Brazil would have ended 2021 with a gross debt of 63.6% of GDP (Gross Domestic Product), if tax benefits had remained at 2% of GDP between 2012 and 2021, according to government calculations obtained by the Sheet.
The value is 20.7% lower than the effective level of the country’s debt, which closed last year at 80.3% of GDP — a level considered high for emerging economies such as Brazil.
The comparison exercise was carried out by technicians from the Ministry of Economy to obtain an overview of the situation of public accounts, if the country had followed a regime of greater control of revenue waivers.
The ministry itself has already made numerous diagnoses about problems and distortions of several of these incentives, which consume more than R$ 300 billion a year. But the efforts to reduce the values run into political resistance and lobbying from business sectors.
Congress and the political wing of the Jair Bolsonaro government (PL) have even gone in the opposite direction, expanding tax benefits. Last year alone, 22 new exemptions were instituted, which drained BRL 5 billion from federal revenue.
This year, its impact will be even greater, of R$ 13.2 billion. Much of it comes from the extension of the exemption on the payroll of 17 sectors, sanctioned by Bolsonaro on the last day of 2021 without any compensation measure.
Of these exemptions, nine are considered tax expenditures, a special modality that represents an indirect government expenditure to try to boost economic activity or meet social objectives.
Between 2005 and 2015, during PT governments, this type of policy gained space and fed the successful lobby of businessmen in search of benefits to their respective sector.
As a result, tax expenditures jumped from 2% in 2005 to 4.5% of GDP in 2015, contributing to squandering federal revenue and deepening the gap in the accounts.
Since then, several attempts to reduce these benefits have foundered amid political pressure from the benefited sectors. Until 2020, they remained close to 4% of GDP.
The institution of new benefits, on the other hand, has been an escape valve in the face of the restriction imposed by the spending ceiling, the government’s fiscal anchor that limits the growth of expenses to the variation of inflation.
If, on the one hand, expenses are locked in the ceiling, on the other hand, the fiscal rule does not represent an obstacle to the creation of new waivers.
In one of the attempts to point out distortions in tax expenditures, the Secretariat for Assessment, Planning, Energy and Lottery of the Ministry of Economy suggested, in 2019, reversing part of the exemption of the basic food basket, directing the saved resource to Bolsa Família, later replaced by the Brazil Aid.
According to the agency’s technicians, the measure would be more efficient in combating poverty, as the exemption from the basket ends up including products consumed only by higher-income families, such as cheese or salmon fillet. The change, however, did not advance.
Another 2021 study pointed out problems in the absence of limits to deduct medical expenses from the IRPF (Imposto de Renda da Pessoas Físicas), which ends up benefiting the upstairs, which is able to afford health insurance or private medical care.
Economist Alexandre Manoel, chief economist at AZ Quest and former secretary of Economic Assessment and Planning, says that for five years Brazil has been focusing fiscal adjustment efforts on controlling expenditure, a prescription that shows signs of exhaustion.
For him, evidence of this is the electoral debate, in which most candidates defend, with their particularities, greater social spending and investments.
“It seems to be the maximum fiscal adjustment that we can get. With this adjustment on the expense side, which was not small, with this decrease in discretionary expenses, the machine is already at the limit”, he says.
Meanwhile, according to Manoel, there were few adjustment measures on the revenue side. “There are policies with effects, from the point of view of job creation, which are small, insignificant or non-existent. The tax benefits were granted for the most part without established goals and without control”, he criticizes.
The economist, however, recognizes the political difficulties to advance this agenda, which has “diffuse benefits” for society, but affects the concentrated interests of some segments with pressure power.
Last year, in the midst of negotiations for the extension of emergency aid to vulnerable people affected by the Covid-19 pandemic, Minister Paulo Guedes (Economy) and his team managed to insert in a PEC (proposed amendment to the Constitution) a provision that required the government to present a plan to gradually reduce tax expenditures.
According to the text, the plan should be enough to bring these incentives to 2% of GDP in eight years.
In the vote, Congress shielded a series of benefits, such as the Manaus Free Trade Zone, benefits to philanthropic entities and exemption from the basic food basket, among others. The sum of the exceptions amounted to about 2% of GDP — half of the existing incentives.
Under these restrictions, the government frustrated expectations of a more aggressive cut. Presented in September of last year, the dehydrated plan listed alleged cuts in benefits that, in fact, already had an expiration date.
At the time, a more benevolent interpretation of government legal bodies suggested the cut target should focus only on the 2.06% of GDP in tax expenditures not exceptionalized by the Legislature. In practice, the legal obligation was a cut of just R$4.2 billion over eight years.
Congress also sponsored a drop in the amount of tax benefits accounted for when it passed a law last year ending the tax expenditure status of Simples Nacional and MEI (individual microentrepreneur).
These special regimes allow micro-entrepreneurs and companies with annual gross revenue of up to R$4.8 million to collect less taxes and in a simplified manner. In the 2022 Budget project, the joint waiver was calculated at R$86 billion – between 0.8% and 0.9% of this year’s GDP.
Discounting this amount, the estimated tax expenditure for the year fell to 3.3% of GDP, although Simples and MEI continue to exist.
To try to overcome political barriers, Manoel proposes a “horizontal reversal” of the benefits, with an increase in some taxes to minimize the size of the incentive to the benefited companies.
He cites as an example the linear cut in the rates of IPI (Tax on Industrialized Products), announced by the government at the end of February. Although it is a tax reduction, it meant a smaller benefit to the Manaus Free Trade Zone, which already had its products exempt from the tax. The measure angered parliamentarians from the Amazonas bench, who are still trying to reverse it.
“The discussion has to be done clearly. In general, candidates are promising more State. It has to be said clearly that, although people don’t want to hear it, it means more tax burden”, says Manoel.
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