Government plans to use BRL 486 billion in subsidies and exemptions – 04/15/2023 – Market

While Minister Fernando Haddad (Finance) seeks to raise revenue to zero the deficit in public accounts in 2024, the government’s loss with subsidies and tax exemptions is estimated by the Federal Revenue at R$ 486 billion next year.

The value, a consequence of legal measures approved over time for different sectors, represents a nominal increase of 6.5% against the previous year and is yet another complication for the government in the task of rebalancing the primary result and stabilizing the public debt.

Technically called tax expenditures, these cuts reduce public revenue from tax exceptions created to reduce costs to consumers or producers. They are granted to different sectors of the economy – mainly commerce, services, health and agriculture (which together account for more than half of the total).

The forecast is that the largest exemptions in 2024 will be granted to those opting for the Simples Nacional (R$ 118.8 billion), agriculture (R$ 57.1 billion), exempt and non-taxable income from the Individual Income Tax ( BRL 40.2 billion), so-called non-profit entities (BRL 40.2 billion) and the Manaus Free Trade Zone (BRL 35.1 billion).

The projections were calculated by the Federal Revenue in the PLDO (Budget Guidelines Bill) of 2024, sent by the government to Congress last Friday (14). The data show a great discrepancy in relation to the proposal of a year ago, which removed Simples from the accounts due to a legal understanding and affected the basis of comparison.

Regarding GDP (Gross Domestic Product), the value increased from 3.23% to 4.23% between the 2023 and 2024 proposals. Regarding the collection calculated by the Revenue, from 16.2% to 18.8 %.

In the comparison between the 2024 PLDO and the 2023 Budget proposal (which considered Simples and updated the tax expenditures account to BRL 456 billion), there is more stability. The nominal increase in spending in 2024 increased to 6.5%, while in relation to GDP it remains at around 4.2% – after a marginal drop of 0.06 percentage points.

Anyway, the numbers show the size of the loss that the Union continues to have with tax expenditures even after successive speeches for the reduction. The forecast value for 2024 is more than three times what the economic team is looking for in revenue (R$ 150 billion) with a package of measures that includes tightening the rules against fraud in e-commerce and taxing the sports betting market.

The government cites the problem of tax expenditures in the proposal sent to Congress, saying that the expenditure ceiling created by the Michel Temer government (and which came into force in 2017) promoted an incentive to expand the instrument. Since that time, it was considered a risk by analysts that expenses would be blocked for new measures – but initiatives to reduce revenues, no (leading the political class, interested in popularity, to promote measures of this type).

In 2019, Minister Paulo Guedes (Economy) began his term preaching the need for a cut in tax spending – but left office with an increase in the bill.

“Is the political class already mature enough to assume the role, to assume command of the Union Budget […]? Cut where? Decrease subsidies. Are we not a factory of inequalities? Didn’t we give BRL 300 billion in tax breaks?”, Guedes said at the beginning of his term.

Bolsonaro’s then “post Ipiranga” even articulated the approval, in the Emergency constitutional amendment (of March 2021, which allowed the resumption of aid to the vulnerable population in that year), of the government’s obligation to send a plan within six months to reduce gradually incentives and tax benefits.

The government complied with the requirement and sent the proposal, but left out a series of measures. Even so, it remains stalled in Congress – reflecting the lack of commitment from the political class to tamper with sectoral privileges and reduce what is one of the main expenses of the Union.

Now, Minister Haddad plans to have a greater discussion on tax exemptions and promote a gradual reencumbrance.

“I can’t do everything at the same time, because nothing will be done, Congress will be paralyzed. He has to cut this salami into slices, to organize it,” said the minister in a recent interview with Folha.

“Even because the calibration of the measures [tamanho de cortes ou gastos] depends on how decisions are made. But let’s do it in the first year of government.”

According to Haddad, the plan is to carry out the review after the tax reform – which he expects to be approved in the House in June or July and in the Senate in September or October.

Lula’s finance minister will face resistance. Among the most delicate points is the Manaus Free Trade Zone – the target of frequent lobbying by the Amazonas caucus and the companies installed there.

In a speech during the transition, Haddad referred to the debate by saying that there are sensitive political issues to be considered on the subject.

“From within the tax reform, it is easier to make a fairer policy from the tax point of view. Bearing in mind that, yes, there are specificities to be considered. There is always talk of the issue of the Manaus Free Trade Zone, which has a specificity”, he stated. .

“Does it have to be considered? It does. There are sensitive political issues to be considered, yes. But there are a series of issues that need to be reviewed”, he said.

Nelson Marconi, coordinator of the Center for Studies on New Development at FGV (Fundação Getulio Vargas), says it is essential to reduce tax expenditures, due to the significant volume and the contribution that the measure would make to public accounts.

He argues that priority should be given to benefits that generate less economic and social return, considering, for example, the jobs generated. Marconi recalls, on the other hand, that the revisions face political interests and the resistance of lobbies in Congress and, therefore, defends a gradual reduction.

“This has to be done in a programmed, planned and announced way. It is difficult to reduce because, since these sectors have these benefits, the resistance to take them away is very great. Because it generates a cost reduction, an increase in the profit margin, a gain for someone”, he says.

One of the benefits cited by him is the existing one for religious times. “There is no justification from an economic point of view for the church to have tax exemption. I know there is a political difficulty, but I think we should review both the productive sectors that generate little result from the point of view of employment and this sector of churches “, he states.