RIO DE JANEIRO, BRAZIL – Brazil would have ended 2021 with a gross debt of 63.6% of GDP (Gross Domestic Product) if tax benefits had remained at 2% of GDP between 2012 and 2021, according to government calculations obtained by Folha.
The value is 20.7% lower than the effective level of the country’s debt, which closed last year at 80.3% of GDP – a level considered high for emerging economies like Brazil.
Technicians from the Ministry of Economy did the comparison exercise to obtain an overview of the situation of public accounts if the country had followed a regime of greater control of revenue waivers.
The ministry has already made numerous diagnoses of the problems and distortions of several of these incentives, which consume more than R$300 billion (US$62 billion) a year. But the efforts to reduce these amounts have come up against political resistance and lobbying from business sectors.
Congress and the political wing of the Jair Bolsonaro (PL) government have even gone in the opposite direction, expanding tax benefits. Last year alone, 22 new tax breaks were instituted, draining R$5 billion from federal tax revenues.
This year, the impact will be even greater, R$13.2 billion. A large part comes from the extension of the payroll tax exemption for 17 sectors, sanctioned by Bolsonaro on the last day of 2021 without any compensation measure.
Of these tax breaks, nine are considered tax expenditures, a special modality representing an indirect expense by the government to boost economic activity or meet social objectives.
Between 2005 and 2015, this type of policy gained space during the PT governments and fed the successful lobbying of business people seeking favors for their respective sectors.
As a result, tax expenditures jumped from 2% in 2005 to 4.5% of GDP in 2015, contributing to the dilapidation of federal revenues and deepening the gap in the accounts.
Since then, several attempts to reduce these benefits have failed amid political pressure from the benefited sectors. Until 2020, they remained close to 4% of GDP.
The creation of new benefits, on the other hand, has been an escape valve from the restriction imposed by the spending cap, the government’s fiscal anchor that limits the growth of expenses to the inflation rate.
If, on the one hand, the expenses are locked in the ceiling, on the other hand, the fiscal rule does not represent an obstacle to the creation of new waivers.
In one of the efforts to point out distortions in tax expenditures, the Secretariat of Evaluation, Planning, Energy, and Lottery of the Ministry of Economy suggested, in 2019, reversing part of the exemption of the basic food basket, directing the resource saved to Bolsa Família (Family Grant), later replaced by Auxílio Brasil (Brazil Aid).
According to the agency’s technicians, the measure would be more efficient in the fight against poverty because the exemption of the basket ends up including products consumed only by higher-income families, such as cheese or salmon fillet. The change, however, did not move forward.
Another study from 2021 pointed out problems in the absence of limits for deducting medical expenses from the IRPF (Individual Income Tax), which ends up benefiting the upper echelons, who can afford health insurance or private medical care.
Economist Alexandre Manoel, chief economist at AZ Quest and former Secretary of Evaluation and Planning of the Economy, says that Brazil has been focusing fiscal adjustment efforts for five years on controlling spending, a prescription that is showing signs of exhaustion.
For him, evidence of this is the electoral debate, in which most candidates defend, with their particularities, greater social spending and investments.
“It seems to be the maximum fiscal adjustment that we can achieve. With this adjustment on the expenditure side, which was not small, with this decrease in discretionary spending, the machine is already at its limit,” he says.
Meanwhile, according to Manoel, few adjustment measures were on the revenue side. “There are policies with small, negligible, or nonexistent effects from the job generation point of view. The majority of tax benefits were granted without established goals and control,” he criticizes.
The economist, however, recognizes the political difficulties in advancing this agenda, which has “diffuse benefits” for society but affects the concentrated interests of a few segments with power to exert pressure.
Last year, amid negotiations to extend the emergency aid for vulnerable people affected by the Covid-19 pandemic, Economy Minister Paulo Guedes and his team managed to insert in a PEC (proposal of amendment to the Constitution) a provision that obliged the government to present a plan for the gradual reduction of tax expenditures.
According to the text, the plan should be sufficient to bring these incentives to 2% of GDP in eight years.
In the vote, Congress shielded a series of benefits, such as the Manaus Free Trade Zone, the benefits to philanthropic entities, and the exemption of the basic food basket, among others. The sum of the exceptions reached about 2% of GDP – half of the existing incentives.
Under these restrictions, the government frustrated expectations of a more aggressive cut. Presented in September of last year, the dehydrated plan listed supposed cuts in benefits that, in fact, already had an end date.
At the time, a more benevolent interpretation by the government’s legal bodies suggested the target cut should only apply to the 2.06% of GDP in tax expenditures not excepted by the Legislature. In practice, the legal obligation was a cut of only R$4.2 billion over eight years.
Congress also sponsored a drop in the accounting volume of tax benefits when it passed a law last year ending the tax-spending status of Simples Nacional and MEI (individual microentrepreneur).
These special regimes allow micro-entrepreneurs and companies with annual gross revenues of up to R$4.8 million to collect less tax in a simplified manner. In the Draft Budget for 2022, the joint waiver was calculated at R$86 billion – between 0.8% and 0.9% of this year’s GDP.
After discounting this amount, the estimated tax expenditure for the year fell to 3.3% of GDP, although Simples and MEI continue to exist.
To overcome the political barriers, Manoel proposes a “horizontal reversion” of the benefits, with an increase in some taxes to minimize the size of the incentive for the benefited companies.
He cites the linear cut in the IPI (Tax on Industrialized Products) rates announced by the government at the end of February. Although it is a tax reduction, it meant a smaller benefit to the Manaus Free Trade Zone, which already had its products exempt from the tax. The measure angered parliamentarians from the Amazonas state legislature, who are still trying to get it reversed.
“The discussion has to be done clearly. In general, the candidates promise more statehood. Although people don’t want to hear it, we have to say clearly that this means more tax burden,” says Manoel.
With information from Folha de S.Paulo