BRASÍLIA—President Dilma Rousseff’s economic team further exposed the extent of the country’s financial and political disarray Monday as it submitted a 2016 budget proposal to Congress that does nothing to pay down the soaring national debt.
The move highlights the failure of Ms. Rousseff’s government to get her economic program approved by Congress and moved Latin America’s largest economy a step closer to losing its investment-grade credit rating.
Breaking a tradition of painting a rosy picture for the upcoming year, the government forecast a primary deficit of 30.5 billion reais ($8.4 billion), equal to 0.5% of gross domestic product.
The arcane “primary” deficit or surplus is a measure of the budget balance before interest payments and a key yardstick of Brazil’s ability to manage its finances.
A primary deficit, rather than a surplus, indicates that no savings will be made, and the debt will likely increase. It was the first time that the budget proposal assumed the primary result will be in the red.
Brazil’s Congress has watered down or rejected measures to cut government costs and raise taxes, while approving bills that increased costs such as public-servants salaries.
The government also assumed a dismal 0.2% growth for the economy in 2016, following an expected contraction of around 2% this year.
Brazil never had a primary deficit until 2014, and the government risks finishing this year in the red, too.
Poor fiscal results are sounding alarms at credit-rating agencies. Earlier this year, Standard & Poor’s put Brazil on watch for a downgrade to junk. More recently, Moody’s cut Brazil to the bottom of investment grade, with a stable outlook. Fitch has Brazil two notches above junk, with a negative outlook.
The disappointing 2016 fiscal forecast comes as Brazil’s government-accounts watchdog is threatening to advise Congress to reject the administration’s 2014 financial books, arguing that Ms. Rousseff’s economic team illegally sugar-coated the numbers to show better results, something the government denies.
The proposal for 2016 has also been described by government officials as an attempt to show lawmakers that immediate action is required to avoid a deeper crisis.
“We need transparency. We need to call the whole society to debate the problem,” said Minister of Social Communications Edinho Silva to reporters.
But convincing Congress to pass unpopular austerity measures won’t be easy. Ms. Rousseff, who was re-elected last year, has seen her political support all but disappear as economic growth has ground to a halt and employment keeps rising amid a global slump in commodity prices that make the bulk of Brazilian exports.
Some analysts say that the dismal budget may work to bring lawmakers onboard.
“It was a wake-up call to Congress,” said Bruno Rovai, a Brazil-focused Barclays economist, adding that he expects the government to work with lawmakers to make changes in the proposal, resulting in more savings.
“I think they’ll try to approve a budget without a primary deficit,” Mr. Rovai said.
But the battle to keep the investment-grade rating may already be lost, Mr. Rovai said. He forecasts that S&P will cut Brazil to junk early next year, with Moody’s following suit by the second half of 2016.