Measures on fuels can reduce inflation from 9.5% to 8.1%, says Santander

Measures to reduce fuel and electricity prices should have an impact of up to R$35 billion this year for public coffers, with a reduction in inflation for the year from 9.5% to 8.1%. This is the scenario seen as most likely by Banco Santander, which considers the partial implementation of the tax changes under discussion.

The bank’s main scenario takes into account the reduction of ICMS on fuels to 17% or 18%, with a partial impact on pumps, and the use of tax credits to reduce the electricity bill.

The fiscal impact of the approval of the PEC (Proposed Amendment to the Constitution) which deals with the compensation for zeroing the state tax on some of these items is not considered. The bank also considers it unlikely that states will zero ICMS. The tax reduction for electricity and telecommunications would be for 2024, according to the institution.

The bank also says companies are likely to use the tax break to shore up margins. Therefore, he estimates that the pass-through to consumers will be only 70%.

Santander also calculated the total pass-through of the tax cut to these prices and, additionally, the reduction in ICMS for energy and telecommunications. In this case, the cost would reach R$ 93 billion, with inflation at 6.4% this year.

For 2023, the bank projects a negative impact of the measures both on inflation — as part of them will be reversed, causing a greater rise in prices — and on public accounts.

In the most likely scenario, inflation would go from 5.3% to 5.9%, with a fiscal impact of R$37 billion on the public sector — mainly due to the permanent reduction of ICMS to 17%/18% on fuels.

If the impact of the measures were total, inflation would reach 6.2% in 2023, almost tying with the 2022 index and bursting the target for another year.

“All things considered, we believe that at least some of the measures could pass, resulting in lower inflation in the short term (2022), but possibly higher inflation in the medium term (2023) — and worsening fiscal accounts for the medium term,” say economists at Santander Italo Franca and Daniel Karp.

They claim that the institution’s official projections have not yet been changed, as there is uncertainty about the approval and implementation of the proposals. They also say that states can still appeal to the Federal Supreme Court to prevent the bill from taking effect or to moderate the fiscal impact, that is, make it more gradual over time.

For the bank, the debate does not affect the outlook for monetary policy, but the fiscal risks associated with the measures and the pressure to maintain stimulus in 2023 will worsen the balance of risks for the Central Bank’s inflation targeting regime.

The bank also says that with the tax cuts, people will have more income to spend on other goods and services, which could offset some of the direct impact on inflation. In addition, the worsening fiscal outlook also means that the balance of risks to inflation is skewed more upward. “Therefore, we believe it is unclear whether the tax cuts will reduce inflation.”