UPDATE 2-Falling taxes squeeze Brazil Jan primary surplus

Fri Feb 27, 2009 1:28pm EST
(Recasts, adds quotes, context, byline)
By Ana Nicolaci da Costa and Isabel Versiani
BRASILIA, Feb 27 (Reuters) - Falling tax receipts squeezed Brazil's primary budget surplus in January to its lowest in five years, fueling fears a slowing economy could undermine years of strong public finances.
The consolidated primary budget surplus tumbled to 5.18 billion reais ($2.17 billion) in January from 18.66 billion reais a year ago, government data showed on Friday.
This was lower than the 6.2 billion reais surplus forecast by a median of 11 economists surveyed by Reuters, with estimates ranging between a surplus of 1.46 billion reais to 16.9 billion reais.
In the 12 months through January, Brazil posted a primary budget surplus equal to 3.58 percent of gross domestic product compared with 4.06 percent of GDP in the 12 months through December. This is the smallest percentage since February 2005 and below this year's target of 3.8 percent of GDP.
"The results reflected (a slowing) of activity in the end of the year, which led to smaller tax collection," Altamir Lopes, head of the central bank's economic research department told reporters.
Rising tax revenue due to robust growth allowed Brazil to surpass its 3.8 percent primary budget surplus target in 2008 but analysts are worried tax income could fall sharply as the economy slows.
"The numbers are showing that there is already some fiscal deterioration under way," said Marcelo Carvalho, economist at Morgan Stanley in Sao Paulo.
"As the economy slows, revenue comes down and that means the outlook for the fiscal accounts is more challenging."
Economic growth is forecast to slow to 1.5 percent this year from above 5 percent last year.
Tax receipts fell 7.3 percent in January from a year earlier, data showed last week, and analysts have said the government may have to maintain or even increase budget cuts it announced last year if tax revenue continues to fall in 2009.
Brazil's government said in January it would temporarily freeze 37.2 billion reais from its 2009 budget to keep spending in check amid an economic slowdown.
Carvalho said the government could cut spending further but was under less market pressure to do so because its overall debt levels had come down significantly over the years. Also, many developed countries were currently running large deficits, he said.
The primary budget surplus, which excludes interest payments, is closely watched by investors as a gauge of the country's ability to service its debt.
In December, Brazil posted a primary budget deficit of 16.79 billion reais -- in the largest year-on-year dip since the data series began in 1991 -- because the government set aside 14.2 billion reais for its first ever sovereign wealth fund.
Including interest payments, Brazil posted an overall, or nominal, budget deficit of 9.25 billion reais in January, compared with a surplus of 5.53 billion reais the same month a year ago.
Brazil's nominal budget dips in and out of negative territory but is more often than not in deficit due to large principal and interest payments on debt.
Net public sector debt rose to 36.6 percent of GDP in January, from 35.8 percent of GDP in December.
For the central bank's report on the fiscal results please see: ">here
($1 = 2.385 reais)
(Editing by Kenneth Barry)