Brazil’s President Raises Taxes but Fails to Deliver Promised Spending Cuts

February 13, 2015

Brazil’s president, Dilma Rousseff, has implemented new taxes to stymie the country’s growing deficit. The taxes include a R$0.22 (US$0.07) per liter excise tax on gasoline and diesel fuel, a 1.5% tax increase on personal loans (a total of 3%), a 2.5% tax increase of the Pis/Cofins (types of social contributions) on imports (a total of 11.75%), and an increase in airport taxes by an average of 14.25%. The tax increases were expected to generate around R$21 billion (US$8 billion) in revenue for the government.

The tax increases along with R$22.7 billion (US$8.4 billion) in spending cuts where projected to move the government from a primary deficit of 0.6% of GDP to a surplus of 1.2% of GDP, but the Brazilian government is unlikely to realize the surplus, which has unsettled bond markets.

Although the new taxes are generating more revenue, the promised spending cuts have failed to materialize. The president has pushed to implement the cuts, but Brazilian lawmakers responded by passing a bill to block the austerity. Moreover, the Chamber of Deputies, the lower house of the Brazilian congress, has passed a bill limiting the president’s ability to eliminate or postpone special projects through executive order.

The mixture of an increased tax burden along with continued deficit spending is a recipe from economic trouble. Sprinkle in low oil prices, which has delayed several major Petrobras projects, and inflation above the Brazilian Central Bank’s target, which has pushed up interest rates; and the Brazilian consumer has almost completely disappeared. As such, it is unlikely that the government will meet the revenue estimates, even with the additional taxes.

The Brazilian president only has herself to blame for Brazil’s economic woes. As the incumbent president, she used tax cuts and spending programs to influence the elections this last year. It may have won her the presidency, but it caused the government to move from a primary surplus of 1.6% of GDP in 2013 to a deficit. With the presidency firmly in hand and economic concerns on the horizon, President Rousseff switched her policies to austerity.

Only time will tell how far Brazil will slide into economic downturn. As Brazil suffer the consequences of President Rousseff’s spending spree, the voters of Brazil can contemplate if the benefits were worth the costs. For all democratic countries, Brazil’s last election is a warning. If the voters don’t punish politicians for manipulating the economy through taxes and spends, then it is the voters who will ultimately suffer the consequences.

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