Tax cuts already cost BRL 54 billion and government studies more actions

The measures adopted or in preparation this year by the government and Congress with the objective of reducing taxes on different fronts will generate a cost of at least R$ 54.2 billion for the Union, states and municipalities in 2022. In addition, the cuts will continue to reduce revenue from public coffers during the next presidential term.

The impact could be even greater depending on the government’s next moves. President Jair Bolsonaro (PL) has demanded initiatives in search of a popular agenda on the eve of the electoral calendar and, among the priorities, are actions that may represent a response to the escalation of inflation.

The IPI (Imposto sobre Produtos Industrializados), for example, can be cut even further for some products. The government has already reduced the tax by 25% just over two weeks ago, at a cost of around R$20 billion per year (half for the Union and half for states and municipalities).

“There is a possibility, according to Paulo Guedes, of reducing [o IPI] even more so for automobiles, motorcycles and white goods. It’s a fantastic thing because it’s never been heard of in Brazil,” Bolsonaro said in a ceremony last Tuesday (15).

The president did not mention that PT governments have already taken this initiative and cut the IPI precisely on cars and white goods in an attempt to move the economy.

In addition, the political class pressures the economic team for measures aimed at fuels. A cut in taxes on gasoline, defended by government officials, could cost the public coffers BRL 27 billion — or even more, depending on the format chosen.

The economic team has repeatedly resisted new fuel-oriented ideas, often seen as expensive and inefficient to hold down prices. In case there is really a need, Guedes’ team prefers focused increases — through the Auxílio Gás or Auxílio Caminhoneiro.

If they proceed, the new cuts would add to the list of tax cuts already made this year. The most relevant was precisely the federal taxes PIS/Cofins and the limitation of state ICMS on products such as diesel and cooking gas.

The measure removed BRL 28.2 billion from public coffers in 2022. Of this total, according to the Ministry of Economy, BRL 14.9 billion will be financed by the Union during the year (another amount, of BRL 1.6 billion, will be felt only in January 2023). Another R$ 13.3 billion will be withdrawn from states and municipalities, in the accounts of the IFI (Independent Fiscal Institution).

Another recent measure, announced last Tuesday, was the gradual elimination of the IOF (Tax on Financial Operations) on foreign exchange operations. In this case, the fiscal impact starts at BRL 500 million in 2023 and gradually grows until it reaches BRL 7.7 billion in 2029 (on average, the annual impact by then will be BRL 2.7 billion).

The ministry is also preparing to reduce taxation on maritime freight, as shown by the sheet, in addition to cutting the Income Tax for foreign investments and eliminating the Cide (Contribution for Intervention in the Economic Domain) on remittances abroad. These three measures would cost around R$6 billion a year, according to estimates.

Members of the economic team heard by the sheet affirm that there is fiscal space for the cuts, but they begin to say that the measures must have a limit.

Despite the fact that slack is still projected in relation to the fiscal target, there is a view among members that one cannot risk a deterioration in public accounts to the point of worsening the fiscal result projected for the year, precisely at an electoral moment – which could give a bad signal to the market.

The deficit forecast by the government during the preparation of the 2022 Budget is R$ 54.8 billion for the consolidated public sector (which includes the Union, states and municipalities) — an amount that can be helped by higher revenues, but can be harmed by electoral measures (such as readjustments for civil servants).

In the limit, they argue, the government cannot risk the fiscal target for the year (which allows for a bigger hole, of up to R$ 177.5 billion for the public sector).

The tax waiver adds pressure to public accounts in what will be the country’s ninth year in the red. The forecast is that Brazil’s debt will grow to R$ 6.4 trillion in 2022 and face higher financing costs in the face of rising interest rates and uncertainties with the domestic and international scenarios.

Juliana Damasceno, economist at Tendências Consultoria and research associate at FGV Ibre (Brazilian Institute of Economics at the Getulio Vargas Foundation), says that tax cuts are less of a concern this year than at other times because of the increase in revenue — but that, even so, the measures generate alerts.

This is because, she says, the increase in public revenues has resulted, as in the past year, from conjunctural effects – such as the advance of inflation and the increase in the price of oil (which inflates earnings from royalties).

The risk is that there will be a time when public revenue will no longer benefit from these factors and the country will need to re-discuss the measures adopted now – which will be a difficult task, given that companies easily “get used” to taxes. lower.

“It is difficult to reonerate. The payroll tax exemption, for example, has been difficult to reverse because companies say that, if taxes rise, they will have to lay off people en masse”, he says.

The exemption from the payroll was extended through a project approved by Congress and sanctioned by Bolsonaro. Created in 2011, it was supposed to end in 2021 – but it was extended until 2023 due to pressure from entrepreneurs.

Damasceno recognizes that measures such as tax cuts are an attempt to improve the lives of the population in a troubled scenario, but says that there will not necessarily be an effect because companies would need to feel that the reduction will be sustainable to pass it on. “There is a possibility that we won’t see it reach the end consumer,” he says.

Another effect commented on by Guedes, that of re-industrializing the country by cutting the IPI, is also viewed with skepticism. “Nobody invests with a high interest rate like ours. A speech like this is very disconnected from reality”, he says.

Impact of measures