tax and tax rules do not guarantee a “passport to the future”

Ensuring sustained growth above 3% per year and inflation within the target over the next ten years will not depend exclusively on the tax reform, which is being processed in the Senate, and the fiscal framework, approved by Congress and already in force.

“We need to go further”, says Sílvio Campos Neto, economist and partner at Tendências Consultoria. Other necessary advances are a firmer fiscal arrangement; a Central Bank acting more calmly, without government interference; carry out administrative reform and promote trade openness, reducing barriers.

According to Alessandra Ribeiro, also an economist and partner at Tendências Consultoria, in this scenario, domestic politics has, over the years, approached “great moderation”, that is, right and left have come closer in supporting structural reforms.

“In this scenario, in addition to the contemplation of more robust effects of the tax reform on the potential Brazilian GDP, with minor exceptions in relation to the text approved in the Chamber and, consequently, a lower rate of Value Added Tax (VAT), there are the effects of approval of the trade agreement between Mercosur and the European Union”, says the economist.

For this year, according to the latest Focus report, the median growth expectations indicate an increase of 2.92% in GDP, inflation of 4.86% and a dollar at R$4.95 on December 31st.

For 2024, the midpoint of growth projections is at 1.5%, inflation at 3.86% and the dollar at R$5 at the end of the year.

Advances in the fiscal area and tax reforms

The achievement of Tendências Consultoria’s basic scenario, which projects an average growth of 2% per year between 2023 and 2032, will also depend on advances in the tax area. This scenario has a 65% probability, according to the consultancy.

“This scenario was constructed based on the government’s relative success in approving measures that, ultimately, reinforce the Brazilian State’s revenue power. This political component would allow the primary result to return more quickly to positive territory, contributing to the fall in the debt rate expected for the coming years”, explains Ribeiro.

The advancement of tax reform is also important, highlights Campos Neto, even with the changes introduced throughout the project. One of them was to make VAT dual, which will replace PIS/Cofins, the Tax on Industrialized Products (IPI, federal), on services (ISS, municipal) and on the circulation of goods and services (ICMS, state).

“A single VAT would be better, but the reform aligns Brazil with countries that have the best tax practices. It also eliminates the tax war, greatly reduces the chance of judicialization of tax issues and brings gains in efficiency and productivity”, says the economist.

One concern of Tendências is in relation to the collection recovery agenda. The consultancy also works with a more pessimistic scenario, with a 25% probability of occurrence, in which the government suffers repeated legislative defeats in its attempt to restore tax revenue. It is a panorama that does not include the progress of this reform.

According to Ribeiro, the government’s perception of immobility in the revenue field would bring a new wave of distrust on the part of economic agents.

“Political pressure, then, would appear in attempts to change fiscal targets and other policies, with emphasis on monetary policy via the appointment of BC directors, which would be perceived as an inflection of the pragmatism of the economic team”, he mentions.

Smoother relationship with the Central Bank

One of the needs to ensure a more optimistic scenario for the Brazilian economy, according to experts interviewed by People’s Gazetteit is a calmer relationship between the government and the Central Bank.

“The technical vision must prevail over politics”, explains the senior economist at the Julius Baer Family Office (JBFO), Gabriel Fongaro. Until now, with President Roberto Campos Neto at the head of the institution, the technical vision has prevailed – but not without hiccups.

Since the beginning of his term, President Luiz Inácio Lula da Silva (PT) has directed heavy criticism at the leader of the monetary authority. At the beginning of the month, for example, Lula expressed his willingness to continue fighting with Campos Neto.

“The citizen of the Central Bank needs to know that he is the president of a Central Bank of Brazil and that interest rates need to be lowered. How is a businessman going to invest? How is a businessman going to build a factory? How is a businessman going to make any investment if he is going to take a very high interest rate. So, we will continue fighting”, stated the president.

But the drop in inflation compared to the last 12 months, the improvement in growth expectations and the improvement in Brazil’s credit rating by the risk rating agency Fitch have shown that Campos Neto is right.

A sign of moderation in this tension came last week, with Campos Neto and Lula meeting for the first time since the beginning of the government.

Another concern is the profile of the next appointments to the board of directors of the Central Bank, which makes up the Monetary Policy Committee (Copom), responsible for defining interest rates. There is fear of appointing names with a more heterodox vision, more complacent with inflation.

Lula’s first appointments to the monetary authority were Gabriel Galípolo, former executive secretary of the Ministry of Finance, to the powerful monetary policy portfolio; and Ailton de Aquino, a career BC employee, for supervision.

Galípolo said during a hearing in the Senate that monetary policy must be aligned with government policy. “It’s a more worrying vision,” says the JBFO economist.

The Tendências partner highlights that a Central Bank more aligned with the government would facilitate the realization of a more pessimistic scenario for the Brazilian economy, with the exchange rate remaining in the range of R$6 at the end of next year and with an average growth of 1.4% over the next ten years.

Reforms in the administrative area of ​​government

Another need for a more optimistic scenario to prevail in the Brazilian economy is administrative reform. “It will be something inevitable in this or the next governments”, says the chief strategist at RB Investimentos, Gustavo Cruz.

Since 1998, the only government to record a drop in public service spending was that of Jair Bolsonaro (PL). For this year, the trend is towards an increase, due to the granting of a linear adjustment of 9%.

Two factors in Cruz’s assessment contribute to reinforcing the problem with public service: rapid career growth and more rigid stability.

Spending on active and inactive public service in Brazil reaches 13.5% of GDP, while the average for Organization for Economic Cooperation and Development (OECD) countries is 9.3%.

A project to contain super salaries in the public sector has been in progress in Congress since 2016. The Senate listed 39 types of extra income that fall outside the civil service ceiling, which is R$41,600, the salary of a minister of the Federal Supreme Court ( STF).

Nine were authorized by the Senate. The project went to the Chamber, which increased the number of salaries outside the ceiling to 32. Approved by the deputies, the proposal returned to the Senate, where it has been stuck since 2021.

“It’s a considerable burden on public accounts”, comments economist Rafael Perez, from Suno Research. He points out that one of the barriers to discussion is the strong lobbying of the public sector, especially in the Judiciary and Executive. But there is a favorable aspect: the administrative reform proposal has the sympathy of the president of the Chamber, Arthur Lira (PP-AL).

Promote commercial openness

Another necessary advance, according to Campos Neto, from Tendências Consultoria, is to promote greater commercial openness in Brazil. Brazil is still a country very closed to exports and imports.

In the second quarter, trade flow (sum of exports and imports) corresponded to 35.2% of GDP. It is the lowest percentage since the first quarter of 2021, according to IBGE data.

The country has few agreements with other countries. In addition to Mercosur and some Latin American countries, according to the Ministry of Development (MDIC), it includes Guyana, Saint Kitts and Nevis, Suriname, Cuba, India, Israel, countries in Southern Africa, Egypt and Palestine (the latter still without validity).

The boldest agreement, between Mercosur and the European Union, unlocked during Jair Bolsonaro’s government, faces resistance from European countries, such as France, for its implementation. Agricultural and environmental issues are behind the strong opposition.

But the problems are not just external. The president of the Brazilian Foreign Trade Association (AEB), José Augusto de Castro, recalls that trade opening is a two-way street, facilitating access to other markets, but also enabling access to the domestic market in other countries. At this point, Brazil suffers from competitiveness problems.