Brazil announces fuel tax raise and further spending freezes

Brazil announces fuel tax raise and further spending freezes

The government said it is trying to fill budget deficits
Brazil Business

Brazil announced fuel tax raises and more spending freezes this week, in an attempt to diminish the country’s budget deficits. Government ministers say the measures are effective immediately. The hope is to raise 139 billion BRL before interest by the end of the year.

President Temer, currently at the Mercosur summit in Argentina, has promised that there will be no more tax raises for now. Brazil’s economy has a projected growth of 0.3 percent for 2017 after two years of contracting by more than 3 percent. However, this week’s measures could harm the country’s fragile economic recovery.

The government had already announced cuts of 39 billion BRL to government ministries in March this year. However government estimates have since been revised, requiring new tax hikes and spending freezes.

Fuel tax doubled

Yesterday, Brazil’s Minister for Planning Dyogo Oliveira said that the spending freezes will reach all government agencies. He also said that social security spending generated an annual budget gap of 185 billion BRL, which the government believes the fuel tax will supplement.

Brazil hopes to raise an extra 10.4 billion BRL by increasing the PIS/Cofins social contribution tax on gasoline, diesel and ethanol. Officials say that the increase will guarantee this amount, as well as an extra 400 million BRL in cash.

The government raised tax on gasoline from 38 cents to 79 cents per liter. However, it is up to gas stations as to how much of this increase they will pass on to the consumer.

Temer brushes off criticism

Business leaders have reprimanded the move, saying that it will harm economic recovery. However, Temer has said that it is “fundamental” to Brazil’s growth and stability. He said that he did not foresee similar moves in the near future. However, he did not rule out further tax increases.

Reports note that budget deficits did not stop President Temer doling out almost 2 billion BRL in parliamentary amendments. Analysts say that although the practice is common, Temer’s spending on the amendments is unusually high.

Additionally, Temer’s timing drew suspicion. He allocated funds to ministers just ahead of a vote on whether he should be tried for corruption. In his statement, Oliveira said that parliamentary amendments are a compulsory expenditure.