Haddad chases BRL 100 billion in taxes to close gap

About to present the 2024 Budget project, which should be delivered to Congress by the end of August, the federal government is trying to contract a collection of at least R$ 100 billion more to achieve the target of a neutral primary result for the year coming up – a value equivalent to almost 1% of the Brazilian Gross Domestic Product (GDP). For this, however, it depends mainly on the approval of a series of measures by the Legislature in the second half of the year.

The intention of the head of the economic team, Fernando Haddad, is to close the 2023 fiscal year with a primary deficit of less than 1% of GDP. In the proposal for the new fiscal framework, already approved in the Senate and pending a vote in the Chamber, the government set the target for a neutral result in 2024 – that is, the idea is to zero out the primary deficit.

Since the presentation of the framework, it has become clear that, in the absence of measures to cut public spending, achieving the targets depends mainly on an increase in tax collection. In other words, the success of the framework depends more on taxpayer help than government effort.

As reported by the People’s Gazette, by the beginning of May the government had already announced at least 12 initiatives to collect more taxes. Judicial decisions by superior courts also helped to reinforce the Treasury’s revenue, but the amounts are still insufficient to close the gap in public accounts.

Among the actions already carried out are the resumption of federal taxation on gasoline and ethanol, the creation of a temporary tax on oil exports, the removal of ICMS from the calculation base for PIS/Cofins credits, in addition to a debt renegotiation program late.

Even so, analysts estimate that an additional revenue of R$ 100 billion to R$ 130 billion is necessary to balance next year’s budget. Although not approved, new measures aimed at guaranteeing the amount need to be filed in Congress later this month in order to be included in the 2024 Annual Budget Law Project (PLOA).

Among the initiatives that the government should propose to Congress is the taxation of exclusive investment funds, which, it is estimated, could raise revenues by around R$ 10 billion. Also on the table is the possibility of extinguishing the Interest on Own Capital (JCP) mechanism.

The economic team also counts on the conversion into law of the provisional measure (MP) 1,171/2023, which establishes a taxation of earnings from investments abroad, with an estimated collection potential of R$ 3.59 billion. Published on May 1st, the text runs the risk of becoming obsolete if it is not approved by Congress.

Already approved by the Legislature, the new rules for taxation of transfer pricing, which, according to the government, can raise revenues by R$ 25 billion, still depend on parliamentarians for their regulation.

Another initiative, the taxation of electronic sports betting, instituted by MP 1,182/2023 and which can generate BRL 2 billion in revenue per year, also depends on regulation by Congress so that structures and processes are created for inspection of the sector.

But the proposal that has the greatest potential impact is the bill that gives back to the government the so-called casting vote in the Administrative Council of Tax Appeals (CARF). The proposal, which has already been approved by the Chamber of Deputies and will be examined by the Senate, could increase revenue by up to R$50 billion.

Analysts are skeptical of tax collection measures announced by the government

Among market macroeconomic analysts, there is skepticism about the government’s targets. “We assess that there is a great distance between the budget proposal and what should effectively be carried out during budget execution, maintaining uncertainty about achieving the primary result target for next year”, says a report signed by economists from XP Investimentos.

The team at Bradesco’s Research and Economic Studies Department, in turn, classifies the scenario as “challenging”. “In addition to the loss of revenue arising from the slowdown in economic activity, the government will also no longer rely on the high contribution of wholesale inflation to nominal GDP and the revenue of some sectors. In a scenario of more intense wholesale disinflation, meeting primary targets becomes more dependent on revenue growth/recomposition”, says the bank’s report.

For economist Livio Ribeiro, a researcher at the Brazilian Institute of Economics at the Getúlio Vargas Foundation (FGV/Ibre) and a partner at economic consultancy BRCG, it is impossible to guarantee, at this moment, that the measures announced by the government will be sufficient to reach the target established by the new fiscal framework.

“All are measures that have an absolutely gigantic degree of uncertainty in their effect”, he summarizes. The change in Carf’s casting vote and the ICMS tax bases, for example, have a high risk of judicialization, he says. “On smaller measures, such as taxing e-commerce and other small tariff changes, there are huge doubts about their effectiveness”, he continues.

“So when you put everything together in the account, yes, you have to make a big leap, and we are not very sure if this will be achieved”, he says. What has been seen, according to him, is an increase in expenses preceding the increase in revenue. “The path that was chosen is very risky, because you set up a primary consolidation strategy that presupposes that you get a lot of things that you don’t have in order to succeed.”

Despite this, he does not rule out the possibility of the government’s success in achieving the target. “Announcement of measures is not a guarantee of collection, but measures that have their implementation problems are not a guarantee of failure. There are no fans for one side or the other, it’s just a fact.”

Economist considers achievement of fiscal target by the government unfeasible

Gabriel Leal de Barros, chief economist at Ryo Asset and former director of the Independent Fiscal Institution (IFI), is more pessimistic. For him, the chance of zeroing the primary deficit from 2024 is close to zero.

“It’s unfeasible; unlikely that this target will be met. There has to be a brutal increase in the tax burden and, as it happens from one year to the next, it is even difficult to see in which headings the government would be able to move to have a collection of that size ”, he explains.

In addition to the announced measures being insufficient, the economist considers that the revenue projections are overestimated by the government. “[Novas regras para tributação de] transfer price, the government estimated that it would collect R$ 25 billion. When we talk to companies, there is a very large divergence. The most reasonable seems to be something close to R$ 10 billion”, he exemplifies.

“Another example: the collection of ICMS on the basis of IRPJ and CSLL, resulting from a decision by the STJ [Superior Tribunal de Justiça], the government had estimated at R$ 90 billion and recently acknowledged it was revised downwards to R$ 47 billion. Still, it’s too high. We have an estimated number of R$ 20 billion to R$ 25 billion”, he says.

In addition, he says, the government’s projection for growth in economic activity would also be overestimated. The Economic Policy Secretariat (SPE) of the Ministry of Finance estimates a rise of 2.3% in next year’s GDP. The financial market median projects a result of 1.3%, according to the latest edition of the Focus report, released by the Central Bank. “This point below takes at least R$ 30 billion from the government”, says Barros.

The economist considers that one of the few hypotheses in which the government’s plans could succeed would be with a decision by the Judiciary that strengthened the Union’s accounts in an extraordinary way. “But even if that happens, we would probably have a legal dispute because of this potential court decision”, he argues.

“The other alternative would be for GDP to surprise a lot. If we are wrong and the GDP does not rise 1.3%, but 2.5% or 3%, then it really becomes more possible”, he says. “But there would have to be a very positive surprise in the economic activity that very few people have in the account. It is not impossible, because in mathematics there is always a scenario, maybe a 5% chance, but it is really quite improbable”, he adds.