Brazil: To investors, Minister Guedes questions accusations of “fiscal populism”

On Wednesday, August 3, Brazil’s Economy Minister Paulo Guedes said the Brazilian economy is beginning a “long economic growth cycle” and walks against most developed nations in the world, which started a process of high inflation and low growth.

In a panel at Expert 2022, an event organized by XP Investimentos in São Paulo, Guedes highlighted signs of reduced inflation in the country and rising employment data to support the optimistic view and stated that Brazil is in fiscal balance.

“An economy moves in an N-dimensional space. In all dimensions, we are moving forward,” Guedes told an audience of investors and self-employed agents who applauded him fervently at several moments during the panel.

“Brazil is doomed to grow ten years in a row. It’s going to grow anyway. Let the ‘but’ class talk. ‘Unemployment is down, but…’, ‘growth is up, but…’, ‘inflation is coming down, but…’. Forget the ‘but crowd’,” he said in provocation to journalists and press outlets.

“We have resilience; we went through the first [covid-19] wave, Brazil had a safe return to work, unemployment plummeting. We are advancing in all dimensions”, he stressed.

The minister also took the opportunity to criticize the federal government’s accusations of “fiscal populism”, which intensified after the approval of the PEC of Precatórios last year and the PEC of Aids in July of this year.

The two measures modified the spending cap, the country’s main fiscal rule, which limits the evolution of public spending to inflation growth, and increased the room for new spending for the administration of President Jair Bolsonaro (Liberal Party – PL) on the eve of the elections.

“They spent last year saying: fiscal populism, fiscal populism. It came at the end of the year, the first surplus since 2013. Where is the fiscal populism? Where is the fiscal populism of a government that generates a surplus for the first time since 2013?” he questioned.

“Don’t believe the narratives. The noise of politics is hellish because Brazilian democracy is vibrant; it is polarized at the moment – we will get over it one day because we are all Brazilians. Pay attention to the facts. Economic growth going up, inflation going down, unemployment going down, investments going up, these are the facts,” he pointed out.

Guedes defended that the country’s fiscal situation is “strong” and “balanced” and evaluated that the monetary policy “is also in place”. On Wednesday, August 3, the Central Bank’s Monetary Policy Committee (Copom) announced the country’s new interest rate, in line with market expectations, with a further 0.5 percentage point increase, to 13.75% per year.

The minister acknowledged that the government “violated the spending ceiling” but justified the move as a way to serve the poorest portion of the population during the Covid-19 pandemic and in the face of the effects caused by the war between Russia and Ukraine.

“‘Did you violate the ceiling?’ The answer is yes, we violated the ceiling. The ceiling is to prevent the growth of government. We are liberals; we want to reduce the burden of government. So the ceiling is to keep the government from growing.

“When a disease comes, I must transfer money to the people. Am I making the government grow? No. I am giving aid to the weakest while the disease is there or while the Ukrainian war is there so they can survive. I’m not making the government grow,” he argued.

“And more than that: it’s strictly within the extraordinary unbudgeted revenues. So, thanks to our administration, the state-owned companies that were making a loss of R$40 billion (US$7.6 billion) a year are now making a profit of R$188 billion a year. That’s R$228 billion more. If you have these resources, we will take part of the dividends, which are ours, the government’s, and we will transfer them to the poorest people,” he continued.

To circumvent the restrictions imposed by the spending cap and by the electoral legislation itself and to increase from R$400 to R$600 the installments paid in the Auxílio Brasil program, besides guaranteeing the payment of a bottle of gas every two months to the beneficiaries of Vale Gas, offering a R$1,000 “trucker voucher” to independent transport workers and emergency aid to taxi drivers, the federal government asked for the recognition of a state of emergency, under the allegation of the substantial rise in fuel prices due to the war in Ukraine.

“A lot of people think: ‘ah, they did it once, they will do it twice, three times, four times’. No. We are there when you have a war, like now, and disease like last year. The safe hand of the state, the friendly hand of the liberals for when there is a need. But not the hand to fondle vagrants, thieves, corrupt people, loss of money,” said the minister, cheered by the audience.

The panel was conducted by Rafael Furlanetti, institutional director, Caio Megale, chief economist, and Júnia Gama, policy analyst, all from XP.

The trio questioned the minister about how the government would behave in the face of the growing pressure for more expenses, which range from promises to maintain the Auxílio Brasil at R$600 in 2023 to readjustments to public servants and correction in the Individual Income Tax table. Guedes is betting on tax reform.

“We have the commitments and the tools. Our commitment is the following: responsibility to future generations. If we maintain our balance during the Covid pandemic and this Russian war, why won’t we keep it now that the situation is improving?

“The commitment is there. Is it possible to give the emergency aid now of R$600 forever, for example? Or is it possible to adjust the Income Tax table? The answer lies in a tax reform already in Congress and has already been approved in the House”, he said.

The idea would be to adopt a 15% tax rate on dividends that exceed R$400,000 per month. “You don’t have to be ashamed of being rich; you have to be ashamed of not paying taxes,” he justified to the audience of investors.

“With tax reform, I take 60,000 people alone, put that tax up there and pay it. Interestingly, since you needed a source, the income tax already sent that source. It is already stamped. If you approve the tax reform, you have the income tax adjustment and the additional R$200 [from the Brazil Aid]. It is perfectly balanced,” he said.

Paulo Guedes also said that if President Jair Bolsonaro (Liberal Party – PL) is reelected in October, he will end taxes levied on production to reindustrialize Brazil. During the panel, he promised to zero the Tax on Industrialized Products (IPI) but gave no details on how he intends to promote the measure.

At the end of last month, the government issued a decree determining a 35% reduction of the IPI on products not manufactured in the Manaus Free Trade Zone. Before, in February, a 25% cut had already been made.

With information from InfoMoney