Opinion – Marcos Lisboa: Fiscal balance through increased taxation?

In the last three decades, Brazil has experienced manic-depressive cycles in the management of public accounts. Phases of uncontrolled increase in mandatory expenses, those that must be carried out by law, were followed by crises in the economy. The biggest expense ended up being paid through an increase in the tax burden or public debt.

Some believe that we are at the beginning of another one of these cycles. It is a bet that the expansion of public spending foreseen in the Transition PEC can be paid for with new tax increases and, in the end, everything will work out.

In the country of subtle and complex rules in which we live, however, it is better to explain that the problem will be more difficult to solve than some people imagine.

Consider the option of increasing Income Tax taxation on profits and dividends. Under Brazilian law, the collection of this tax must be distributed to municipalities (24.5%) and states (21.5%).

It doesn’t stop there. Part of these resources should be used to finance regional development funds in the North, Northeast and Midwest: 3% of the total collected.

There are also transfers that the Union is obliged to make to states and municipalities based on the collection of Withholding Income Tax, Tax on Rural Property, Tax on Gold Operations and CIDE.

There are also other rules for transferring federal revenue to governors and mayors, as in the case of revenue obtained from the exploitation of natural resources. The list goes on with compulsory transfer to the National Penitentiary Fund, the National Education Development Fund, and much more.

This distribution of resources is much more complicated than it seems due to current rules, aggravated by decisions of the Judiciary. The complex formula for calculating the State Participation Fund (FPE), described below, illustrates the madhouse of rules in Brazil.

This formula was systematized in the study “Transfers from the federal government”, by Alexandre Rocha, available on the website of the Federal Senate.

In another study, Rocha shows the difficulties of making a fiscal adjustment by increasing revenue. Even in the case of a new tax, a relevant part of the higher collection must legally be allocated to local governments, which, in turn, are obliged to increase public spending.

Hence, the difficulty of making a fiscal adjustment based on revenue: the tax burden has to increase about twice as much as the intended fiscal adjustment, as our laws determine an increase in public spending in the event of greater collection.

Our fiscal cyclothymia, and the recurring need for abrupt adjustments in the tax burden, undermines economic growth.

Invariably, in the most acute phases of fiscal imbalance, the exchange rate is devalued, market interest rates rise and high inflation comes back to haunt us, resulting in a slowdown in economic activity. This contributes to the greater volatility of GDP growth rates in Brazil compared to developed countries.

In the few good moments of the last four decades, we even grew reasonably compared to the average for the rest of the world. We have not grown as much as other emerging countries, but at least slightly above most of the rich countries.

It should be noted, however, that our income drops much more in times of crisis; much more frequent here than in high- or middle-income countries. The result was a Brazil that, on average, grew much less than the world average in recent decades.

This cycle was momentarily interrupted after the adoption of the spending cap. The federal government’s primary expenditure stopped increasing and the economy’s basic interest rate fell to less than 5% per year, a fact hitherto unheard of since the Real Plan.

During the pandemic, public spending rose again, and this time at an unprecedented magnitude, which was inevitable given the urgency of caring for people.

The increase in inflation, however, made it possible to reduce public spending as a fraction of GDP, since, due to the pandemic, salary adjustments were not granted to public servants.

Over the past two years, the economy has performed better than expected. However, as often happens in our history, this good moment was the password for the resumption of the unbridled distribution of benefits to organized groups.

Laws were passed eliminating the collection of Income Tax on the profit of event sectors and exemptions for churches, just to name a few examples. Other groups received transfers from public resources to increase their income, such as truck drivers and taxi drivers.

In an article published in the Brazil Journal, Marcos Mendes and I systematized 42 measures that granted benefits or protections to various organized sectors in the last two years.

The work as a whole resulted in a federal government budget proposal for 2023 that does not even include the recently approved mandatory expenses.

The lobbies take advantage of the proposed expansion of social policies to obtain new resources for their parochial interests. The Transition PEC will result in the highest central government expenditure as a proportion of GDP in our history, excluding the pandemic period.

With the breach of lack of control, other corporations take the opportunity to appropriate public resources. This is the case of members of the Judiciary, who are demanding retroactive benefits, and the security forces, who want to stop paying Income Tax.

The new government does not seem to want to pick fights with organized groups. The inevitable solution seems to be, once again, an increase in the tax burden. Better to warn that this increase will have to be much larger than expected.