MP who reinstates payroll reflects government’s fiscal desperation

Provisional Measure 1202, issued by President Luiz Inácio Lula da Silva (PT) at the end of 2023, vetoing the payroll tax exemption for the sectors that employ the most in the country, is considered a “disastrous” option and the result of “fiscal desperation ” of the government by experts consulted by the People’s Gazette.

In addition to establishing a clash with the Legislature, disregarding Congress’s deliberations on the topic, the measure also does not present an alternative to tax distortions, as justified by the Minister of Finance, Fernando Haddad.

“The proposal creates an even less intelligent tax reduction than the previous one”, assesses Hélio Zylberstajn, senior professor at the Faculty of Economics and Administration of the University of São Paulo (FEA-USP) and coordinator of the Salaryometer at the Fundação Instituto de Pesquisas Econômicas (Fipe).

For him, the MP maintains the same “sin” of the initial payroll tax exemption, which is electing sectors. “The subjectivity of choice encourages lobbies. It becomes a political game, it’s very bad”, he says

The MP revokes the payroll tax exemption for 17 sectors of the economy that had been approved by the National Congress last year, maintaining the replacement of the employer’s social security contribution (CPP), of 20% on employees’ first minimum wage, with rates of 1% to 4.5% of gross revenue. A People’s Gazetteas a communications company, is among those benefiting from the extension of the payroll tax exemption.

In its place, the MP defines a gradual return of the employer contribution to salaries, in a staggered manner, until 2027. Without informing the criteria for the choice, it establishes 42 economic activities – and no more sectors – in which the contribution will be reduced.

The activities, divided into two groups, will have a CPP reduction of 50% or 25% in the first year, depending on the group in which the activity is allocated. In the first group of activities, the government included, for example, activities related to the transport, TV and pay TV sectors. In the second group, book publishing, shoe manufacturing and civil construction.

In addition to displeasing those contemplated with a gradual exemption, the MP does not justify the exclusion or non-inclusion of other segments. Activities linked to manufacturers of machinery and equipment, the textile and clothing industry, call centers and animal protein and their sectors are some that are not listed in the MP.

“This is divide and rule. Everyone was left with almost nothing and others with nothing, Vivien Suruagy, from Feninfra (National Federation of Call Center, Installation and Maintenance of Telecommunications and IT Network Infrastructure), told UOL, the most labor-intensive sector. all sectors served by the program.

In the opinion of Marcelo Faria, president of the Liberal Institute of São Paulo (Ilisp), the MP is a “patch” that created a clash with Congress in a fundraising logic. “The problem is not the activities that have exemptions, but the other sectors that do not have them”, says Faria.

Fiscal issue is at the center of the debate

Adopted in 2011, the payroll tax exemption, which aims to create jobs in labor-intensive sectors, would expire at the end of this year.

At the initiative of Congress, it was extended until 2027, but ended up vetoed by President Lula da Silva. The veto was overturned in a new vote in December, with a large majority in the Chamber and Senate. On December 28, the MP was announced by the Minister of Finance, Fernando Haddad, to come into effect on April 1.

Haddad justified the publication of the MP based on the estimated cost of the exemption for this year, which was not included in the Budget. As Congress approved, it is estimated that the impact of extending the exemption would be at least R$18.4 billion in 2024.

Of this total, the total value of the tax exemption for companies in the 17 sectors would be R$9.4 billion. Another R$9 billion would go to municipalities with up to 156,216 inhabitants due to the reduction in the social security rate from 20% to 8% on civil servant salaries, a point also suspended by the MP.

With the payroll tax increase, the government estimates that it will raise R$6 billion this year. The MP also limits the compensation of tax credits obtained by companies through a court decision, which should generate another R$20 billion for the Treasury.

It also extinguishes, until 2025, the tax benefits granted to event promotion companies through Perse (Emergency Program for the Resumption of the Events Sector), created to alleviate losses in the sector during the Covid-19 pandemic. The program would cost the government another R$6 billion this year.

The minister is racing against time to increase federal revenue this year and circumvent the requirement that the fiscal target be revised in March, when the National Treasury will release the bimonthly public accounts report.

To maintain the zero deficit target, foreseen by the fiscal framework, the government needs to raise extra revenue of R$168.5 billion. The market estimates that the value will not be reached, estimating a deficit of up to 1% of GDP, and is already counting on the target being revised.

Haddad is trying to extend the deadline, in a clash with government sectors, which are trying to push for a review of the target, which would allow more budgetary space in an election year.

In the opinion of the president of Ilisp, the goal is just to raise more money to be able to cover the excess spending by the government, which does not want to do its part and cut expenses. “The government’s calendar is electoral, so much so that the exemption runs until 2027, after the two elections. The MP is postponing this eternal patch”, he stated.

Job creation divides government and businesspeople

Sectors benefiting from the exemption claim that its extinction will lead to layoffs due to the increase in social security costs.

The federal government, in turn, uses research from the Institute for Applied Economic Research (Ipea) showing that from 2012 to 2022 the exempt sectors closed 960 thousand jobs, a drop of 13%. At the same time, according to the survey, private companies in other sectors saw an increase of 6.3% (1.7 million) in formal jobs from 2012 to 2022.

The numbers in this sense, however, are questioned by trade unions and economists. Fernando de Holanda Barbosa Filho, senior applied economics researcher at Fundação Getúlio Vargas (FGV) told UOL that the studies are “bad”. One of them shows that the cost of creating jobs is very high in relation to the salary paid to workers.

For Zylberstajn, there is no evidence that differentiated taxation helps employability. “Taxation must be neutral, equal for all sectors.

In Marcelo Faria’s assessment, even with the clash of contradictory narratives about layoffs and unemployment, the scenario is harmful to the government. “Justifying the withdrawal of a benefit with a social impact is difficult. The government should be concerned about the economy and not just revenue.”

MP must be negotiated and culminate in a bill

Zylberstajn believes that the proposal can be improved in this sense, with negotiations between the government and Congress in the four months until the provisional measure comes into force.

According to him, the government could calculate the total loss with the exemption and distribute the amount equally among all employers, reducing the value of the first minimum wage rate for all employees in the country.

A proposal similar to that defended by the special secretary for tax reform, Bernardo Appy, but ended up not being discussed within the scope of PEC 45. “It would be a much more reasonable solution”, believes the professor.

The president of the Senate, Rodrigo Pacheco, promises a discussion on the MP’s fate for next week. Pressure is growing on him from deputies, dissatisfied with the imposition of the government and entities from various sectors. The Parliamentary Entrepreneurship Front (FPE) sent a letter to the Board requesting the return of the MP. For now, Pacheco just said he was “strange” about the measure. Political and economic analysts do not rule out a negotiation that culminates in a bill to be evaluated by Congress.