Lula Proposes Tax Hike to Bridge Budget Gap and Boost Spending in Brazil

While Congress leaders are hesitant to support higher taxation, Lula is doubling down on plans to boost spending in 2024

Lula Proposes Tax Hike to Bridge Budget Gap and Boost Spending in Brazil
By Martha Beck
September 01, 2023 | 07:47 AM

Bloomberg — President Luiz Inacio Lula da Silva unveiled his 2024 budget proposal, promising to eliminate Brazil’s growing fiscal deficit through a number of new taxes that still require approval from lawmakers.

The plan, sent to congress on Thursday, will face many hurdles. While congressional leaders are reluctant to support tax increases, Lula plans to boost public spending even more in 2024.

The 2024 budget was the most complex in Brazil’s history,” Planning Minister Simone Tebet told journalists as she outlined the proposal. She promised, however, that the government will “reach a zero fiscal deficit” next year.

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Finance Minister Fernando Haddad, speaking alongside Tebet, added that the goal of a balanced budget was approved by Lula. “If he hadn’t agreed with the idea, he would have vetoed it,” he said.

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Brazil’s fiscal performance has been quickly deteriorating since Lula took office. The primary deficit, which excludes interest payments, widened to 0.8% of gross domestic product over the past 12 months through July, according to central bank data released earlier on Thursday. That compares with a 1.3% surplus at end-2022.

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By the end of the year, the primary deficit for the central government only is expected to grow to 145 billion reais ($29.5 billion). Considering the increase in public spending expected for 2024, the government will require 168 billion reais in additional revenue in order to completely eliminate it, according to Tebet.

What Bloomberg Economics Says

“Brazil promised a balanced budget in 2024 and offered reasonable assumptions for nominal GDP growth, but markets may not buy the government’s estimates for the additional revenue meant to offset higher expenditures. We don’t think Thursday’s budget announcement will convince analysts and investors that the country will soon be done running primary deficits..”

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— Adriana Dupita, Brazil and Argentina economist

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More Taxes...

Part of that revenue is conditioned to the approval of several new taxes, mostly aimed at the country’s wealthiest individuals. Among them are levies on closed-end and offshore funds, as well as the elimination of a mechanism that reduces income tax paid by large companies.

Lula Seeks to Spend More, Close Budget Gap With Taxesdfd

Together, the measures can potentially bring in more than 30 billion reais to public coffers in 2024. Yet all of them need to be approved by lawmakers, which means they run the risk of being watered down or even completely rejected. Congressional leaders have already expressed skepticism about the tax rates outlined in the initial proposals.

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And More Spending

The economic team will also face challenges on the spending side.

The budget bill estimates a 129 billion-real increase to public spending, but Lula is likely to keep pressuring for more social outlays in 2024, when Brazil will have mayoral elections.

Brazil’s 2024 budget is the first to be drafted under new fiscal rules approved by congress and designed to shore up public finances. It sets a zero primary deficit target, with a tolerance range of minus 0.25% to plus 0.25% of gross domestic product. Economists expect Haddad to fail to deliver on that promise, possibly missing the range of tolerance as well.

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(Updates with bill sent to congress; adds detail on expected additional revenue in table.)

--With assistance from Robert Jameson.

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