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BRASILIA/SAO PAULO, Feb 27 (Reuters) - Brazil's bigger-than-expected budget surplus showed on Friday that a new finance minister was delivering on promises, but heavy job losses underscored the likelihood that austerity would push the economy back into recession.
2015 began with the heaviest layoffs in six years, according to labor data on Friday, pushing unemployment to a one-year high in a trend likely to further erode President Dilma Rousseff's slumping popularity.
In a sign of further austerity, the government also announced it was paring back tax breaks on payrolls and export revenue, two measures at the heart of industrial policy during Rousseff's first term.
Leaner tax benefits will likely further shore up the federal budget but at the expense of jobs, underscoring the ascendance of market-friendly Finance Minister Joaquim Levy in a cabinet long sympathetic to labor interests.
"The (tax break) measures didn't yield the expected results and turned out to be extremely expensive," Levy said at a news conference.
In his first month on the job, Levy delivered an overall budget surplus of more than 3 billion reais ($1 billion), the first positive figure in two years, due to spending cuts and expiring tax breaks.
Banco Bradesco chief economist Octavio de Barros cheered Levy's efforts on Twitter, calling the latest fiscal data "spectacular."
Brazil's currency firmed over 2 percent in Friday trading, its strongest session in three months, as the fiscal data helped Levy establish credibility with investors.
"Macro is off to a good start. Now the focus is corporate risk," wrote Barros, a former colleague of the finance minister.
Brazilian states and cities also pulled their weight, contributing nearly half of the public primary surplus, which counts savings before debt payments. Credit Suisse economists warned in a note that the federal government would not get such help in the months ahead.
Local governments have mostly been cutting back after their first primary budget deficit in 16 years, as slowing growth has dented tax revenues. Such moves may help save Brazil's coveted investment grade credit rating but adding to expectations of a painful recession.
Higher tax rates and shrinking public budgets are contributing to a sharp consumer downturn that has helped trigger an industrial slump, as companies adjust to lower demand.
Economists expect the central bank to make its third steep interest rate hike in a row next week, pushing up borrowing costs as inflation races far above the government's target.
Tighter credit contributed to a weak Christmas shopping season last year, triggering widespread retail layoffs and contributing to total job losses of 82,000 in January, far more than economists forecast.
$1 = 2.86 Brazilian reais Additional reporting by Silvio Cascione; Editing by Todd Benson and Christian Plumb