Brazil's new government vows tough steps to curb runaway deficit

BRASILIA (Reuters) - Brazil’s new center-right government plans to unveil tough measures soon to curb a massive budget deficit and may consider raising taxes temporarily, depending on the results of a detailed review of the fiscal situation, the finance minister said on Friday.

Henrique Meirelles, a former central bank governor who has been given the job of trying to haul Latin America’s biggest economy out of recession, said his top priority was to return transparency to public finances.

Brazil’s Senate on Thursday suspended President Dilma Rousseff and put her on trial on charges of breaking budget laws by borrowing from state lenders to boost expenditure ahead of her re-election in 2014.

Vice President Michel Temer has taken over as interim president during the trial, which could last up to six months, with an agenda to boost private investment and reduce a government deficit that topped 10 percent of economic output last year.

Meirelles warned that the budgetary situation left by Rousseff’s outgoing government could spell a deficit worse than the forecast 96 billion reais ($27.72 billion) this year.

“Preferably, taxes should not be raised. But the priority is to balance public finances,” he told Globo TV, adding that no decision would be taken hastily and that any future tax increases would be temporary.

Meirelles later told reporters that he will announce the next central bank chief on Monday along with his entire team at the ministry. He said new measures to reduce the country’s ballooning debt burden will be announced when the time is right.

Temer’s government is hoping to capitalize on its honeymoon period with Congress to push through a new 2016 budget in the coming weeks. If it fails to do so, the government could be shut down as soon as next month, when it is likely to hit the deficit limit imposed by the current spending plan.

Experts have voiced concern that cutting public spending and raising taxes could further shrink the roughly $2 trillion economy, which is on track in 2016 for a second year of contracting by more than 3 percent - its worst performance since the 1930s.

Rousseff’s supporters have argued that the new government does not have a democratic mandate to push ahead with liberal economic reforms, as it is unelected and Temer took power only because of the impeachment process.

Opinion polls show that only around 1 percent of Brazilians would vote for Temer, a veteran Congressman.

But in his first address to the nation on Thursday, Temer laid out a radical change of direction in strategy while pledging to maintain social programs for Brazil’s poor that were introduced during 13 years of rule by the leftist Workers Party.

If Rousseff were convicted in the Senate trial and definitively removed from office, Temer would be president until elections in 2018.

Meirelles said the government will seek to overhaul the pension system with the adoption of a minimum retirement age. He also said state-run banks will be managed by professionals, without political interference.

Aides to Temer have said that Meirelles, who headed the central bank from 2003-2010, will be given oversight over the government’s economic policy team, and that he wants to name a respected economist as central bank chief.

The shortlist for the job includes former central bank directors Ilan Goldfajn, Mario Mesquita and former treasury chief Carlos Kawall, officials say.

Meirelles said the central bank president will keep the right to be tried only in the Supreme Court even after the bank loses its cabinet status, and said that right will be extended to the entire central bank board.

($1 = 3.4630 Brazilian reais)