Lula says no need to erase Brazil's fiscal deficit next year

By Lisandra Paraguassu

BRASILIA (Reuters) -Brazilian President Luiz Inacio Lula da Silva said on Friday that his government does not need to erase its fiscal deficit next year, given the importance of funding for priority projects and construction investments.

Speaking at a news conference, Lula said there is no need to eliminate the budget deficit immediately and chided investors for being "too greedy" in demanding targets that cannot be met.

"It would be tough to get to a (deficit) target of zero, especially because I don't want to make cuts in construction investments," he told reporters. "I'm not going to set a fiscal target that forces me to start the year by cutting billions in projects that are a priority for this country."

"If Brazil has a deficit of 0.5% or 0.25% ... That's practically nothing. So we will make the right decision and we will do what will be best for Brazil," he added in briefing with journalists at the presidential palace.

His comments caused a negative reaction in local markets, with the Brazilian real erasing earlier gains against the U.S. dollar, while the benchmark stock index Bovespa extended losses, dropping by 1% at mid-afternoon trading.

Medium-term interest rate futures accelerated gains, with the contract expiring in Jan. 2026 reaching 10.66%, from 10.578% earlier.

Brazil's public accounts are expected to end this year with a wider shortfall than initially anticipated, Treasury Secretary Rogerio Ceron said earlier on Friday, acknowledging new challenges to the goal of balancing them in 2024.

Delays and disappointments on revenue-boosting measures have made it harder for the government to balance its budget and erase the deficit by 2024, as planned in a new fiscal framework.

Those proposed budget rules have calmed investors nervous about an explosion of public spending, but weak returns from one-time revenue measures, falling tax figures and rising 2023 deficit targets show the government still has work to do.

"The market is often too greedy and keeps demanding a target that they know will not be met," Lula said.

Next year will be a difficult year due to the slowdown in China's economy and rising U.S. interest rates, he noted. "We have to find solution here," he added.

(Reporting by Lisandra ParaguassuWriting by Anthony BoadleEditing by Brad Haynes and Diane Craft)