CPMF: increasing taxes is not the alternative


Author: Armando Monteiro Neto

Source: Correio Braziliense, 17/01/2008

Increased taxation and expenditure cuts were the two alternatives considered by the government to settle the Federal Budget, in view of the end of the CPMF. The increase in taxation is already a fact, while the expenditure cut will proceed in the legislative discussion of the budget proposal. However, restraining public spending would be the most appropriate alternative to adjustment.

We do not agree with the tax increase, even partially, as a way to offset the end of the CPMF. The growth of public expenditure above the growth of the economy has been constant since the last decade, so that the federal public expenditure as a proportion of GDP increased from 14% in 1997 to 17,8% in 2007. This growth determined a constant increase in the tax burden on society. The Federal Senate's decision in the CPMF case expressed a clear message from society against this permanent increase in the tax burden that occurs in Brazil year after year. Increasing taxes is therefore not what society expects.

In addition, from an economic point of view, the increase in the rates of the two taxes (IOF and CSLL) will accentuate the tax wedge and the bank spread, which should be reflected in an increase in interest rates to final borrowers. It will limit the expansion of credit and this will contain one of the main factors that explain the recent strong economic expansion. Raising taxes is thus an anti-growth measure.

The non-renewal of the CPMF is new data that needs to be assimilated. It certainly cannot be a threat to fiscal responsibility and the control of public accounts - the foundations of long-term stability. It requires a change of posture in addressing fiscal issues.

There are lessons to be used. First, there is a clear perception that there are limits to the tax burden of society and that we cannot maintain provisional taxes indefinitely and an anachronistic tax system without economic rationality. In this sense, the discussion of tax reform can - and must - advance immediately. It is necessary to define a permanent and functional tax model.

Second, the need to detail the "spending cut" is also a unique opportunity to make clear the need to review the system of binding revenue and mandatory expenses and also to create mechanisms to control spending growth. Only in this way will it be possible to improve efficiency, choose priorities, monitor objectives and give greater focus to public spending. In short, promoting a fiscal management shock and making the State more efficient.

It is possible to promote a significant cut in expenses in the budget proposal for 2008. It is important to note that, in global terms, there is no need to cut costs effectively, but to reduce the pace of growth in expenses. The challenge is to be selective and minimize the impact on investment.

CNI estimates that a reduction in expenses would be feasible, even if the social programs and the PAC are preserved, through a cut in personnel and costing expenses. To do so, it is enough that, in the revision of the budget proposal, the appropriations existing in the month of July for expenses in 2007 are maintained. With that, investments could be kept at the same level available for 2007, that is, about R $ 26 billion, of which R $ 13,8 billion included in the PPI.

With this cut, and without resorting to an increase in taxation, it would be necessary to accept, exceptionally and temporarily, a smaller primary surplus in 2008: around R $ 46 billion. With the use of the PPI mechanism, the adjusted target would be achieved and the debt / GDP ratio would still maintain its downward trend.

Eventually, a collection of taxes higher than projected and expenditure execution lower than released - as traditionally occurs during budget execution - could bring the final result of the target without adjusting the PPI (R $ 60,4 billion).

This is a strategy that preserves the intention to reduce the tax burden and maintains growth. But it requires a change in posture in relation to spending, with the imposition of limits on its growth not only this year, but also in the following years. This is the main lesson of the episode: we have to change the culture and make the public budget within the limits of the taxation tolerated by society.

Armando Monteiro Neto
Federal deputy and president of the National Confederation of Industry (CNI)