Firms should not expect tax cuts—or other measures that reduce public revenue to cheapen the cost of products—to help improve structural inflation. While firms could potentially experience some short-term respite, they should still expect industrial production to contract in 2022 impacted by ongoing supply chain disruptions, slow employment recovery, and dampened purchasing power. Additionally, due to the forgone revenue, firms should be prepared for some degree of fiscal risk to continue to weigh on Brazil’s 2022 economic outlook.
On February 25, President Jair Bolsonaro decreed a 25% cut in the tax rate of Industrialized Products (IPI). The measure, expected to impact more than 300,000 firms, will benefit all industrial sectors, except tobacco and its derivatives. As a regulatory tax, the IPI could have its rates altered by presidential decree—without the need for Congressional approval—where governors and mayors, who would also be affected, exert pressure. The impact on public coffers is calculated at BRL 20 billion a year, half for the Union and half for states and municipalities. It is estimated that the measure will help increase Brazil’s GDP by BRL 467 billion in 15 years. Investments should be increased by BRL 314 billion in this period. The primary goal of the IPI reduction is to boost domestic industry production and activity. However, the Ministry of Finance arguably expects the measure to help reduce the prices of industrialized products and thus contribute to controlling inflation.
In the last decades, the Brazilian industrial sector has lost competitiveness as well as decreased its participation in the country’s GDP, employment, and exports. Ultimately, the reduction of the tax burden aims to correct the misallocation of productive resources and reduce the cost of doing business in Brazil (Custo Brazil), raising the level of productivity in the long term. Similar measures have been adopted by previous governments; during former President Luis Inácio Lula da Silva’s government, the PT president promoted a series of benefits involving the reduction or cut of the IPI tax. Among them, he encouraged tax discounts for cars produced in the North, Northeast, and Midwest regions, which were in force from 2010 until 2015, under Dilma Rousseff. Despite the improvement in short-term production, these efforts failed to stimulate structural gains to industrial output in the long term, signaling that the latest IPI cuts will likely fall short. Furthermore, despite lower tax burdens for firms, low levels of disposable income and ongoing price sensitivity will continue to weigh on production.
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