José Márcio Camargo, a professor of economics at the Catholic University of Rio de Janeiro (PUC-RJ), with specialization in labor and microeconomics (he has a Ph.D. from MIT), says that the measures in the program to stimulate the Brazilian industrial sector announced yesterday “do not solve the problem… because they are mostly more of the same.”
“Reduced payroll taxes, reduced interest on Development Bank (BNDES) loans and incentives for investments in research, development and innovation were what we expected and what we got,” said Camargo, referring to the way governments prepare the public for what they are going to do by leaking news about what they are going to do.
He recalled that the minister of Finance, Guido Mantega, also said he was going to do something about the exchange rate, but nothing in that area was announced (except that the 6% IOF would remain in place for the foreseeable future and that Brazil intended to strengthen its international reserves further).
In Camargo’s view, the reduced payroll taxes will have a positive effect on the job market. “One of the main reasons for the shadow or informal labor market in Brazil is the tax burden on both employer and employee. With this reduction both sides win; it is a win-win situation. More workers will get jobs in the formal economy and the government gets more tax revenue. The payroll tax reduction is a victory,” he said.
However, there is a downside, Camargo added. More jobs at a moment of low unemployment may put pressure on salaries. “Higher salaries mean more inflationary pressure. The industrial sector could be shooting itself in the foot.” It will pay less taxes on salaries, but probably pay more on business income.
Camargo points out that the Brazilian corporate income tax is inefficient as it is levied on the whole productive chain. The bigger the chain, the more taxes. In general, modern, sophisticated production chains are long and they are the ones most heavily penalized by this form of taxation.
Camargo says he does not see how minister Mantega is going to remove all taxes from exports. “As you buy the material you need to manufacture your product you have to pay taxes at each stage, that is the problem with taxes on corporate income.”
Camargo is also not optimistic about the lower interest rates the BNDES will charge in the program. He says the bank already has rates close to negative in real terms and that, in the end, companies are not investing for lack of money, but simply because they cannot achieve the necessary levels of competitivity due to structural problems in the country.
The Brazilian Association of Large Industrial Consumers of Energy (Abrace) emitted a note following the announcement of the government’s program to assist the industrial sector lamenting that the measures providing economic incentives did not deal directly with the cost of energy.
According to Paulo Pedrosa, president of Abrace, Brazilian industrial competitivity depends on a reduction in the costs of electricity and natural gas.
With regard to the government’s stimulus package for the industrial sector, he complained: “We see no sign of cost reduction. Not for electricity, for gas or for the tax burden on them.”
“Measures reducing those costs would translate into an immediate higher level of competitivity in the Brazilian industrial sector,” concluded the president of Abrace.
To compensate lost tax revenue, one the linchpins of the government’s program to stimulate industrial production that was announced yesterday, there will be an increase in taxes on beverages (mineral water, soft drinks and beer).
The executive secretary at the Ministry of Finance, Nelson Barbosa, who made the announcement, explained that the objective was to neutralize the impact of any reduced revenue on the budget.
Barbosa said he was not going to specify how much the tax increases on beverages would be. He did say that there would not be any increase in taxes on cigarettes.
The new stimulus package, a total of more than 20 of measures, ranging from the automobile sector to exports to cancer treatment, were presented as part of the ongoing Greater Brazil Plan .
According to the executive secretary at the Ministry of Finance, Nelson Barbosa, the program will cost the government R$ 60.4 billion this year, due to reduced tax revenue, along with credit and grants to the National Treasury and official, state-run banks.
A total of R$ 45 billion, in the form of government bonds, will be transferred between now and the end of 2013 from the Treasury to the Brazilian Development Bank (BNDES) to be used in the government’s program to sustain investments (Programa de Sustentação do Investimento – PSI). This operation will not involve funds from the budget, but will mean an increase in public debt.
Tax cuts will benefit industrial production (so-called “white goods” and building material, for example), and the government will also make significant reductions in payroll taxes in some 15 economic segments as part of the program objective of providing economic stimulus to the manufacturing (industrial) sector. Nelson Barbosa revealed that the tax cuts will reduce tax revenue by around R$3.1 billion in 2012.
According to the Ministry of Development, Industry and Foreign Trade, the following areas will all receive benefits from the program in one form or another: petroleum, gas and ship building, autos, healthcare services, defense, aeronautical and space industries, information technology and communications/electric-electronic complex, capital goods, mining, metallurgic, personal hygiene, perfume and cosmetics, chemical industry, cellulose and paper, renewable energy, civil construction, furniture, footwear, garment industry and jewelry, agribusiness, commerce, services and logistical services.
The program will also include around R$ 4 billion in new government purchases. Under the provisions of the decree, to stimulate domestic production, Brasília will be allowed to buy Brazilian-made goods that are up to 25% more expensive than similar imported items).
Finally, the export sector will have access to reduced-interest loans totaling some R$ 2 billion.