Author: Oscar Pilagallo

Source: ETCO Magazine, No 15, April 2010

By Oscar Pilagallo

Amid doubts about the real cost of anti-crisis measures and uncertainties about the effects of their suspension, Brazilian society takes stock of this year and a half of government action while preparing to grow again in an economic environment that will be influenced by the restoration of taxes that had been reduced. With the collapse of the United States real estate market as its epicenter, the global economic crisis peaked in September 2008, with the collapse of Lehman Brothers, synonymous with solidity on Wall Street, and the nationalization of the largest American mortgage institutions. It was an announced outcome: the economy in the USA had been growing on a fragile pillar, the indiscriminate granting of credit, including to customers known as “ninjas” (“no income, no jobs, no assets”, no income, no work , without assets).

The crisis spread quickly. Last year, the International Monetary Fund projected a 1,5% shrinkage in the world economy. This fall, however, was not uniform. Developed countries were the most affected, with a decrease of 3,8%, while emerging countries saw the sum of GDP (Gross Domestic Product) decline 1,4%. In this scenario, Brazil managed to remain afloat. The crisis - if it would not be a “little wave”, as President Lula said at the beginning - was not strong enough to sink an economy that, sustained largely in the domestic market and with public accounts under control, proved less vulnerable to adverse world situation. The result was that the GDP of 2009 had only a slight drop of 0,2%, according to the first estimate of the IBGE. Last year ended better than it started. Despite the more comfortable economic situation in Brazil, the world crisis threatened to catch the country in the balance. The Stock Exchange reflected the uncertainty that permeated the business environment. The Bovespa index, which had surpassed the level of 70 thousand points, dropped to less than 30 thousand in the first months of 2009. The industry felt the initial blow, reflected in the sharp drop in the IBGE production index (from 111,9 to89,5 , 2008 in the last quarter of 300). The automakers, for example, saw production plummet. The number of licensed vehicles decreased from almost 200 before the crisis to less than XNUMX at the beginning of last year, according to Anfavea, the manufacturers' association.

 

A package of government measures has helped Brazil to reverse this situation. To minimize the effects of the crisis, the authorities put in place a set of initiatives that offset the reduction in economic activity. Several measures contributed to the result. In his presentations, Finance Minister Guido Mantega highlights the expansionary monetary policy. He lists: there was a reduction in the banks' compulsory reserve by R $ 100 billion; a drop in the basic interest rate (the Selic rate dropped from almost 14% per year to less than 9%); transfer of 100 billion reais from the National Treasury to the BNDES; and an increase in credit in public banks (in the first seven months after the outbreak of the crisis, the increase was almost 20%, in contrast to the 2,5% of private banks) .

The most visible measure, however, was the cut of the IPI (Tax on Industrialized Products) for some sectors, a benefit that, having already been partially suspended, should be removed completely by the middle of the year. The government's response was relatively quick. In December 2008, three months after the peak of the crisis, the reduction of the IPI for vehicles was announced, with a greater stimulus for the popular and flex. Expected to last three months, the measure has been extended. From October to the end of March, sales of the most popular and flex-fuel vehicles were encouraged. In the case of trucks, the tax with zero rate is valid until the middle of the year. Later, in April 2009, the incentive was extended to other sectors, such as white goods (refrigerators, stoves, washing machines and tanks), and then to construction materials and furniture - which will be permanently reduced. After the end of the exemption, the tax on furniture returns, but to 5% (and not 10% as previously). The impact of these measures, which allowed the reduction of consumer prices, was relevant for sales. Home appliance and electronics stores, despite the 2,6% drop in average sales for the year, recorded a 15,8% increase in sales compared to December 2009 over the same month last year, according to Fecomércio. "The reduction in taxes was very important for the recovery of sales," said Abram Szajman, president of the entity that represents 150 employers' unions in São Paulo. In the automotive sector, more important due to its multiplier effect on other areas of the economy, the result was expressive.

In 2009, 2,74 million new cars were licensed, compared to 2,19 million the previous year. In recognition of the role of the public sector, Anfavea (National Association of Motor Vehicle Manufacturers) came to honor President Lula with the delivery of a thank-you plaque this year. The increase in sales, however, was not reflected in the level of employment Of course, without the tax relief, the result would be even worse, but the fact is that in 2009 only the São Paulo industry closed 98 thousand vacancies, a decrease of 4,3% in relation to the previous year.When the comparison is made over September 2008 - the zero point of the crisis - the accumulated drop is 7,3%, with the dismissal of 262 thousand employees in São Paulo. Fiesp, which produces this statistic, estimates that this year there will be a 6,3% recovery in the level of employment and that, therefore, only in 2011, with the maintenance of economic growth, the number of employees would return to the pre-crisis level. It is easier to assess the impact of measures on sales and jobs than on tax revenue. There is no doubt that the value of taxes fell last year. The question is how much of the drop can be attributed to the tax waiver. Guido Mantega has his calculation. The Minister of Finance evaluated the tax exemption in 2009 at around 25 billion reais. This would have been the total that the government failed to collect as a direct result of incentives to the industry. As an order of magnitude, the number is in line with that released by the IRS. They are just not identical because the two universes, although overlapping, are not the same: the taxes that fell due to the measures represent a part of the tax whole. Thus, according to the IRS accounts, the total collection last year decreased by 21,8 billion reais, from 737,1 billion reais to 715,3 billion reais.

 

Raimundo Elói de Carvalho, Revenue Analysis coordinator who expects a reversal of the accumulated revenue drop last year

There was a drop in the collection of almost all taxes and contributions (with the exception of social security revenue, which rose due to the increase in the wage bill), but the biggest one was that of the IPI. In 2009, the IPI yielded 22,9 billion reais for the government coffers - 8,4 billion reais less than in 2008.The relationship between tax relief and drop in revenue is direct. So much so that in January this year , when part of the IPI rates were recomposed, the volume of taxes grew to the point of breaking the record for the month, with 73 billion reais collected. For Raimundo Elói de Carvalho, coordinator of Revenue Analysis, at the end of the first quarter there should be a reversal of the accumulated drop of last year.

The question yet to be answered, however, is the impact on tax collection as a whole. Mantega himself addressed the matter by stating, during the announcement of the stimulus to the white line: "By reducing the IPI, there will be an increase in sales and the collection of other taxes will increase". But how much was this increase in sales just because of the tax relief? And how much did the collection of other taxes go up due to the reduction in the IPI? The account was in charge of Ipea (Institute of Applied Economic Research), an agency under the Planning Secretariat. Although the study refers to the results of the first half of 2009, the conclusions are valid for the entire period in which the reduced IPI was in force. In order to arrive at an estimate of the impact on sales, Ipea calculated the difference between the forecast sales with the prevailing prices and the hypothetical sales, which would be in force if there had been no exemption. Despite the limitations of the model, it allows to estimate that, in the period, 191 thousand vehicles had the sale attributed directly to the reduction of the IPI, that is, 13,4% of the total. The calculation of the impact on the collection followed the same reasoning.

 

The starting point is the Federal Revenue Service account, according to which, in the first half of 2009, 1,8 billion reais of IPI was no longer collected. Of this total, the extra collection of other taxes should be excluded. Ipea used the same criteria to compare a real scenario to a hypothetical scenario. It calculated the difference between tax revenue from vehicle sales that actually occurred and the estimated sales without tax relief. The result showed that, without the exemption from the IPI, the collection of the main federal taxes in the first half would have been lower by 1,2 billion reais. To estimate the drop in tax collection, just subtract the negative impact (1,8 billion reais that was not collected) from the positive impact (1,2 billion reais more collected in other taxes): it would give 559 million reais, in the counted Ipea . This is the real cost of fiscal stimulus actions in one semester. The total cost has yet to be calculated - between the first initiative, in December 2008, and the last one, scheduled for next June, the countercyclical measures will have lasted a year and a half. The number determined by Ipea is modest, especially when considering the benefits generated for the economy, and probably, according to the institute, it would be even smaller if the account included the States' ICMS (the institute disregarded the ICMS because it is not possible to obtain revenue data by economic activity). Therefore, concludes the study, carried out by economists João Sicsú and Fábio Roitman, "from the public sector point of view, the loss of IPI collection was, to a large extent, compensated in other taxes".

 

“The success of tax cuts
was evidence of the results
positive that the definitive fall
tax burden would bring to the economy. ”

Paulo Skaf, president of FIESP.

 

If so, and if the measures are consensually considered positive, then why not extend the scheme indefinitely? This is what some business leaders ask themselves. "The success of tax cuts in combating the crisis was clear evidence of the positive results that the definitive fall in the tax burden could bring to the Brazilian economy," says Paulo Skaf, president of Fiesp. “The reduction created a virtuous circle: it increased production, employment, sales and even the collection made by the government. Instead of withdrawing the benefit, the industry would like the exemption to be extended to other chains, such as the food sector, for example. ” The entrepreneur asks: “If the model has proven to be effective, why not keep it?”.

 

 

Szajman, from Fecomércio, hits the same key. "Raising the tax burden means reducing the power of purchased consumers," he says in defending the continued reduction of the IPI. The businessman fears that, as an end of the incentive, there will be a retraction of the movement in stores, since the tax relief led to an anticipation of purchases, especially of more popular products, destined to the lower income classes, more sensitive to price variations. . In line with the reasoning that a lower tax burden would only bring economic benefits to the country, economist Paulo Rabello de Castro published an article in Folha de S. Paulo in which he argues that, with a tax burden of up to 30% of GDP, “the Brazil could grow twice as much (6% per year) until 2020 and collect the same amount of taxes for the State ”. The July 2009 text, when the tax burden was 36% of GDP, refers to “In-gana”, Delfim Netto's parody of Brazil as “Belíndia”, a mixture of Belgium and India. “Ingana” would be Brazil with the level of taxes in England and the quality of services in Ghana.

 

“Raising the tax burden means reducing
the purchasing power of consumers ”

Abram Szajman, president of Fecomércio

 

Many defend a reduced tax burden in the midst of tax reform. But, for some entrepreneurs, stimulus measures adopted in response to a crisis have an expiration date. In early 2009, when the government announced the first extension of the IPI reduction for vehicles, the president of General Motors in Brazil, Jaime Ardila, already considered that, although the measure would be beneficial for the sector, the impact on sales would begin to dilute.

André Franco Montoro Filho, executive president of ETCO, agrees with this point of view. For him, the provisional and sectorial measures, by stimulating the anticipation of the purchase, had the same logic of a settlement. From this perspective, he evaluates, they were adequate to deal with the crisis and were in accordance with the recommendations of good theory. But if perpetuated, the impact on economic activity would necessarily be reduced.

Despite agreeing that it would be good for Brazil to reduce taxes, Montoro does not share the idea, defended by business sectors, that the reduction of tax rates, by stimulating production, ends up increasing the collection. It would also be necessary to reduce public spending. “The evidence of the Lafer Curve was never found”, he says, referring to the theory of the American Arthur Lafer, for whom, after a certain level, the increase in rates produces the opposite effect, causing the collection to fall due to the exhaustion of the contributory capacity in this case the reduction of the rate would increase the collection.

 

The opinion of Raul Velloso, a specialist in public accounts, is that provisional measures should not be definitively extended. “The tax exemption in times of crisis is perfectly valid, as long as it returns to normal,” says the economist.Velloso makes reservations about the government's action. For him, greater emphasis should have been placed on monetary expansion than on sectoral exemptions. Thus, the benefit would be general and it would have avoided privileging only a few production chains. The countercyclical measures, in any case, played an important role for the country to go through the period of international crisis without major problems. For Velloso, however, there is no longer any need to maintain these instruments. "It's time to go back to normal, there is no more crisis." The numbers corroborate his assessment. More important than the fact that Brazil's economy has retreated little in the adverse environment of 2009 is the prospect of more accelerated growth for this year. According to market projections, GDP in the first quarter is expanding at an annualized rate of 6% to 8%.

And, contrary to what happened in 2009, the acceleration is being pulled by the industry. The automotive sector itself, already with less incentives, has been performing well. In the first two months of the year, the sale of 434 thousand vehicles surpassed by 9,4% that of the same period last year, according to Anfavea. It is an expressive result, especially when one takes into account that in the beginning of 2009 the tax relief measures had been recently adopted and, therefore, had a greater impact on the consumers' decision. With the apparent end of the crisis, Brazil resumed the course interrupted in September 2008. Not only is the end of the fiscal stimulus approaching, but interest rates will rise again, which, according to most projections, should happen as of this half. The Selic increase, to be decided by the Central Bank, will be the definitive signal that, from the government's perspective, the crisis will be behind us.