Fuel subsidy expected to accelerate Brazil’s debt rise, says global banking association

Brazil will hardly avoid a scenario of accelerated debt growth in the next five years if it implements tax cuts to try to lower fuel prices. The view is from Sergi Lanau, Deputy Chief Economist at the IIF (Institute of International Finance).

The conclusions are in an article published this Tuesday (15) by Lanau and his team.

The global association of approximately 450 banks (including Brazilian ones, such as Bradesco and Itaú) showed optimism with the Brazilian fiscal scenario in 2021 even amid the government’s operation to circumvent the spending ceiling, but now warns that this mood could reverse.

“Last year, we maintained our constructive view of Brazil through the ups and downs of budget discussions. […]. If considerable tax cuts are approved, we will be less constructive,” says the text signed by Lanau and economists Martín Castellano and Filipe Carvalho.

For the IIF, the proposals currently under discussion to cut taxes could cost from 0.5% to 1% of GDP (Gross Domestic Product) this year.

Avoiding sharp increases in debt would become more difficult, as the combined impact on the primary deficit of the softer spending ceiling and tax cuts could amount to up to 2% of GDP.

“Brazil’s debt may remain in a manageable range after changes in the spending ceiling. Not if major tax cuts under discussion are approved,” added Lanau on social media when commenting on the article.

“If we add sizeable tax cuts under discussion, it becomes difficult to avoid scenarios where debt increases rapidly over the next five years (even if spending stays in line with the ceiling),” Lanau said.

For the team, the situation in Brazil is no longer worrying because it is one of the emerging countries that will spend less in 2022 compared to 2019 (before the pandemic).

“This is no small feat, given Brazil’s history in electoral years, [quando] Spending increases are common as elections approach,” economists said.

Even so, they noted that pressure for such policies had materialized in other areas with several proposals to cut taxes under discussion.

In scenarios where tax cuts are large and not rolled back after 2023, debt stabilization would be an even more distant prospect.

The IIF considered it impossible for any tax reduction measure not to be implemented. The institution sees the proposal put forward by the Ministry of Economy to reduce the IPI (Tax on Industrialized Products) and federal taxes on fuel as the one with the least impact, with a cost of 0.5% of GDP.

Sought, the Ministry of Economy declined to comment.

Fuel prices are a priority for President Jair Bolsonaro (PL) and the allied base, which fears the impact of inflation on elections and has sought different initiatives to address the issue.

In both Houses of Congress, reducing fuel prices is the main agenda at the moment. In the Chamber, government deputy Christino Áureo (PP-RJ) filed a PEC (Proposal for Amendment to the Constitution) with the approval of the Planalto.

In the Senate, another dubbed “PEC Kamikaze” appeared by the economic team. She had the support of government ministers and the senator and son of the president, Flávio Bolsonaro (PL-RJ). The potential impact is over R$100 billion, according to members of Minister Paulo Guedes’ portfolio.

In the current scenario – that is, disregarding a tax cut on fuels -, the National Treasury already calculates that government indebtedness will remain above the pre-Covid level for at least another ten years.

The forecast is that the net public sector debt (the DLSP), which represented 54.6% of GDP in 2019, will end 2021 at 58.3% and continue to rise until reaching 68.2% in 2030.

The gradual increase is motivated by factors such as the prospect of higher interest rates and a longer period of deficit in public accounts, which will require a greater fiscal effort if one wants to reduce indebtedness over the years.

The Ministry of Economy worked with internal projections in recent months that pointed to a surplus in the government’s result in 2023, but the prospect of more spending (including flexibility in the payment of precatories) will postpone the return of results to blue.

As shown by sheetthe appetite of the political wing of the government for measures of popular appeal in an election year will be a challenge for Minister Paulo Guedes’ team, which is dealing with a fiscal bomb that could exceed R$ 230 billion.

The collection of artifacts to be disarmed at the National Congress this year is not limited to the fuel issue. With the resumption of legislative work, parliamentarians returned to work with projects that alleviate debts of large companies, expand tax exemptions or increase government spending.

UNDERSTAND THE PROPOSALS TO REDUCE FUEL PRICES

In the camera

PEC still without number (did not gather enough signatures)

• Author: Deputy Christino Áureo (PP-RJ), who presented a text formulated by the Civil House
• What it provides: Union, states and municipalities will be able, in 2022 and 2023, to reduce or eliminate taxes on fuel and gas without compensation; extrafiscal taxes (such as IPI, IOF and Cide) may also be reduced in 2022 and 2023, not only on fuel and gas
• Impact: BRL 54 billion, according to government calculations

in the senate

PEC 1/2022

• Author: Senator Carlos Fávaro (PSD-MT), with the support of the President of the House, Rodrigo Pacheco (PSD-MG)
• What it provides: allows, in 2022 and 2023, to reduce federal, state and municipal taxes on the prices of diesel, biodiesel, gas and electric energy, without compensation for the loss of revenue; allows the reduction of other taxes of an extrafiscal nature (such as IPI, IOF and Cide); authorizes the Union to create, in 2022 and 2023, a diesel aid of up to R$ 1,200 per month to self-employed truck drivers; it also allows the expansion of Auxílio Gás, in number of families and in subsidized value (50% to 100% of the value of the cylinder); authorizes transfers of up to BRL 5 billion to municipalities to subsidize free access to seniors and avoid a significant increase in tariffs
• Impact: More than BRL 100 billion, according to government calculations

PLP 11/2020

• Rapporteur: Senator Jean Paul Prates (PT)
• What it provides: allows fixed charging of ICMS per liter of fuel (today, the charge is a percentage of the price); Senator included expansion of Auxílio Gás, for 11 million families; government wants to include in this project the exemption of diesel

PL 1472/2021

• Rapporteur: Senator Jean Paul Prates
• What it foresees: creation of a kind of fund to be used to stabilize fuel prices; resources would come from a tax on the export of oil and derivatives