IMF: Brazil needs more progressive tax system, less budget tightness

RIO DE JANEIRO, BRAZIL – In the document released on Wednesday, September 22, the Fund’s experts say Brazil needs a broad and more progressive reform of its tax system – contrary to the income tax reform proposed by the government of President Jair Bolsonaro, which does not help progress, according to analysts.

In its report on Brazil, the IMF also states that public debt should decline this year and remain stable, but warns that uncertain prospects may weigh negatively in the short term.

The institution suggests that the government should adopt a more robust medium-term fiscal framework that can strengthen finances, increase credibility, reduce fiscal risks and improve the government’s resilience to shocks. The IMF forecasts a fiscal deficit of 6.3% of Gross Domestic Product (GDP) in 2021 and 6.9% in 2022.

According to the experts, reducing budget tightness is needed for more public investment and a stronger social network. “Reducing budget tightness and mandatory spending will be critical to create the fiscal room needed for high-priority programs and to increase flexibility in reacting to shocks,” they say. “Fiscal spending should be reduced along with more comprehensive tax reforms that increase progressivity, reduce resource misallocation, and boost potential growth.”

The Fund points out that after reaching close to 99% of GDP in 2020, public debt should drop to 92% by the end of the year and remain at that level over the medium term. Public debt is expected to close 2021 at 91.6%, compared to 98.6% last year. The projection for 2022 is for public debt at 90.6%.

The IMF technical team reinforces, however, that the depreciation of the Brazilian currency against the dollar and the increase in commodity prices have been contributing to accelerating inflation, as well as inflation expectations, despite the output gap remaining negative.

Inflation is projected to close 2021 at 5.8% – a very optimistic perspective compared to consultants and banks, which forecast inflation at around 8% by the end of the year. In 2022, the trend is for inflation to slow down to 3.7%, within the target range until the end of 2022, according to the IMF.

With no changes in relation to the World Economic Outlook report released in July, the IMF projects GDP growth of 5.3% this year and 1.9% next year, and expects that the surplus of household savings will sustain consumption, as vaccination advances.

The technicians also note that a reassessment of market fundamentals – which could arise from concerns over the implementation of the fiscal policy framework and election uncertainties – and a tightening of global financial conditions could lead to capital flight, which would increase government financing costs, leading to a weaker currency.

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