Payroll exemption: provisional that is becoming definitive – 06/19/2023 – Cecilia Machado

There is no better qualification than that given by the leader of the government in the Senate, Jaques Wagner (PT-BA), for yet another extension of the payroll exemption: “A provisional one that is becoming definitive”. Instituted in 2011, covering 56 sectors of the economy and with a fiscal impact of BRL 25 billion a year, the program survives until today, covering 17 sectors, at a cost of BRL 10 billion a year.

The last extension took place in 2021, in the post-pandemic period, and there was great fear that the end of the program would be accompanied by an even more adverse scenario for the job market. At that time, the unemployment rate reached the highest value in the historical series, close to 15%, and the recovery of employment took place in a very uneven and slow way. The extension, for another two years, would only be valid until 2023.

But, after the deadline, a new extension – this time for another four years, until 2027 – is discussed again. Having obtained a favorable vote in the Economic Affairs Committee (CAE), the proposal goes to a second vote in the same collegiate before being sent for final evaluation by the Chamber. Considering the relevance of the topic and the economic and fiscal impacts of this policy, it is important to discuss the main justifications presented by the rapporteur for this new extension. In particular: (1) that we are in a challenging economic context, which impels us to act to protect jobs; (2) the view that maintaining the exemption does not imply cuts in public policies; (3) and that the policy has positive effects on employment and therefore should be maintained.

First, it should be noted that the job market has been recovering surprisingly since the end of the pandemic. The unemployment rate, at 8.5%, corresponds to the lowest level in the historical series since 2015. Employment continues to expand and there are more admissions than dismissals in positions with a formal contract. Salaries accumulate real gains, with readjustments that are taking place above inflation. Economic activity remains resilient and grows sustained by a good first quarter of the agricultural sector. The disinflationary process the economy is going through is evident, making the interest rate cut cycle somewhat more likely in the near future. Thus, there could not be a more favorable scenario than the current one for the reassessment of the payroll exemption policy, contrary to the argument in (1).

Second, there is a common view that the exemption policy does not compete for resources with other government expenditures, since tax expenditure is outside the limit for the growth of expenditures established in the new fiscal regime. In these terms, it is true that maintaining the exemption does not imply cuts in social policies. But R$ 10 billion that are not collected is still R$ 10 billion more that could be destined for education, the public health system or social assistance. When the public budget is thought of in an integrated way, the (opportunity) costs become evident, in contrast to the argument in (2).

And, third, the narrative that the exemption policy encourages job creation is recurrent. It may even be true, but there is, so far, no government evaluation report on the cost-effectiveness of payroll exemptions throughout its term. In addition, there are numerous other policies that achieve the same objective —such as qualification and training programs for workers, changes in labor legislation or changes in the tax structure more broadly— and it is questionable whether payroll exemption for 17 specific sectors is the best way to boost job growth.

Discussing payroll exemption within a broader context, as defended by the government, makes much more sense than extending, once again, a policy of dubious effectiveness. How to justify the urgency of extending a program that has existed for over 12 years without any careful evaluation?

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