Who wins and who loses with Lula’s popular car plan – 05/25/2023 – Vinicius Torres Freire

President Luiz Inácio Lula da Silva (PT) launched his so-called popular car program. The discount would reach up to 11%. Thus, the cheapest cars would come to cost BRL 61,000, equivalent to 21 months of the average national wage or 46 months of the minimum wage.

The government warned that the plan will still have to be evaluated by the Ministry of Finance. It is not known, therefore, the size of the subsidy (tax money) that will be given to those who buy a car. Minister Fernando Haddad is unlikely to say to Lula “forget it, he has no money”. But it is dismaying that even the government is not aware of the costs and benefits (which go beyond money).

Forget for the moment that subsidy policies for cars are failures in economic, technological, environmental and social terms. Take a look at certain business numbers.

Around 50% of Brazilian households had a car in 2019, according to the most recent data from the IBGE. It is reasonable to speculate that they are not the poorest houses. Mere observation of regional inequality in automobile ownership gives a clue to the differences.

In the Northeast, there were cars in about 29% of households; in the North, 27.7%. In the state of São Paulo, 63.4%. In Santa Catarina, 75.3%. In Mato Grosso do Sul, 60.5%.

Hard to say how much “More Cars” will cost. Consider that the price discount will be the average of the tax reduction range, that sales will increase in the same proportion as this price decrease and that one takes into account the registration in April of the ten cheapest cars (Fenabrave data) .

The thing could cost around R$ 200 million per month. In one year, more than R$ 2 billion, excluding changes in sales for other reasons. It’s a bead on the napkin. By the way, will only retail have a discount? Almost half of sales are direct, to company fleets, for example. Will they have a discount?

Given the enormity of government spending, more than R$ 2 trillion this year, it seems like a pittance. It’s not like that. The government estimates that it should have a deficit of R$ 136 billion this year. According to the fiscal framework plan, the deficit would be R$ 50 billion. By a previous estimate by Haddad, of BRL 100 billion. Whatever the calculation, the minister will have to cut spending or increase tax collection by at least R$36 billion. Who pays the bill?

The recent peak of quarterly car production was in October-December 2022 (520 thousand). From February to April, there were 422 thousand. The number of direct jobs at automakers remained the same, around 101,000 workers. The industry works with an idle capacity of around 40%. If all goes well, there would be a marginal gain in related businesses. Maybe increase the supply of used cars a little. But consider that the average car financing rate is almost 29% per annum (compared to 21% in March 2019).

This popular car plan is a demagogic and more caricatured version of the government’s first industrial policy tests, which have just announced cheaper BNDES loans for industry and exporters — in a smaller part, it may even be a good thing, but details are lacking. In the recent past, there have been mistakes or disasters.

Finally, the government contradicts itself with this plan of subsidies and incentives for short-term economic activity. It loses money, but promises surpluses. It creates more sectoral subsidy, contrary to the proposed tax reform and the attempt by Treasury and Planning to reduce such benefits. It goes against the grain of the monetary policy (interest rates, of the Central Bank) of reducing activity, as it indirectly expands spending (not to mention direct and large expansion). Minister Haddad had been saying that it is necessary to reconcile monetary and fiscal policy. Hmm.

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