Brazil Inflation Spurs Plan to Cut Spending

Brazil announced plans to cut 50 billion reais, or about $30 billion, from 2011 spending, an admission by the month-old government of President Dilma Rousseff that years of rising government outlays have helped inflame a worrisome rise in inflation.

Finance Minister Guido Mantega said Wednesday that the government would curb spending mainly by slashing proposed earmarks tacked onto the budget by lawmakers, and controlling administrative costs, including a slowdown in hiring for the country’s massive public sector.

Economists praised the big proposed cuts as a step toward cooling off an inflation rate that reached 6% in January—well above the central bank’s annual target. All the same, some observers noted that even with the proposed cuts, government spending will still rise in 2011 compared to 2010, itself a double-digit increase over 2009.

“You still have a policy that is stimulating demand and therefore inflation,” said Gray Newman, a senior Morgan Stanley economist who follows Brazil.

The markets also delivered what seemed like a verdict that the cuts weren’t enough. Brazil’s benchmark Bovespa stock index fell 2.4%.

Inflation is still low by the standards of a country that endured currency crashes and four-digit rises in the inflation rate as recently as the early 1990s. But the sudden uptick presents an unwelcome hitch in a yearslong economic expansion that lifted millions out of poverty and afforded Brazilian leaders unprecedented global prestige.

Finding 50 billion reais to cut from the budget won’t be easy. That is because most government spending is locked in salaries, pensions, social-security costs and other fixed entitlement programs that can’t be touched without changes to the law.

“The really worrisome spending are the fixed costs they can’t touch in the short term,” said Marcio Garcia, an economist at the Pontifical Catholic University in Rio de Janeiro.

Mr. Mantega didn’t provide details on specific programs that will be reduced. Individual ministries, officials said, would be responsible for proposing cuts to their areas in the coming weeks.

Mr. Mantega, however, also said the cuts wouldn’t affect Brazil’s big social-welfare programs or a multibillion-dollar infrastructure program that includes roads, river dams, and stadiums for soccer’s World Cup in 2014 and the 2016 Summer Olympics.

Brazil’s goal is to tamp down inflation enough to allow the central bank to start reducing Brazil’s 11.25% interest rate—among the world’s highest. The high rates, in turn, are attracting a flood of speculative investment into Brazil that’s sent the currency soaring and made local manufacturers less competitive against global rivals.

With inflation causing complaints about rising food prices, and local executives clamoring about an overvalued currency, the political stakes couldn’t be higher for Ms. Rousseff.

Elected largely because of the economic growth Brazil enjoyed during the eight-year administration of her predecessor and mentor, former President Luiz Inacio Lula da Silva, her popularity could erode if inflation or other economic ills interrupt the good times, analysts say.

“People are starting to get scared and the government knows that,” said Alexandre Barros, a political consultant in Brasilia, the capital. “This is about the president being able to maintain the support she needs to have a long-term, credible government.”