The Minister of Finance, Fernando Haddad, confirmed on Wednesday night in a speech on national television that the government’s spending containment package will generate savings of R$70 billion over the next two years.
At the same time, he announced the increase in the income tax exemption range for those earning up to R$5,000 and said that the initiative will be offset by increased taxation for those earning above R$50,000 per month.
Among the containment measures, Haddad mentioned that new rules proposed for the adjustment of the minimum wage — which impacts the government’s pension expenses — will ensure that it will continue to rise above inflation, in a “sustainable manner and within the new fiscal rule”. He did not detail these rules, but in recent weeks indications were that the same real growth ceiling for the minimum wage as foreseen by the fiscal framework for government expenses will be established, at 2.5% per year.
As reported earlier by Reuters, the minister also said that measures are planned such as reducing the payment of the salary bonus only to those earning up to R$2,640, the correction of the bonus for inflation in the coming years until the benefit reaches the limit of one and a half minimum wages and the growth of the global amount of parliamentary amendments below the limit of fiscal rules.
A minimum age for entering the reserve and limitations on transfers of military pensions, among other adjustments, will also be proposed for military pensions.
“These measures I mentioned will generate savings of R$70 billion over the next two years and consolidate this government’s commitment to the country’s fiscal sustainability,” stated Haddad. “To guarantee the results we expect, in the event of a primary deficit, the creation, expansion or extension of tax benefits will be prohibited,” he added in the statement.
The minister confirmed that anyone earning up to R$5,000 per month will no longer pay Income Tax.
“The new measure will not have a fiscal impact, that is, it will not increase government spending. Because those with rent greater than R$50,000 per month will pay a little more. All without excess and respecting established international standards”, said Haddad.
According to the newspaper Folha de S. Paulothe minimum rate for those earning more than R$50,000 per month will be 10% on total income and will include taxation on income that is currently exempt, such as, for example, dividends.
President Luiz Inácio Lula da Silva’s campaign promise, the IR exemption for income of up to R$5,000 per month was confirmed this Wednesday afternoon by members of the government, but the reaction in the markets was negative. Currently, monthly amounts of up to R$2,824.00 are exempt, equivalent to two minimum wages.
READ MORE: See the full text of Haddad’s speech about the IR exemption and other measures
During the afternoon, agents assessed that the proposal to increase the exemption range — which could impact government revenues — went against the government’s previous signals that the package would focus on measures to contain spending.
The malaise caused the spot dollar to soar and end at its highest value in history, at R$5.9141, with the North American currency for December quoted at R$5.9595. The Ibovespa fell 1.73%, to 127,668.61 points, while the Brazilian interest curve began to price even greater chances of the Central Bank raising the Selic basic rate by 75 basis points in December.
Congress
President Luiz Inácio Lula da Silva and Haddad met at Palácio do Planalto with the presidents of the Senate, Rodrigo Pacheco (PSD-MG), and the Chamber, Arthur Lira (PP-AL), as well as leaders of the government base in Congress, to present the package.
After the meeting, the government leader in the Chamber of Deputies, José Guimarães (PT-CE), said that the focus will be on voting on proposed adjustments to government programs over the next three weeks. According to him, the texts should arrive at the Chamber “at any time”.
According to the leader of the PT bench in the Chamber, Odair Cunha (MG), a “constitutional commandment” establishes that the government needs to send the proposal for a complementary bill for the Income Tax reform this year. He also reiterated that the Executive asks Congress to vote to contain expenses in 2024.
The partner and head of Analysis at Levante Investimentos, Enrico Cozzolino, expressed skepticism in a conversation with Reuters after the package was announced.
READ MORE: Dollar touches R$5.99 with market reaction to tax package and IR reform
“What we see is the government’s difficulty in cutting spending, in taking unpopular measures. He always tries to strike a populist tone,” he said.
For the head of Allocation at W1 Capital, Victor Furtado, there are doubts about the execution of the package.
“We believe that there are clear challenges ahead, even though this saving of R$70 billion helps in complying with the fiscal framework defined last year,” he stated, in a comment sent to clients. “We do not see structural changes that could put public debt on a more sustainable trajectory in the long term,” he added.
