Brazil’s Lula Seeks Income Tax Exemptions Along With Public Spending Cuts
(Bloomberg) -- Brazil President Luiz Inacio Lula da Silva has tacked on an income-tax relief measure to a long-awaited plan to cut government spending, heightening concerns about the budget deficit and sparking a selloff in the currency, stocks and bonds.
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Finance Minister Fernando Haddad, who opposed Lula’s push to include the tax measure, is now set to unveil it alongside the spending cuts, according to a person familiar with the situation who requested anonymity to discuss internal matters. The finance chief is planning to present and detail the package at a Thursday morning press conference, two people familiar with his plans said, after delivering a recorded address to the nation Wednesday night.
The tax proposal will excuse workers with monthly salaries of up to 5,000 reais ($844.5) from paying income taxes, according to two other officials with knowledge of the matter, seeking to deliver on a longstanding pledge from the leftist Lula. O Globo first reported that it would be included in the announcement.
The real weakened more than 2% to finish the day at 5.934 per dollar, its lowest-ever closing price. Stocks slumped the most since June and swap rates surged as much as 37 basis points.
“Putting tax cuts in the spending reduction bill is upsetting the markets,” said Greg Lesko, managing director at Deltec Asset Management LLC in New York. Investors are “awaiting details of the spending cuts, but it’s hard to close the fiscal gap this way.”
Brazil’s government was initially expected to announce the cuts to public spending earlier this month following local elections, and delays have put investors on edge. A local media report on Tuesday that congressional votes on the reductions could only come next year prompted local assets to temporarily slip. Markets are clamoring for austerity after Lula’s government increased expenditures to improve living standards for the working class.
Lula will meet with Haddad, ministers and congressional heads Arthur Lira and Rodrigo Pacheco on Wednesday afternoon to discuss the package, according to other people familiar with the plans. The gathering was first reported by local press.
Last month, the leftist head of state said he wanted even bigger income tax exemptions beyond his existing promise for workers with salaries of up to 5,000 reais, adding to investor worries about the budget.
The plan will come with revenue measures to offset the exemption, according to the person familiar. But that is unlikely to calm market jitters.
“This decision to send it along with the package shows how much the government remains resistant to spending cuts and concerned about popularity,” said Anna Reis, chief economist at Gap Asset in Rio de Janeiro. “That’s not a good sign for what will come in the spending cut package and in the next two years of government.”
Signs that the administration was abandoning pledges for fiscal responsibility have wreaked havoc on local assets in 2024. The real has posted the biggest drop among 16 major currencies so far this year, stocks are trailing most global gauges and interest rate futures have surged.
Brazil will end 2024 with a 68.8 billion-real primary fiscal deficit, which excludes interest payments, according to a budget report released in September.
For 2025, the government plans to eliminate that gap with the help of 166.4 billion reais in extraordinary revenue. In April, it backed off its pledge for a surplus next year, sparking a wave of investor angst.
--With assistance from Giovanna Bellotti Azevedo and Leda Alvim.
(Updates market move in fourth paragraph.)
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