Brazil raises taxes by $7.5 billion in quest for confidence

2015-01-20 12:14:50

Brazil’s government will raise taxes on fuel, imports, credit and cosmetics as part of efforts to restore confidence in its fiscal discipline, Finance Minister Joaquim Levy said.

The measures will increase revenue by more than 20 billion reais ($7.5 billion), he told reporters Monday in Brasilia after markets closed. As part of the new policy, Brazil will resume collection of the so-called Cide tax on fuel and raise taxes on loans to individuals and imports. It will also change the system used to collect taxes on cosmetic products, he said.

“This is a series of actions being taken to re-balance the economy, particularly from a fiscal perspective with the aim of improving confidence,” Levy said. Brazil is “making changes step by step so it can reach, with as little sacrifice as possible, what’s needed to resume the path to growth.”

Policies adopted by President Dilma Rousseff’s administration during her first four years in office widened the country’s budget deficit, slowed growth and fanned above-target inflation. Levy, who took office this month, is undoing those policies to prevent Latin America’s biggest economy from losing its investment-grade status.

Swap rates on the contract due in January 2016 rose 11 basis points, or 0.11 percentage point, to 12.67 percent Monday as analysts and investors projected that the central bank will increase borrowing costs this week by a half-percentage point to curb inflation. The real depreciated 1.1 percent to 2.6509 per U.S. dollar.

Increase Revenue

Higher fuel taxes will increase revenue by 12.2 billion reais this year, the Finance Ministry said in a statement distributed to reporters. The government will bring in an additional 7.4 billion reais from higher taxes on personal loans, 694 million reais from imports and 381 million reais on cosmetics, it said. The tax increases will start taking effect next month.

Petroleo Brasileiro SA will pass the tax on to refineries, meaning the net price for the oil producer will remain unchanged, the state-run company said in a statement late Monday. Prices at the pump will increase by an estimated 5 percent to 7 percent, O Globo newspaper reported on its website.

“They’re really trying” to raise revenue to meet fiscal goals, Andre Perfeito, chief economist at Gradual CCTVM, said by phone. “The problem for me as an economist is that we’re going to have more inflation in the short term.”

Inflation Rate

The inflation rate will surge to 6.67 percent in 2015 from 6.42 percent in December, according to a central bank survey of economists published Monday. Consumer prices have increased above the midpoint of the 2.5 percent to 6.5 percent target band since Rousseff entered office in 2011.

A trained economist, Rousseff has vowed to better contain inflation in her second term. The central bank raised borrowing costs in the past two meetings and the government has capped monthly spending and boosted interest rates on loans from state development bank BNDES since her re-election in October.

The higher cost of living has eroded the economy. Analysts in the central bank survey cut their 2015 growth forecast in the past three weeks to 0.38 percent. That would be the fifth consecutive year the country would grow less than Latin America, according to a Bloomberg survey.

Standard & Poor’s in March last year downgraded Brazil’s credit rating to one level above junk, citing the economic slowdown and deteriorating fiscal accounts. Moody’s Investors Service in September lowered its outlook on the Baa2 rating to negative. That is the second-lowest investment grade.

The government’s objective is to increase the primary budget surplus target, which excludes interest payments, to 1.2 percent of gross domestic product this year from a deficit of 0.2 percent in the 12 months through November.

“The measures announced today are within the realm of what the government needs to do to meet its fiscal target,” Carlos Kawall, chief economist at Banco Safra, said in a phone interview from Sao Paulo.