Bolsonaro’s attempt to stimulate the economy would cost Brazil US$20 billion

RIO DE JANEIRO, BRAZIL – Tax cuts are likely to cost Brazil more than R$110 billion (US$22 billion) in tax revenue this year as part of President Jair Bolsonaro’s attempt to ease inflation and stimulate the economy in an election year, despite warnings from economists.

The estimated revenue loss, calculated by Reuters based on Brazilian Treasury data, includes a new government proposal to lower fuel prices still pending approval in Congress.

High inflation and an uneven economic recovery are punishing the popularity of Bolsonaro, trailing former President Lula da Silva in the presidential race. As the October elections approach, Bolsonaro’s government has increasingly adopted a policy of tax breaks.

However, more than half of the new incentives expire at the end of the year, leading analysts to warn of inflationary pressures looming in early 2023.

“We’re going to have this dilemma next year: either we’re going to have higher-than-expected inflation, or we’re going to have a worse-than-expected fiscal outlook to keep the tax breaks,” said former Treasury Secretary Jeferson Bittencourt, now an economist at ASA Investments.

The measures imply about 0.9 percentage points of inflation from this year to 2023, Bittencourt estimated, which may push Brazil’s central bank to keep interest rates higher for longer.

Monetary policymakers have raised interest rates to 12.75% from a record low of 2% in March 2021 and are poised to do so again this week.

“You solve one problem in 2022 but create a bigger one in 2023,” said XP Investimentos economist Tatiana Nogueira.

The tax breaks imposed by Bolsonaro this year range from reduced import tariffs and industrial taxes (IPI) and even a special tax regime for soccer clubs. Brazil’s IPI tax applies to industries that manufacture and import manufactured goods, such as refrigerators, cars, air conditioners, and televisions.

This year, more than half of Brazil’s revenue loss will come from tax cuts and state subsidies to curb rising fuel prices, which are expected to cost some R$64.8 billion.

In March, the special secretary of Finance and Budget, Esteves Colnago, criticized gasoline tax exemptions mainly benefiting middle- and upper-class families and not the neediest Brazilians.

Even this cost relief could soon be offset by a price increase by the state-owned oil company Petrobras, which sets domestic fuel prices in line with those of the world market.

Petrobras last raised fuel prices in March. The fuel importers association Abicom estimates that they are now 17% behind the world references.

With information from Ámbito