rousseff's first term prompted Standard & Poor's to strip Brazil of its investment grade ratings this year.

Markets expect another rating agency to downgrade Brazil in the coming months, which could force foreign investment funds to withdraw their money from the country.

The welfare program, known as Bolsa Familia, is wildly popular among poor Brazilians, a key constituency for the left-leaning Rousseff, who is facing impeachment proceedings for allegedly manipulating public accounts to boost her re-election last year.

A senior ruling Workers' Party congressman, Paulo Pimenta, said he will propose later on Tuesday a reduction of the target to avert cuts in the Bolsa Familia.

A deeper-than-expected recession has slashed tax revenues, complicating the administration's efforts to plug a fiscal deficit that widened sharply during Rousseff's first four-year term.

The Brazilian economy is expected to contract 3.5 percent this year, according to a weekly central bank poll of economists.