Interest rates may fall with new tax rule, say economists – 02/16/2023 – Market

The anticipation by the government of the presentation of the new fiscal rule to control the public debt to March may reopen the space for the Central Bank to start lowering interest rates in the second half of this year — as the market predicted at the end of last year.

At the center of the clash between President Lula and the Central Bank, the Selic at 13.75% per year (and interest above inflation by almost 8%) could fall as uncertainties about the behavior of the public debt in the coming years make it smaller.

This is the opinion of economists Bráulio Borges, an associate researcher at FGV-Ibre, and Manoel Pires, coordinator of the agency’s Fiscal Policy Observatory. Both participated in a seminar on the subject this Thursday (16) held in partnership between Sheet and FGV-Ibre.

For economists, however, an increase in revenue will be inevitable in the coming years to achieve fiscal balance, since, on the expenditure side, there is little room for large-scale cuts.

Pires recalls that, in 2019, the Jair Bolsonaro government approved the pension reform and, throughout his four years in office, he did not readjust the salaries of public servants. As these are the two biggest expenses of the federal government, there is a limit, according to him, for significant gains with spending cuts going forward.

On the revenue side, according to economists, it is expected not only the return of taxes on gasoline from March (an extra revenue of almost R$ 30 billion) but also the review of other exemptions and, eventually, tax benefits granted to companies and sectors.

If the tax reform is approved in the first half, the team of Minister Fernando Haddad (Finance) is preparing changes to the Income Tax for the other half of the year, which may lead, according to economists, to the end of some exemptions (such as in health and education) to raise revenue.

Borges states that it is unreasonable to assume that there will be no increase in revenue when, for example, expenditure on assistance spending went from around 0.5% as a proportion of GDP (before the Covid-19 pandemic) to 1.5% with Emergency Aid.

He recalls that the amount of R$600 currently paid was a campaign promise by both Lula and Bolsonaro, and that this will have to be financed with more revenue.

Borges claims that revenues linked to the mineral extraction and oil sector should rise naturally in the coming years. From the equivalent of 1% of GDP, they could reach 2.5% in 2024; and reach around 3% at the end of the decade, giving some relief to the Treasury.

Watch the full webinar below Sheet-FGV-Ibre.