Brazil’s Finance Minister Fernando Haddad gave a statement at an event hosted by BTG Pactual on Monday, that the government has taken an initiative to precisely identify the effects of revenue shortfalls from past tax changes. Admittedly, this step was taken as it would affect President Luiz Inacio Lula da Silva’s new fiscal rules. Haddad also said that a shortfall of around 50 billion reais ($10.2 billion) was anticipated this year, a probable result of tax changes imposed by the previous administrations. In addition, those funds were factored into estimates for a budget deficit of 1% of GDP for 2023.
Tackling the impact of widespread tax credit utilization on tax revenues
Haddad said that the corporate income tax collection of the country was impacted by a “monumental offset” of tax credits, which was followed by the 2021 Supreme Federal Court decision to exclude state tax from the base calculation of federal taxes. This decision’s effects can be traced back to 2017, making it feasible for companies to claim extensive tax credits. Given the adverse and unpredictable impact of widespread tax credit utilization on tax revenues, Haddad said that the government is considering different ways to handle the situation. He also said dealing with a significant sum that has been affecting the fiscal framework, which was recently approved, has become the primary objective of the government.
The Finance Minister also emphasized the fact that there is room for more interest rate cuts by Brazil’s central bank, which has delivered three 50-basis-point reductions consecutively, resulting in the increase of its key Selic rate to 12.25%. He continued saying that he supported the Senate’s ongoing analysis of a broad tax reform affecting consumption taxes. The government considers this as a measure to enhance productivity in the country.
What does the future hold for Brazil’s economy?
The proposal for Brazil’s new fiscal rule indicates that Lula’s administration can recognize the importance of replacing the old spending cap with a credible, new fiscal anchor to tackle macroeconomic uncertainties. The new rule provides a more holistic approach to fiscal consolidation by aiming for primary balances, rather than just spending, and limiting the scope for tax cuts, as witnessed in the previous year.
It is to be noted that the new rule will only be credible with a better fiscal strategy. According to multiple sources, the rule would only modestly reduce primary spending/ GDP in 2024-2026, after a jump in 2023. Since the President had said that the government may not eliminate its primary budget deficit in 2024 as indicated by the new fiscal rules, there has been a conjecture that the next year’s fiscal target may be revised. This subject was avoided to be addressed directly by Haddad.