The new government in Brazil and the tax issue

Lula’s victory in the second round of the Brazilian presidential elections It represents, on the one hand, a relief and, on the other, a great uncertainty. It was surprising, in any case, that the winner’s advantage was very small, less than that indicated by the electoral polls. with some reluctance, the defeated candidate recognized the result of the pollswhile trucker sympathizers carried out roadblocks to challenge the result, but without obtaining the support of the population.

From the point of view of the economy, specifically, the fiscal situation continues to be the main vulnerability in the short term, but there is no definition by Lula about the course to follow. However, there is the prospect of moving, initially, towards compromise solutions. The possibility of granting a “waiver” for another breach of the spending cap rule in 2023 is being discussed: a permit that must be granted by Congress (which would have to pass a new constitutional amendment) so that certain expenses are excluded from the ceiling. expenses next year.

The exemption proposal stems from the recognition —more political than economic— that the spending ceiling, in its current format, would have become unfeasible, since it has already produced such a large reduction in non-compulsory spending that it has reached unsustainable levels. This is the case of various programs in the areas of education (school feeding, for example); health (Popular Pharmacy); of the federal universities, which function precariously; science and technology programs, which suffer from a lack of funds; and the bodies responsible for environmental policy, incapable of exercising adequate supervision of crimes against the environment. Public employees have not had a salary increase in the last three years, despite an accumulated inflation of 28% in the period.

The outgoing and incoming government transition teams have already started talking. The PT and its allies are already negotiating with the re-elected politicians of the current legislature -responsible for approving next year’s budget- a budget slack that allows spending beyond the ceiling that can reach 2% of GDP, an increase of more than 10% compared to current levels.

These expenses, which were not foreseen in the budget project sent to Congress by the current government, include maintaining the value of R$ 600 per month per family in transfers from Auxílio Brasil; an additional fee per child of R$ 150; and, a real increase in the minimum wage, given by the average annual growth rate of GDP in the last five years (around 1.3%). In addition, there is a need to rebuild the budget of some social programs that have been severely affected by the cuts made to meet the spending ceiling.

In addition to the increase in spending, the new government will also have to face, in its first year, a probable reduction in the growth rate of collection due to the change in the external scenario and the consequent drop in the price of commodities, one of the factors that boosted tax collection this year, which grew 7.6% above inflation in the first three quarters of the year. Government revenues were also influenced by other transitory factors, such as revenues from concessions, royalties from the exploitation of natural resources, mainly oil, and anticipated dividends from state-owned companies. This even allowed the government to reduce the rates of several federal taxes, including the IPI (tax on industrialized products), and reduce the tax rate on fuels to zero. In addition to encouraging the use of fossil fuels, these revenues may be lacking in a more adverse international context with lower internal growth.

The reversal of the income trajectory next year may still be negatively influenced by the possible increase in the income tax (IR) exemption limit, whose impact may exceed 1% of GDP. It is worth noting that the maintenance of the value of Auxílio Brasil, the real increase in the minimum wage and the increase in the IR exemption limit, were promises repeated on numerous occasions during the campaign by the two candidates.

The combination of slower revenue growth with higher spending and interest rates that are expected to remain high for a long time will result in a fiscal deterioration in 2023, with the main result going from a surplus of 0.5% of the GDP this year to a deficit of 0.8% of GDP in 2023. The counterpart of the waiver should be the definition of a new fiscal rule, replacing the spending ceiling, which ensures a path of gradual reversal of the public debt as proportion of GDP and its subsequent stabilization in a not too distant time horizon.

There is a positive disposition towards the new government to accept an increase in social spending, as well as some increase in the tax burden, or a tax reform that makes the structure less regressive. It is necessary, however, to consider that the best way to combat poverty is economic growth, and that the main obstacle to sustained growth has been the persistent fiscal imbalance and its implications in terms of high real interest rates. Finally, it is possible to increase the efficiency of public policies, improving their focus and introducing mechanisms and incentives that really result in the eradication of poverty.

The new government in Brazil and the tax issue