February 13, 2020

BRAZIL: Blunders and irritants reinforce focus on tax reform

BY Mario Marconini

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( 3 mins)

President Jair Bolsonaro’s recent provocation against state governors saying he would bring down federal taxes on fuel if they did the same for their VAT tax (ICMS) generated much noise but not a real change in the reform agenda. Economy Minister Guedes was assigned to make peace with the governors and the result was to reinforce the need for a tax reform. Guedes himself has been unfortunate in his use of words in the last few days but the effect was also to strengthen the prospects for a tax overhaul. On 7 February, Guedes said that public servants were parasites of a dying host (the government). Yesterday, 12 February, he said that the dollar at one point was so cheap that even maids were going to Disneyland. In both cases, the minister shows an unusual carelessness at a time when he has reason to be annoyed. He wanted the administrative reform to move but had to accept that it is no longer feasible.

Bolsonaro’s reticence to move on matters that could affect public servants was evident already in November 2019, after former President Luiz Inacio Lula da Silva was released from jail. At the time he asked Guedes to send the “softest” proposal possible for the administrative reform to avoid giving political fodder to Lula. This was also evident in regard to the so-called Emergency PEC (PEC 186/2019) which creates triggers in the event of non-compliance with the golden rule (budget deficits must not exceed investment), allowing exceptional public servant dismissals and payroll cuts. Since then, upon return from recess, there was talk of re-engaging with the administrative reform and the Emergency PEC but only the latter may survive the effort since it is needed as a means for government to comply with the mandatory spending cap and the golden rule. The administrative reform has fallen by the wayside despite efforts to apply it only to future public servants.

From a reform perspective, taxation is therefore the main game in town. As previously explained, House Speaker Rodrigo Maia favors focusing on the tax reform since it is pro-business, avoids austerity during an election year, and has support to move forward. The process has been tortuous for a while already, since the end of the pension reform in November of last year. The idea of creating a joint committee comprising the government, the House and the Senate to contrast proposals and seek a single text has not come to fruition. The idea was in fact to create the committee during the parliamentary recess, which ended on 2 February. It would seem that the committee has in practice been replaced by the sheer priority the three potential participants can jointly bring to the table.

Guedes announced yesterday, 12 February, that the government will send a proposal to Congress within the next two weeks. The announcement had a cry-wolf effect on legislators who have seen this happen before to no avail. This time it may be true since Guedes and the government have nothing else to move on and time is quickly running out on the 2019 municipal electoral calendar. Ultimately, blunders and irritants have essentially reinforced the original reform script for this year.

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