(Adds presidential spokesman and Piaui governor comments)
By Alonso Soto
BRASILIA, Nov 17 (Reuters) - Brazil's federal government is considering sharing 5 billion reais ($1.5 bln) in fines from an asset repatriation program with cash-strapped states as the economy struggles to pull out of its worst-ever recession, a presidential aide told Reuters on Thursday.
Last week, Brazil's Supreme Court froze that amount after state governments filed suits to demand President Michel Temer share the money with states struggling to pay employees and honor their debts.
The administration had initially decided to appeal the decision, but Temer is now considering sharing the money to ease the impact of a painful recession that is lasting longer than the administration expected.
"Temer believes he may have to give up some of those funds to avoid the fiscal crisis spreading and contaminating the national economy," said the aide, who asked not be named because he is not allowed to speak publicly.
In a briefing to reporters later on Thursday, presidential spokesman Alexandre Parola said the government will discuss options to ease the states' financial burden but did not say if the government was considering sharing the fine.
The government collected 46.8 billion reais, divided evenly between fines and taxes, during the amnesty for Brazilians who held undeclared assets abroad.
State governments are demanding the government share 21.5 percent of the amount of fines, equivalent to a total of around 5 billion reais.
The governor of the northeastern state of Piaui, Wellington Dias, told Reuters that the funds would give a breather to the states, but that more needs to be done.
"We don't believe in a solution based solely on cutting investments and expenditures. For us to pull out of this crisis we need to make the country grow again," said Dias who led the suits to freeze the fine proceeds.
He added that the government could cut interest rates to free up space for more loans to states and even use part of its foreign reserves to stimulate local economies.
A final decision depends on whether the central government can meet its primary deficit goal of 163.9 billion reais this year, the presidential aide said.
A member of the economic team told Reuters the government will reach the fiscal target even if it gives up some of the proceeds of the amnesty. But he added there was concern that a decision to help finance the states could send a negative signal to markets demanding a faster turnaround of fiscal accounts.
A Finance Ministry spokesman declined to comment.
The government is seeking ways to help states hit-hard by a collapse in revenues, without tapping the national treasury, the aide and other government officials said.
Soaring payrolls after years of red-hot economic growth added pressure to states finances.
Anti-austerity demonstrations rattled Rio de Janeiro on Wednesday with hundreds of civil servants demanding the local assembly shelve legislation to reduce benefits and wages.
"Solving the states' debt woes is a top priority and we know structural reforms are needed to do so in the long run," said the presidential aide.
Congress is also working on a second amnesty program for next year that will share fines with states and municipalities. ($1= 3.4193 reais) (Reporting by Alonso Soto; Editing by Chizu Nomiyama and Cynthia Osterman)