July 28, 2016 / 7:02 PM / 2 years ago

UPDATE 1-Brazil central gov't deficit narrows, but challenges remain

(Recasts; adds data details, context)

BRASILIA, July 28 (Reuters) - Brazil’s central government on Thursday recorded a smaller-than-expected primary budget deficit for June, but a drop in tax revenue continues to challenge a government struggling to close what could be a record shortfall this year.

The central government, which covers federal ministries, posted a primary deficit of 8.802 billion reais ($2.68 billion) for June, better than the 13.85 billion shortfall expected by economists polled by Reuters. The government had a deficit of 15.49 billion reais in May.

The continued drop in revenues and increased government spending has raised doubts that interim President Michel Temer will be able to met fiscal goals this and in coming years to rebalance the public accounts. Temer has vowed to erase the deficit in coming years in a bid to regain confidence of investors in a once-booming economy that is now mired in recession.

Finance Minister Henrique Meirelles has promised to fulfill the government’s 2016 primary deficit goal of 170.5 billion reais, but has so far refrained from cutting expenditures that many analysts say is needed to put the accounts back in order.

The Brazilian economy is expected to contract more than 3 percent his year after a drop of 3.8 percent in 2015, in its first two-year contraction since the global economic crisis of 1930s.

Brazil collected 98.129 billion reais ($30 billion) in federal taxes in June, down 7.14 percent from a year earlier when adjusted for inflation, the government said earlier on Thursday. (Reporting by Marcela Ayres; Writing by Alonso Soto; Editing by G Crosse and Bill Trott)

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