Brazil seeks to tackle deficit with ambitious economic programme

Luiz Inácio Lula da Silva’s administration on Thursday announced its first economic measures, outlining a number of proposed tax increases and spending cuts aimed at turning Brazil’s projected deficit this year of more than R$231bn (US$45bn) into a surplus of more than R$11bn.

Finance minister Fernando Haddad warned that this goal would prove difficult, however, and said the government would be content to end this year with a deficit of less than 1 per cent of gross domestic product, down from forecasts for 2.1 per cent.

Following violent riots in Brasília on Sunday, many expected the announcement to be postponed, but the economy ministry decided to demonstrate its work had not been disrupted.

Haddad was accompanied by two other ministers and senior secretaries in a gesture aimed at conveying the administration’s broad backing for the measures, which are likely to prove unpopular with voters.

However, they may assuage market concerns about the nation’s public accounts and the government’s commitment to fiscal rectitude.

“This fiscal restructuring programme is based on the assumption that there is no lasting sustainable growth with a deficit of R$230bn,” said Simone Tebet, minister for planning, who announced the package alongside Haddad.

“[This deficit] means we cannot create room for employment and income generation with 2 per cent of GDP already committed,” Tebet added. “This impacts interest rates and consequently the viability of Brazil returning to growth.”

Haddad called the primary deficit “absurd” when he formally took office on January 2.

The package envisages increasing revenues by more than R$190bn, while reducing expenses by R$50bn.

This will be done via a series of changes to taxation, including the reversal of an exemption for large non-financial companies adopted in the final days of the previous administration of Jair Bolsonaro. The measures will also change how companies can generate tax credits with the ICMS levy, a state-level tax on the movement of goods.

In addition, the measures seek to restore the government’s so-called quality vote at the Administrative Council of Tax Appeals, a court that judges tax disputes.

Restoring this vote virtually ensures the federal government will win disputes when there is a tied judgment at the court, which happens frequently. This in turn will lead to increased revenues.

Congress voted to strip the government’s quality vote in 2020 during the Bolsonaro administration.

The economic package is composed of a series of ministerial ordinances and several presidential decrees and executive orders that must be voted on in Congress, which could present some obstacles.

Mariam Dayoub, chief economist at Grimper Capital, said the package was a “good strategy until more structural measures are worked out. The market already reacted well to the news when it leaked last week and I believe it will continue to react well.”

Sergio Vale, chief economist with MB Associados, said the market was waiting for Haddad to announce a new fiscal framework and the government’s proposal for tax reform.

“The announced objective is indeed ambitious. Probably not all that the government is forecasting will happen. Haddad already signalled this,” Vale said.

Additional reporting by Carolina Ingizza

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