In second place in the electoral polls, President Jair Bolsonaro (PL) has adopted a series of measures in the economic area to face two challenges in 2022: reducing the impact of high inflation and, at the same time, trying to stimulate demand and offset the loss of household purchasing power. Two objectives that, from an economic point of view, are contradictory.
The assessment among economists is that the government has been successful in contributing to an economic activity that is stronger than expected in this first half of the year. On the other hand, measures to combat inflation – such as reducing taxes—may even yield electoral dividends, but they will bring little or no relief to the consumer’s pocketbook.
The first question raised is the way found to hold prices: tax exemptions on diesel, industrialized products (with the IPI cut) and the reduction of import tax on ethanol and some inputs and food.
Tax cuts do not always reach the final price and, when they do, they can lead to an increase in demand that pressures prices in a second moment, says André Braz, coordinator of the consumer price index at FGV Ibre (Brazilian Institute of Economics of Getulio Vargas Foundation).
He states that the first IPI reduction did not result in a deceleration of inflation and some products, such as the zero car, continued to rise in price.
“Not always the product that becomes cheaper can sustain this level for a long time. It is cheap at the beginning, demand increases, the market reacts to this increase in demand by raising price and the balance of this tax reduction benefit is even smaller” , says Braz.
“It’s the government trying to establish a position. It wins votes, gains popularity, but the practical effect I don’t believe we will reap.”
On the demand side, the government has already adopted several measures, such as the release of up to R$ 1,000 from the workers’ FGTS, the anticipation of the 13th of the INSS and the flexibility of the spending ceiling to release more parliamentary amendments and make AuxÃlio Brasil viable.
They join the reopening of several activities after the drop in the number of deaths from Covid, factors that already lead the market to predict GDP growth in the first quarter of close to 0.5%, when before, there was even talk of a fall.
This additional stimulus also makes it difficult for the Central Bank to control inflation that has been above 10% since last September and is expected to break the target for the second year in a row.
“On the one hand, you have an increasingly restrictive monetary policy. On the other hand, several measures to try to smooth the slowdown in economic activity. You are braking with one foot and accelerating with the other. “, says Marco Caruso, chief economist at Banco Original.
He also claims that tax cuts help inflation in the short term to be lower, but that part of this reduction can turn into a greater profit margin for the producer.
Daycoval Asset’s chief economist, Rafael Cardoso, says that AuxÃlio Brasil, redemption of the FGTS and anticipation of the 13th salary are some factors that, together with the resumption of activities, make the work of the BC difficult at this time.
“There are a series of phenomena that will keep demand artificially heated at the beginning of this year. The Central Bank has done a lot, it is in a territory where economic activity must be stopped, but these effects are being hidden by the issue of reopening, fiscal impulses and so on.”
Economist Heron do Carmo, a professor at FEA-USP (Faculty of Economics, Administration, Accounting and Actuarial, University of São Paulo), believes that high inflation until the October election is already contracted and the government will not have enough time to change the scenario.
“They can get a small reduction with fuel and energy, but there would be a punctual decline in a given month and then it would go up again. There is not much the government can do, besides hoping that the period between May and August, which tends to be lower inflation, don’t be surprised.”
Carmo adds that there are many uncertainties ahead, such as the evolution of the pandemic in China, the unfolding of the War in Ukraine and the electoral issue itself. The prospect of frost could also lead to an unexpected rise in mid-year food prices.
“Now, even if everything goes well, what can be expected is inflation running around 9% in 12 months, in September and October”, he says.
This week, Bolsonaro said that the IPI cut did not reduce prices, but helped to avoid a greater rise in industrialized products. “When I cut IPI, for example, it would go up a lot, vehicles, motorcycles, white goods. It doesn’t mean that the IPI brought the price down, but it didn’t go up.”
The National Congress also tries to postpone this year’s energy bill readjustments to 2023, avoiding repercussions on consumers’ pockets in an election year.
Goldman Sachs’ Alberto Ramos says the Brazilian economy and household spending have benefited from a fair amount of fiscal stimulus in recent months, such as diesel and cooking gas subsidies, a broader cash transfer program, import taxes and tariffs, in addition to FGTS withdrawals and double-digit salary increases for state and municipal public sector employees.
The institution raised its growth forecast for the Brazilian economy this year from 0.6% to 1.25%.
“We do not rule out other measures to mitigate the impact of double-digit inflation and stimulate household consumption before the October elections”, says the economist in his scenario review.
Ramos expects, however, strong headwinds in the second half of the year.
Several economists have also revised upward their projections for economic growth in 2022 in recent weeks and also point to a second semester – precisely the election period – of less intense activity.
Factors that are contributing to a better first half, such as the reopening of the economy and measures to anticipate consumption, will lose strength. In addition, the effects of rising interest rates here and in the US will be greater.
“The days of the harvest of good economic results may be numbered”, says Luis Otavio de Souza Leal, chief economist at Banco Alfa.
The Central Bank itself, says Leal, stated that the tightening of financial conditions “creates a risk of a stronger deceleration than anticipated in the quarters ahead, when its impacts tend to become more evident”.
Measures to stimulate the economy
- Minimum wage readjustment in January
- Anticipation of the 13th of the INSS
- Release of up to BRL 1,000 from the FGTS
- 5% server reset
- Brazil Assistance Program
Measures to combat inflation
- Exemption of industrialized products (IPI)
- Reduction of import tax on ethanol, inputs and food
- diesel tax exemption
Competitors and inflation
“The cost of living all over the world, food, fuel, everything went up in price. Brazil was one of the countries that least increased the price of things”​
Jair Bolsonaro (PL)
“Today, 50% of inflation in Brazil happens at prices administered by the government, such as electricity and diesel oil. If they were responsible to the people, the price of gasoline and food would already have dropped”
Lula (PT)
“Petrobras has a monopoly protected by the government, it has no competition. That’s why it makes this criminal abuse. (…) Then there’s the invasion of Ukraine by Russia, oil hits US$ 140 and Bolsonaro orders the US to pass $140 for the people”
Ciro Gomes (PDT)
“Fighting inflation requires basic tools that we don’t see today: first, control of public spending, with fiscal responsibility. Then, the courage to carry out urgent reforms, such as tax reforms, generating investments and new jobs”
João Doria (PSDB)
“Again, the federal government puts this bill in our lap. (…) As we are talking about the price of fuel, which is dollarized, this affected the housewife who goes to the supermarket and buys everything more expensive”
Simone Tebet (MDB)
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