Faced with the fear that inflation may remain high for a long time — a topic that will certainly be part of the electoral debate — the government decided to sponsor the so-called PEC of Fuels in order to enable the reduction of federal and state taxes on fuels and electricity. no source of compensation.
The Ministry of Economy says it is not opposed to tax cuts, even if they deepen the hole in public accounts, hurt the LRF (Fiscal Responsibility Law) and increase the country’s indebtedness. Trying to control inflation by generating fiscal imbalance remains a tempting option, even though it has never worked anywhere in the world.
The speech that the collection is booming created an environment conducive to populist measures. By the time the lights went out in 2021, the government had already extended the payroll tax exemption without tax compensation, infringing the LRF and gaining more space in the spending ceiling in the election year. The next measure in the queue is the correction of the Income Tax table for individuals, a promise from the last campaign.
The fact is that fiscal and monetary policies are always intertwined in the cause of inflation and in the fight against it, and there is no voluntarist measure of tax cuts or price controls that can change this reality. How can we forget about Sarney’s inspectors or the damming of gasoline prices under Dilma’s government, which ended the last year of her term with double-digit inflation? And what about MP 579, from 2012, which imposed, by force, a tariff reduction in the electricity sector, generating an inflationary bomb for the following years?
It is true that after a long period of extremely expansionary monetary and fiscal policies — far beyond what is necessary — interest rates are rising and spending has been slower. However, as contradictory as it may seem, the effect of fiscal policy on inflation remains bullish.
Why does inflation go up when tax cuts are used as a shortcut to lower it by force? The reason comes from the fact that one of the main causes of the inflationary surge in Brazil is precisely the breaking of the fiscal anchor, that is, the lack of belief that the government will be able to bring the public accounts to a sustainable path.
When the Treasury increases spending or reduces taxes in an economy with high idle capacity, inflation is not pressured if its creditors understand that at some point in the future there will be an increase in the tax burden or cuts in other spending to pay the increase in debt. However, when this assumption is broken, inflation expectations rise (since the inflation tax will finance the government), the exchange rate depreciates (due to increased country risk), and the result is more inflation.
Taxes are always distorting, and the discussion of tax reform should not be off the agenda. However, by proposing a reduction in the taxation of fuel and electricity without compensation, the government not only hits the tax collection in full, but also signals that it cares little about tax rules — created precisely to avoid fiscal populism. Everything moves towards generating more distrust.
Defusing inflation is always a joint task of fiscal and monetary policies. In today’s Brazil, there is no horizon in which surpluses can be expected with any degree of confidence. The future is even more uncertain with the best-placed candidates in the presidential race. They do not bring any proposal for fiscal consolidation to the debate — quite the contrary. Controlling inflation by creating fiscal imbalances will only result in more inflation, higher interest rates and lower growth.
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