Cursed inheritance is that of the Bolsonaro government, not that of FHC, says Appy

The legacy of Jair Bolsonaro (PL) in the fiscal area will be one of the biggest challenges for the government of Luiz Inácio Lula da Silva (PT). On the one hand, the president-elect will have to find space to fulfill campaign promises, at the risk of losing popularity and governability at the beginning of his term. On the other hand, it needs to pass on signs of responsibility in the management of public accounts to the markets.

The situation is very different from that found 20 years ago by economist Bernard Appy, who at the time held one of the most important positions in the Ministry of Finance and is now seen as one of the names quoted to carry out a reform of the tax system in the PT government.

In an interview with Sheet, Appy, who is director of CCiF (Centre for Fiscal Citizenship) and author of one of the tax reform proposals that are in Congress, says that the real cursed legacy is the one that will be left by the current government: measures to increase expenditure and reduce revenues with an impact of almost 4% of GDP (Gross Domestic Product), around R$ 350 billion. He also talks about speculation about his position in the new government.

How are the conversations with the president-elect’s team? Are there any invitations to participate in the government? I didn’t receive any invites. It wouldn’t even make sense. The team is only discussed after the Finance Minister is defined. It has nothing. Who decides the team is the Minister of Finance.

Mr. he was executive secretary of the Ministry of Finance in the first Lula administration and also coordinated reforms in the second term. Is it possible to draw a parallel between the difficulties that the government will face in 2023 and the situation 20 years ago? Since the end of 2021, in annualized terms, measures to increase expenditure or reduce revenues adopted by the federal government, but with an impact on the Union, states and municipalities, reach almost 4% of GDP. This is being offset by the high collection linked to the rise in the price of commodities, especially oil. If oil returns to normal, there will clearly be a deterioration in the fiscal result.

You have the challenge of fulfilling campaign promises and, in the political situation in Brazil today, the new government cannot take the risk of having a very large loss of popularity at the beginning, because it would be bad for governability. At the same time, the international situation makes it difficult to have a fiscal policy that is seen as irresponsible. Just look at what happened in the UK. I would say it is quite a challenging situation.

In 2003, the market was suspicious of the new government, and a very orthodox economic policy was adopted. In 2003, you had a factor that does not exist today, and that was extremely relevant, which was a very fragile external accounts situation, very low international reserves, and there was no way to run the risk of having a capital flight. The impact then would be greater than it is today.

On the other hand, the degree of fiscal imbalance that we are seeing today did not exist. The cursed inheritance is the legacy of the Bolsonaro government. It has nothing to do with Fernando Henrique’s heritage. In the case of the Fernando Henrique administration, the bulk of the fiscal adjustment had already been made. An additional installment was made in 2003. Now, we are inheriting a set of measures that in one year increased expenses and reduced revenues by around 4% of GDP.

Can a reform agenda being pursued in this first year of government help to give a positive perspective to public accounts, at least in the medium term? An agenda that increases growth potential, and therefore revenue, not as a proportion of GDP, but in real terms, together with a credible measure of expenditure control, would have the effect of generating a greater perception of the country’s solvency in the long term. .

Mr. has been leading debates around consumer tax reform for at least 15 years. Do you think the next government is in a position to approve it? If the government is willing to put political capital into approving the reform, the chances are high. He has two relevant works: political and communication. It is necessary to show parliamentarians and society the positive effects of the reform, which perhaps has not been done in an ideal way until now. With a reasonable degree of concessions, this reform can be approved. If it’s a priority for the government.

But it is also necessary to see what the disposition of the new governors will be. An unprecedented consensus had been reached by all the finance secretaries on tax reform. There’s a new round of negotiation. There is support from small and medium-sized municipalities, and resistance from large municipalities, but everything can be resolved with a good negotiation.

The president-elect’s government plan highlights the issue of the country’s reindustrialization. Can tax reform help with this issue? All sectors of the economy benefit from the reform, but the industrial sector is the most benefited. Not because it will be favored, but because it is the most affected by the distortions of the current tax system, distortions that burden investments and reduce the competitiveness of Brazilian production both in the domestic market and in exports. A good reform of consumption taxation corrects these distortions.

How does the reform fit into the future government’s plan to tax the richest? Adopting a uniform rate in the taxation of goods and services, you would have a positive distributive effect, because today in Brazil services are taxed less than goods, and the rich consume much more services than the poor. As a proportion of consumption, the rich pay less tax than the poor in Brazil.

In addition, the reform provides for a tax refund system for low-income families, which we call personalized exemption. Instead of exempting the product, you exempt the person. With a limit, not to have fraud. These two components have a very positive distributional effect. Apart from that, there is the discussion of income taxation, which is also very important.

Should the issue of Income Tax, with correction of the table and taxation of profits and dividends, go hand in hand with the reform of consumption? These are complementary reforms. From a political point of view, dealing with both simultaneously is positive. There is no contradiction between the reform of consumption, of income taxation and, eventually, of the payroll as well.

The Fiscal Citizenship Center has argued that there is room to increase income taxation in Brazil, and that space should be used to relieve payroll in the range of up to one minimum wage. It is a measure that has a positive impact on formalization, which makes the worker more productive.

A project of the Ministry of Economy that deals with Income Tax has already been approved by the Chamber, but it stopped in the Senate and was heavily criticized by tax experts and companies. Does this proposal resolve the issue? It is a project with many problems. One of the most serious is that he passed with a forecast of exemption in the distribution of dividends for companies with revenues of up to R$ 4.8 million per year. You have cases in which the partners of these companies, who already pay very little income tax today, for example, in the case of pejotized companies and high-income professionals, would pay even less with this change. Additionally, this creates an incentive for business fragmentation.

The way in which this bill passed in the Chamber is very bad from the distributive point of view, because it would aggravate the low taxation of people who already have very high incomes today. As it stands, this project should not be approved.

X-ray

Bernard Appy, 60, director of CCiF (Center for Fiscal Citizenship). Economist and former Executive Secretary and Economic Policy Secretary at the Ministry of Finance (2003-2009). He was Director of Strategy and Planning at BM&F Bovespa (currently B3) and managing partner at LCA Consultores.