By Patricia Duarte and Marcela Ayres
BRASILIA (Reuters) – Brazil’s government on Thursday increased a spending freeze and raised taxes to cover a budget gap this year, reinforcing its commitment to fiscal discipline but dealing a potential blow to fragile economic growth.
In a statement by the Finance and Planning Ministries, the government said it will freeze an additional 5.9 billion reais ($1.9 billion) in federal spending this year.
It will also raise the federal PIS/Cofins social contribution tax on gasoline, diesel and ethanol in order to raise an estimated 10.4 billion reais in additional revenues, it added.
The tax increase “is absolutely necessary to preserve the fiscal adjustment and maintain the economy’s trajectory towards recovery,” the statement said.
Brazil lost its investment-grade rating in 2015 after missing budget targets for years.
The country’s renewed austerity effort has weighed on public investments in infrastructure and disrupted services such as passport issuance, but has been justified by President Michel Temer’s yearlong administration as a necessary step to rebuild trust with investors and curb the growth of public debt.
Officials had previously said they planned to reduce the spending freeze, currently at 39 billion reais, as tax revenues were expected to increase.
Finance Minister Henrique Meirelles on Wednesday said in an interview with GloboNews TV that the budget restrictions were reaching excessive levels and could be reduced within 60 days.
Brazil targets a budget deficit of 139 billion reais this year before interest payments. The deficit in the 12 months through May reached 167.6 billion reais, equivalent to 2.59 percent of gross domestic product.
Reuters had reported earlier in the day that the government was set to announce a tax increase and additional spending freeze for this year.
The tax hike will be implemented by executive decree and will not need to be endorsed by Congress – bypassing lawmakers’ strong opposition to tax increases in the recession-hit economy ahead of an election year.
Brazil’s economy is expected to grow 0.3 percent in 2017 after contracting by more than 3 percent in each of the past two years, according to a weekly central bank poll of economists.
($1 = 3.1241 reais)
(Additional reporting by Lisandra Paraguassu; Writing by Silvio Cascione and Bruno Federowski; Editing by Sandra Maler and Jonathan Oatis)