In the minutes of the Monetary Policy Committee (COPOM), the Committee warns that changes in parafiscal policies or the reversal of structural reforms, which lead to a less efficient allocation of resources, can “reduce the power of monetary policy.”
The first comment (Effective harmony (of powers) from fantasy to reality) dealt, preliminarily, with the occurrence of (concrete) facts that will lead to an increase in the business tax burden.
Against facts, there is no argument. Some more that support the assessment (conclusion) were brought to the debate.
Marcos Mendes, an associate researcher at Insper and organizer of the book “Para não esquecer: políticas públicas que empobrecem o Brasil,” affirms that “those who do minimally reliable accounts, in the market and in academia, know that an increase in the public deficit of more than R$ 90 billion will generate a strong increase in debt, interest, and inflation, bringing down growth. Given the known figures and the open doors to the unknown, this Proposal of Constitutional Amendment (PEC) will not cost less than R$ 200 billion. It looks like a truck going downhill – and with a brake problem.” (published on the PCO website on 12/14/02).
These warnings are reinforced by the Quarterly Inflation Report released on Thursday, December 15, by the Central Bank, when it states that “there is high uncertainty about the future of the fiscal framework” and that it will remain ‘vigilant’ as to the impacts of fiscal stimulus in 2023 and its transmission to economic activity and, as a result, to inflation.”
In the minutes of the Monetary Policy Committee (COPOM), the Committee warns that changes in parafiscal policies or the reversal of structural reforms, which lead to a less efficient allocation of resources, can “reduce the power of monetary policy.”
In the Central Bank’s view, presented in the aforementioned report, there is a concern with subsidized credit. This analysis was included in the document, which brings a complete picture of the economic scenario and the balance of risks for inflation. In addition, in one of the excerpts, the Central Bank says that projections for inflation depend on considerations about the evolution of fiscal and “parafiscal” policies.
When asked to detail what the “parafiscal” policy mentioned in the document would be, Campos Neto explained “that it was the amount of credit subsidized by the government.”
For Campos Neto, this type of credit reduces the power of the Central Bank’s interest rate policy to fight inflation. “The decrease in subsidized credit had a great importance and relevance in the decrease of the neutral (interest) rate, and we understand that it also affects the power of monetary policy.” (more details in “The primer of warnings” from the president of the Central Bank to Haddad at the Treasury and Mercadante at the BNDES, in History, by Adriana Fernandes – 12/14/22 -Estadão).
Other relevant data, which corroborate the Central Bank’s concerns, were brought by the newsletter Exame Invest of 12/14/22:
“The average growth in the value of food and beverages in the last 12 months reached the milestone of 8.05% above the official inflation. And, according to the IBGE, the items probable to be gifted on this date will also make Christmas more expensive”.
Among the most significant price increases are:
- Onion (137.74%)
- Fruits (35.21%)
- UHT milk (26.04%)
- English potatoes (22.75%)
- Chicken egg (19.79%)
- French bread (19.48%)
- Cheese (13.92%)
- Olive oil (8.85%)
- Fish (6.24%)
The basic food basket has risen twice the inflation rate in less than a year and already consumes about 50% of the minimum wage. The increase of some of the most popular items in the basket helps to reinforce this shock, as is the case of coffee, milk and its derivatives, which have already increased 15%, 77%, and 39%, respectively.
Shocks like these are profoundly impacting the purchase decision process of people and, consequently, how companies need to respond to this scenario.
Besides these macroeconomic scenarios, we cannot ignore the impacts of Brazilian politics. Márcio Freitas (FSB Comunicação’s political analyst, in the Newsletter Bússola da FSB Comunicação of 12/16/22), in an excellent article entitled “O minueto de Lira e Lula,” very well defines the Brazilian political spectrum:
“The political class undoubtedly has a very keen sense of the possibilities and means of its self-preservation. It develops a powerful force of attraction and absorptive capacity that is only rarely ineffective, even in view of its most irreducible and consequential opponents,” Robert Michels declared, speaking about the iron law of oligarchies. In the form of an Italian saying: “cambia il maestro di capella, ma la música é sempre quella.”
Well, back to the heart of our comments.
After the elections, statements and actions presented by Lula’s transition team increased the fear of a more statist government with higher expenses. The Ibovespa, the main index of B3, the Brazilian stock exchange, lost the equivalent of R$ 577 billion in market value since October 21, the last time it hit 119,000 points. That’s right, the stock market has lost almost half a trillion Brazilian Reais since Lula’s election (and we still have market companies recommending investments in variable income, as if the expectation for 2023 were a boom. The unwary should beware). The calculations are from the TradeMap investment platform and consider the variation up to Friday’s closing (12/9).
In an article by journalist Eduardo Negrão, published in Jornal Da Cidade on 12/13/22, “Fernando Haddad (PT) said on Friday (09) that a new fiscal rule must be established, replacing the spending cap, and to do so, the creation of a new tax is necessary.
The transition cabinet has worked in recent weeks on mapping out revenue enhancement measures for the federal government in order to reduce the primary deficit in an environment of higher spending.
These are measures to (un)stimulate (sic) the non-payment of taxes:
- in this sense, there are proposals to change the form of correction of tax debts, with the incidence of compound interest instead of simple interest, which would require a change in the National Tax Code.
- it is also proposed to rethink the scope of the “tax secrecy” concept.
- it is suggested to eliminate taxation on companies’ presumptive profit, reduce the reach of Simples Nacional, and institute progressive taxation on corporate profits.
- regarding individuals, the proposal is to reach a final rate of 35%, something that was already being studied by Lula’s campaign.
- there is also the idea of taxing dividends, with a table of incidence similar to that of taxation of individuals.
- taxing the legal entities of regulated professions used and approved by the labor reform (outsourcing of middle and end activities).
- running alongside, the convenience of whether or not to renew the tax reduction on fuels, which expires at the end of the year.
Therefore, for 2023 and 2024, we will have: 1st) high interest rates with the maintenance of the SELIC rate around 13.75%; 2nd) increase in default; 3rd) high inflation rate; 4th) falling consumption; 5th) low growth; 6th) high exchange rate; 7th) rising unemployment rate; 8th) government subsidies with the fiscal imbalance outside the curve of fiscal responsibility. (That’s not what we applaud, but those are the facts…)
So, be prepared. MORE TAXES TO COME.
