Brazil's Current Economic Growth and Tax Revenue Dilemma

Via Syndicated Feed

Cover Image Attribute: Image of Rio De Janeiro skyline by David Mark from Pixabay

 Amidst Brazil's astonishing economic surge in the initial half of this year, there has been a substantial dip in tax revenue, casting doubts on the government's audacious fiscal targets and causing turmoil in the plans for an ambitious tax reform.
The disparity between the unexpectedly robust economic growth and the disappointing government revenue can be predominantly attributed to the driving forces behind Brazil's recent economic outperformance. According to officials, a remarkable harvest at the outset of 2023, coupled with vigorous oil and mining production, has set the stage for the economy to expand by over 3% this year. This stands in stark contrast to the majority of economists' predictions of less than 1% growth in January.
Nevertheless, Brazil's commodity exporters bear a lighter tax load than retailers and heavy industries, amplifying the gross domestic product (GDP) more than the government's revenue, as per Rafaela Vitoria, the chief economist at Banco Inter.
"We don't expect a change in this dynamic. Tax collection in the second half (of 2023) will remain stagnant," stated Vitoria. "The GDP subject to taxation is not expected to rebound, especially in manufacturing and retail."
The Finance Ministry of Brazil anticipates that a significant portion of this year's unexpected growth will be driven by the relatively undertaxed agricultural sector, confirmed by an anonymous ministry official.
With the central government's revenue declining by 5% through June compared to the previous year in real terms, the Finance Ministry has broadened its estimate for this year's primary deficit to 145 billion reais, equivalent to 1.4% of the GDP. Consequently, the ministry is hastily implementing emergency measures to bolster tax revenue by next year in compliance with new fiscal regulations that necessitate the elimination of this deficit.
According to two other ministry officials, this strategy has left some individuals within the Finance Ministry needing clarification, who perceive the rush for additional revenue as undermining the broader initiative to revamp the tax system in Latin America's largest economy. Following significant progress in Congress toward consolidating consumption taxes, Finance Minister Fernando Haddad vowed to initiate income tax reform in the latter half of the year.
However, President Luiz Inacio Lula da Silva has since moved to increase taxes on closed-end investment funds through an executive order and proposed the elimination of a tax loophole for shareholder payouts, as first reported by Reuters in July. These measures were initially scheduled for discussion as part of Congress's comprehensive income tax reform but have now taken precedence.
"Given the problem with next year's target, they're trying to bring everything forward, at whatever cost," commented one of the Finance Ministry officials, requesting anonymity. "The idea of doing a thoughtful (income tax) reform, like what's been done for consumption taxes, is going to be tough."
The other official cited an aversion to curtailing public spending as the reason behind the urgent drive to boost revenue.
"The fiscal shortfall and unwillingness to cut expenses has left no other alternative," the source declared.
The Finance Ministry declined to provide a statement.

Impact of Oil Prices

Haddad acknowledged last week that budgetary pressures had compelled the government to expedite measures that would have otherwise been postponed until the following year when discussed in Congress.
While public revenues have consistently fallen short of private predictions this year, the subpar collection figures were partially unforeseen.
The baseline for 2022 received a boost from oil auctions and the privatization of the power utility Eletrobras, along with substantial dividends from state oil company Petrobras and state financial institutions BNDES and Caixa, which facilitated election-year spending.
The surge in oil prices also augmented the Petrobras dividend and state royalties. Nevertheless, crude prices have moderated this year.
Brazil's progress in combating inflation, which decreased from 5.8% last year to 3.2% in the 12 months up to June 2023, adversely impacted public finances, given that the country's tax collection is inherently skewed towards consumption.
"The 2022 tax collection was heavily influenced by oil prices and inflation," observed Felipe Salto, the chief economist at Warren Rena brokerage, highlighting the silver lining of reduced borrowing costs.
With inflation under control, Brazil's central bank has initiated a cycle of reducing interest rates. This will alleviate the costs associated with servicing public debt and ultimately benefit more tax-intensive sectors such as retail and industry.
In the meantime, the Finance Ministry is focused on implementing short-term solutions for revenue enhancement while still holding out hope for a more extensive discussion on tax reform towards the end of the year, according to a fourth official, who spoke on anonymity.
"Obviously, the need to balance the budget requires you to bring forward some measures, but that doesn't prevent you from having the right structural debate later," the official concluded.

Growth Projections

Last month, Bank of America (BofA) revised its projections for Brazil's economic growth in the current and the following years, as indicated in a report released on August 28. This revision was attributed to robust carryover effects from better-than-anticipated growth in the first quarter and declining interest rates.
The U.S.-based bank now forecasts a 3.0% expansion in Latin America's largest economy this year, up from the expected 2.3%. Additionally, their gross domestic product (GDP) growth projection in 2024 has been upgraded to 2.2% from 1.8%.
This positions BofA considerably higher than the median forecast of private-sector economists polled by the central bank, which suggests growth rates of 2.31% in 2023 and 1.33% in 2024, according to a survey released earlier.
The economists at BofA, David Beker, and Natacha Perez, attributed this year's upward growth revision to stronger net exports and a less pessimistic outlook for investments, following surprising first-quarter GDP figures and recent activity data.
"Although we have barely changed our view on private consumption, the strength of the labor market continued to surprise us to the positive side," they remarked.
In 2024, the economists added lower interest rates, increased investments, and lower-than-anticipated unemployment rates should favor growth in the South American nation.
Earlier this month, Brazil's central bank initiated a cycle of monetary policy easing with a larger-than-expected 50-basis-point reduction in interest rates to 13.25%, following nearly a year of rate stability aimed at curbing inflation.
IndraStra Global Staff has not edited this story, which is auto-generated from a syndicated feed.

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