Government already fears peak inflation in the campaign and sees output in fuel PEC

The fear that there will be a spike in inflation in the third quarter of 2022, at the height of the electoral campaign, triggered the decision of President Jair Bolsonaro (PL) to sponsor the PEC (proposed amendment to the Constitution) that will allow reducing taxes on fuel.

The chief executive appears in second place in polls of voting intentions, behind former president Luiz Inácio Lula da Silva (PT). In the most recent survey carried out by Datafolha, from December 13 to 16, 60% of respondents said they would absolutely not vote for the current president in 2022.

The behind-the-scenes assessment is that further increases in fuel prices could harm Bolsonaro’s candidacy.

Government interlocutors heard by the leaf enumerate factors such as the prospect of rising oil prices, food crop failure and even geopolitical disputes as motivations for the Chief Executive to want to forcefully lower the prices of gasoline, diesel, ethanol, gas and electricity.

Even in the economic team, which tends to act more on the defensive when it comes to giving up revenues or increasing expenses, the feeling is that it is not possible to “cross your arms” in the face of the situation.

Economy Minister Paulo Guedes is not opposed to cutting taxes, which will deepen the hole in public accounts this year and increase the country’s indebtedness.

The plan to eliminate PIS/Cofins on fuels should reduce collection by R$ 50 billion in the year, without any need for compensation. In practice, the PEC goes beyond the requirements of the LRF (Fiscal Responsibility Law).

In 2021, inflation rose 10.06%, the highest since 2015 – when the country was under the administration of former president Dilma Rousseff (PT). For this year, the market already expects a high of 5.09%, which would represent a new burst of the target.

The concern is greater if this upward movement in prices takes place between July and September, on the eve of Brazilians going to the polls. In the words of a ministerial assistant, inflation and elections do not mix in Brazil.

In this sense, the PEC would represent a measure “with strong popular repercussions”, admitted an assistant to Guedes, on condition of anonymity. According to this source, inflation is a factor of concern within the government.

In the market, projections indicate that the barrel of oil, currently close to US$ 90, could reach US$ 100 precisely in the third quarter, a decisive period for the campaigns. An increase of this magnitude tends to be passed on by Petrobras, whose pricing policy follows international market prices.

Political interlocutors of the president cite geopolitical tensions in oil-producing regions, such as the Russian-Ukrainian border and the Middle East, as elements that drive the price of the commodity – with perverse repercussions for the pockets of Brazilians, according to the sources.

The government also closely monitors food inflation, which could be driven by crop failure due to drought in the south of the country and excessive rainfall.

The price of fuel and energy is treated in the government as not only a sectorial issue, but also an economic and, above all, a social one.

Concern about inflation was publicly expressed by the number two of the Civil House, Executive Secretary Jônathas Castro, in a podcast released by the ministry. “There is a huge effort by the government to contain inflation,” he said.

“We are still experiencing the economic and social effects of the pandemic and understand that, due to these effects, it is pertinent on the part of the government to make a historic effort so that we can, once again, take action to reduce the price of fuels. “, said Castro.

Technicians in the economic area opposed to the measure, however, warned of the ineffectiveness of reducing federal taxes. One of the sources interviewed by the report, on condition of anonymity, says he does not see any advantage other than electoral gain.

The assessment among technicians is that the tax reduction is absorbed in the form of profit margins by the production chain, or by new readjustments that may be announced by Petrobras. Thus, a high fiscal cost policy would have zero effect on consumers’ pockets.

There is also dissatisfaction with the fact that the government encourages the use of fossil fuels even more, going against the sustainability agenda and opening the way for intensified criticism on this front.

The objections were exposed at a meeting on the subject at the Ministry of Economy, in the presence of Guedes. The indication given, however, is that the team needs to take some action.

The minister aims to link the tax cut to the shelving of the salary readjustment proposal for civil servants in police careers, a measure that is considered by the economic team as a trigger for a more serious crisis. But even his aides are skeptical of the success of this strategy.

For now, Guedes has been successful in blocking a second proposal involving fuels: the creation of a stabilization fund supplied with revenues from royalties, special participations and dividends from Petrobras. The money would be used to hold down the price of diesel and gasoline.

The transfer of resources would need to be outside the spending ceiling, a rule that limits the advance of expenses to inflation. For the economic team, moving the ceiling –already disfigured by recent changes– in an election year would be a very high risk move.

The government’s proposal to temporarily cut taxes on fuel and electricity, without the need for compensation measures, should also reach state taxes.

Interlocutors in the government informed Folha that the text of the PEC in preparation should release all entities of the Federation to reduce the tax burden on fuels — which includes ICMS (Tax on Circulation of Goods and Services).

The device is a way of putting pressure on governors, with whom Bolsonaro has been fighting an intense battle over alleged guilt for the increase in the price of gasoline, diesel and ethanol.

The Chief Executive argues that the governors do not accept giving up the ICMS tax on fuel and that this is a determining factor for the price at pumps to remain high.

With the PEC, governors would also be freed from the obligation to compensate for lost revenues. With broad permission for states to follow suit, the behind-the-scenes assessment is that governors who oppose the federal government will be at a crossroads.

They will need to decide between following the policy of the President of the Republic, aligning themselves with the federal government on this issue and still giving up revenue; or maintain the current level of taxes, assuming the political wear and tear on the population.