(Adds change in targets and spending cuts, Levy and analyst comments)
By Alonso Soto
BRASILIA, July 22 (Reuters) - Brazil dramatically lowered its fiscal savings goals for 2015 and 2016 on Wednesday, due to plunging tax revenues, and announced new spending cuts to underscore its commitment to austerity amid a steep economic downturn.
The government cut its primary surplus goal for this year to 8.7 billion reais or 0.15 percent of gross domestic product from 66.3 billion reais, the equivalent of 1.1 percent of GDP, originally budgeted.
The primary surplus, or revenue available to meet interest payments on debt, is closely watched by markets and credit rating agencies as a gauge of a country's capacity to repay its debt. The agencies have warned they may further downgrade Brazil, a move which could undermine investor confidence and raise borrowing costs.
The steeper-than-expected cuts in the primary surplus targets could complicate President Dilma Rousseff's bid to regain the confidence of investors as Latin America's largest economy heads into its worst recession in 25 years.
"The target revision should not be taken as a sign that we are abandoning the fiscal adjustment," Finance Minister Joaquim Levy told reporters in a presentation. "We are committed to fiscal discipline."
The government cut its 2016 primary surplus goal to 0.7 percent of GDP from 2 percent and to 1.3 percent for 2017.
Until a few years ago Brazil maintained primary surpluses above 3 percent of GDP as tighter spending controls and a commodities bonanza filled public coffers.
That changed when Rousseff took office in 2011 and granted billions of dollars worth of tax breaks to businesses in a failed attempt to restart a stagnant economy.
Levy said additional budget cuts of nearly 9 billion reais for this year were proof that fiscal belt-tightening is here to stay, despite political pressure to ease the adjustment.
Rousseff is struggling with record-low popularity as the economy tanks and a widening corruption scandal at state-run oil giant Petrobras nears her inner circle of advisers. She is also facing a rebellious alliance in Congress that has watered down many of her cost-cutting measures.
The government acknowledged that it was prepared to slash the savings goal further if revenues continue to disappoint.
"My take is that it will be an eye opening call about severe difficulties in the fiscal front," Alexandre Schwartsman, a former central bank director, said in note. "Nothing good can come out of it."
With the target revisions the government now estimates that Brazil's gross debt-to-GDP ratio will only start to fall by 2018 given the weaker fiscal results.
Levy, a University of Chicago-trained economist and known fiscal hawk, was initially resistant to lowering the 2015 target because he feared it could send markets the wrong signal about the governments' commitment to fiscal adjustment.
In May, the government vowed to cut 70 billion reais in expenditures to restore its credibility with investors.
$1 = 3.1741 Brazilian reais Additional reporting by Silvio Cascione; Editing by W Simon and Tom Brown