Success of Lula 3 depends on an end of the year with more taxes – 07/20/2023 – Vinicius Torres Freire

Congress vacations empty the political-economic news. A greater part of the public’s attention is occupied by what has become one of the great issues of our time, so to speak, Barbie. In real and adult life, the topic of the hour is Fernando Haddad’s attempt to agree with Congress on a timetable for approving taxes, the most important issue for the economy in the second half of the year.

If Haddad is successful, there will be the prospect that the goal of zeroing the government deficit in 2024 seems realistic. The perspective that the fiscal targets will be slightly breached should lower interest rates, keep the exchange rate (“dollar price”) behaved and contribute to a recovery of the economy between the final quarter of this year and the first of 2024.

The tax increase is essential for the success of Lula 3, for more serious discussions about the future, for stabilizing the country and, thus, reducing the risk of a new attack by political barbarians.

Haddad wants to tax the investment funds of the rich, the so-called exclusive funds, the privilege of the most indecent ones. Want to tax betting sites. He wants to put an end to other tax exemptions and make some, already disallowed by the Justice, end up earning some money for the Treasury (they are not yielding yet).

It will have to deal with the difficult problem of ending exemptions (less taxes) on the payroll of certain sectors. It will have to prevent the increase in the Income Tax exemption range for Individuals, a ruinous promise of Lula’s campaign 3.

It will have to prevent the government from coming up with plans to force the growth bar through subsidies, tax exemptions such as “More Cars” or “More Fridges, bursting state-owned or public banks; to avoid the many sectoral favors that are in the Congressional voting queue.

It is necessary to increase the tax burden, no matter what name is given to the collection of more taxes, whether “reoneration”, an end to “tortoises”, tax expenditures, etc. The tax burden is just a ratio: total taxes collected divided by the value of GDP.

Is required. This is what should have been done since 2015, when it became clear that the government’s accounts had gone to shit. That is, taxing more instead of borrowing to cover the federal government’s staggering deficits.

The second semester should also see the final approval of the tax reform, under the risk of being disfigured by tax rate reductions for sectors with a strong lobby. Out of that will come not more money, but a method of making the economy more efficient. The “green transition” and industrial policy programs should also appear in the second half of the year.

All extremely important. But, in the short term, it is necessary to charge more tax.

Will Congress pass up Haddad’s tax program? Will the new alliance with the center-right support an agreement on this crucial matter? Since 2015, at least, Congress has barred taxes.

There are signs of improvement on the horizon. Longer-term interest rates have dropped significantly since April, which should start to have a practical effect towards the end of the year. The capital market starts to recover. The beginning of the Selic decline should help, although almost nothing this year. If all goes well, its effect on credit will begin to be visible around Carnival 2024. Desenrola could ease indebtedness and bank balance sheets, giving some boost to credit, which has dwindled significantly since April.

None of this goes very far, however, if there is no prospect that the government will be able to meet its fiscal targets (of reducing the deficit). That is, the success of spending containment and Haddad’s tax semester.

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