Finance Minister Fernando Haddad said on Thursday the government would now analyse alternatives to strengthen the national budget after the Congress dealt a setback.
His comments were made in Brasília, a day after the lower house excluded a reform to overhaul investment taxation from its voting list, in a setback to the government’s fiscal ambitions.
It was previously estimated that the withdrawn proposal would raise 20.9 billion reais ($3.9 billion) in additional revenue in fiscal 2024.
The funds were a mainstay for the administration of President Luiz Inácio Lula da Silva in its drive to achieve its fiscal targets, which seek to shrink the country’s budget deficit without slashing social spending or investment.
Tax overhaul stalls in Congress
As part of the proposed measure, the tax on interest on equity payments would be raised, and effective income tax rates would be unified on financial investments.
The proposal sought to reduce Brazil’s complicated tax structure and to increase state revenues at the same time.
The fact that it had been taken off the agenda highlights the difficult political road ahead for Lula’s economic team as they try to push through fiscal reforms.
Spending is also one of the reasons why the government is faced with a dilemma over how to balance its priorities with the need to show fiscal responsibility to investors and ratings agencies.
Haddad, who has tried to ground fiscal expectations ever since he took over, said the government will now take time to evaluate other routes to strengthen the budget.
Supreme Court ruling provides some leeway
Despite the parliamentary failure, Haddad cited a recent Supreme Court decision as a source of flexibility.
The court affirmed that the president has the authority to change some tax rates, giving the administration some leeway to shift economic policy without congressional consent.
“That gives us comfort in reaching the end of the year,” Haddad remarked, referring to the court’s judgment.
According to Brazilian law, some taxes are deemed regulatory rather than fiscal.
These include the IOF tax on financial transactions, as well as the import and industrialised products (IPI) tax.
Because of their regulatory nature, such taxes can be altered unilaterally by presidential decree, providing a potential short-term revenue adjustment method.
Lula seeks calm amid political friction
President Lula attempted to allay fears over the legislative setback in an interview with a local radio station earlier on Thursday.
He claimed to have told his team not to fret about the move in Congress and indicated confidence that the government will find other routes to reinforce public finances.
Lula also said that as of next Wednesday, the government will open a process of talking about the ways the financial system can “pay its debt” to the country.
Fiscal goals still in focus
The failure to achieve investment tax reform demonstrates the conflict between Brazil’s economic objectives and the realities of political negotiations in Congress.
While the government remains committed to meeting its objectives, the way forward becomes increasingly uncertain.
Haddad and Lula’s economic team face the task of maintaining fiscal credibility while managing a fractured legislature.
The Supreme Court’s decision provides a temporary buffer, but relying on executive directives may elicit criticism from lawmakers concerned about overreach.
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