Brazil Finance Chief Says No Plan B After Senate Kills Tax Bill

(Bloomberg) -- Finance Minister Fernando Haddad said there’s no Plan B after lawmakers shot down his latest attempt to craft legislation aimed at getting Brazil’s fiscal deficit under control.

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Late Tuesday, the Senate returned to the government parts of a provisional measure that curbs the use of tax credits to offset the cost of an exemption from payroll levies.

“The Senate took a part of the responsibility to try to build a solution,” Haddad told journalists in the end of the day.

The provisional measure has drawn the ire of companies and Congress as the minister seeks to keep the country’s fiscal target within reach.

The leader of the government in Brazil’s Senate, Jaques Wagner said in a speech that President Luiz Inacio Lula da Silva wasn’t “comfortable” with the measure and that Congress’ decision was a “way to stop what would be an endless tragedy.”

After that comment, Senator Randolfe Rodrigues, the government’s Congress leader, said Lula has “deep confidence” in Haddad.

The deliberations inside Lula’s government reflect the difficult situation in which Haddad has found himself as he fights to deliver on his goal of eliminating Brazil’s primary fiscal deficit, which excludes interest payments, this year.

Mounting skepticism over Brazil’s ability to control its fiscal deficit has weighed on local markets, forcing economists to pare down bets on interest rate cuts and traders to start pricing in rate hikes.

Haddad’s team introduced the provisional measure last week as it sought to mitigate the cost of a payroll tax exemption for small cities and certain economic sectors, which Congress extended over the government’s initial objections.

It immediately faced backlash from lawmakers and major companies, especially in the country’s massive and influential agricultural sector.

Companies including Archer-Daniels-Midland Co. and Amaggi Importacao e Exportacao Ltda withdrew new offers for commodities such as soybeans and corn as traders were taken by surprise by the measure, which limits the ability of some companies to monetize tax credits.

Private refineries that account for 20% of Brazil’s fuel supply could even halt operations if it is no longer profitable to produce, Evaristo Pinheiro, head of industry group Refina Brasil, said in a Monday interview.

The Finance Ministry currently projects a deficit of 14.5 billion reais ($2.7 billion) — or 0.1% of GDP — this year, inside the tolerance range allowed by spending rules. The payroll tax exemption will cost 26.3 billion reais, according to the ministry’s estimates.

(Retop with Congress returning provisional measure and Haddad’s reaction)

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