Economy Minister: Creating New Funds to Aid States Could Bankrupt Federal Government

RIO DE JANEIRO, BRAZIL – Brazil’s Minister of Economy Paulo Guedes said yesterday, September 14th, that the federal government could become bankrupt if federal funds were created to compensate states and municipalities for the loss of revenue caused by the tax reform in Congress. The statement was made during the online event “The municipalist perspective on Tax Reform”, organized by the National Confederation of Municipalities (CNM).

According to the Minister, the federal government should share resources with states and municipalities, but it can not offer a guarantee of revenue collection. He said that to guarantee transfers to states and municipalities, increasing the federal government’s indebtedness over the years, would be an attack on future generations. “There have been many suggestions to make a revenue stabilization fund. I think it’s very reckless,” he said.

Guedes pointed out that the equivalent of ten percent of the Gross Domestic Product (GDP) was spent on measures to tackle the Covid-19 pandemic. “If we announce that we are creating funds, financed by the federal government, to ensure another eight percent of GDP, Brazil will face tragic fiscal sustainability problems. The central government may collapse and there will be a shortage of money for everyone, because we will enter a fiscal implosion route. We are placing all our efforts on the edge of a volcano. We must have great fiscal responsibility,” he argued.

Guedes also argued that the expenses caused by the pandemic should be paid by the current generation, using oil exploration and privatization resources. “The federal government must not bend, at the risk of breaking, on the pretext of helping our contemporaries. This would be cowardice of our generation, a lack of courage on our part to pay for this fight against the coronavirus. If we are fighting fiercely for the health of Brazilians and the preservation of our jobs, our generation must address it,” he said.

According to the Minister, through the measures to tackle the pandemic the government was able to protect jobs, provide assistance to Brazilians in vulnerable situations, and guarantee resources for health. “Today the hospitals have beds. No Brazilian is missing out on health due to lack of beds,” he said. But he stressed that these expenditures were for an emergency situation and that fiscal responsibility must be maintained.

The Minister further said that the new Fund for Maintenance and Development of Basic Education (FUNDEB) requires R$250 billion and the agreement on compensation for losses produced by the Kandir Law, which exempted exports from the state Tax on the Circulation of Goods and Services (ICMS), an additional R$50 billion. “No one has proven to be more federalist and to help states and municipalities than this government. But we need to be wise because it is not a horn of plenty,” he highlighted.

Guedes said that the federal government would like a broad tax reform, with the involvement of the federal, state and municipal governments, but respects the Mayors’ decision to either join or reject the tax simplification plan. “We would like us all to be together in this. We support the broad reform but we also support the Mayors’ decision. They decide if they want to join our new tax on goods and services. Obviously, the Legislature may look at it differently,” he said.

In July, the first part of the federal government’s tax reform proposal was sent to Congress, which provides for the unification of two federal taxes, the Program for Social Integration and Training of Public Servants (PIS/PASEP) and the Contribution on Social Security Financing (COFINS). The two taxes will be extinguished to make room for a new Social Contribution on Operations with Goods and Services (CBS), with a single 12 percent value-added tax rate. The government still intends to propose other parts of the reform.

According to the Minister, through the reform the federal government intends to reduce and simplify tax rates. “We will simplify and reduce some tax rates for companies that create jobs and innovate and attend the great mass of Brazilian workers. We will increase taxes on dividends, which are the people who can pay; reduce them for companies,” he said.

Guedes also said that if a tax is created it will be possible to eliminate others “six, seven or eight”. “When everybody pays, we pay less” he said. The Minister has advocated the creation of a tax on online transactions to offset the reduction of payroll tax.

According to the Minister, the pandemic has left two “extraordinary” lessons. One is the political class’s decision-making power to determine where to direct public resources. And the second is the inefficiency of indexation of health and education spending. “The political class has the power to decide increases in spending year after year. It is the duty of the political class not to ignore imortant needs. The essence of politics is to decide where to place the money,” he said.

Also at the event organized by the CNM, the President of the Chamber of Deputies, Rodrigo Maia, said that the tax reform will produce social justice and improve the business environment in the country. According to him, the majority of taxes are collected by the federal government, while taxation of the provision of services to the population is left to municipalities. “The tax reform will permit organizing the five imposts now burdening goods and services – IPI, PIS/Cofins, ICMS and ISS. This guarantees that the tax base becomes everyone’s – the municipalities, states and federal government, each with its own rate,” he said.

Maia criticized Guedes’ proposal of creating the tax on online transactions. “Now the CPMF discussion is back. Besides the fact that the tax is very bad, one will still think of a tax that will concentrate all its revenues in the federal government. Once again creating distortions. It’s a good thing that the CPMF has little chance of being recreated, at least this year that I’m in the presidency,” he said. He considers the tax as regressive, because it taxes more the “simplest population to the detriment of the Brazilian elite.”

Source: Agência Brasil