Fiscal, taxes, dollar and interest rates down, GDP up: the economic retrospective of 2023

Report from the magazine IstoÉ Dinheiro brought an economic retrospective of 2023. Dr. Eduardo Maneira was heard to speak about the importance and impact of the tax reform, approved this year by the National Congress.

Fiscal, taxes, dollar and interest rates down, GDP up: the economic retrospective of 2023

December 29, 2023

EDDA RIBEIRO
(Credit: José Cruz / Agência Brasil)

The year began with the third term of Luiz Inácio Lula da Silva (PT) full of criticism, expectations and doubts about the legacy left by former President of the Republic Jair Bolsonaro. To the surprise of some – mainly in the financial market – inflation, which ended at 5.79% in 2022, closed better, compared to the current 4.68% in the last 12 months, according to the Brazilian Institute of Geography and Statistics (IBGE).

Another positive horizon, also related to the fall in the Broad Consumer Price Index (IPCA), was the downward trajectory of the Selic, the basic interest rate, which began 2023 in a political clash between Lula and Roberto Campos Neto, from the Central Bank, and closed at 11.75% per year. It is the lowest level for the index since May 2022.

Economic retrospective: understand how interest rates, inflation, GDP and government measures related to closing 2023:

GDP, INTEREST AND INFLATION

Reginaldo Nogueira, PhD in Economics and senior director at Ibmec, recalls that the inflationary flow closely followed the global trend from the end of the 2020 pandemic. Entering 2021, inflation across the planet began to rise, driven by a few factors, the first being the collapse of production chains during the pandemic and the Russia x Ukraine war, putting pressure on agricultural commodities, considering that both countries are relevant exporters. The scenario caused interest rates in the world to become high, in Brazil reaching close to 14% per year.

“Inflation rates began to cool down, and expectations for 2024 began to improve. Interest rates continue to fall, but we continue to expect expectations within the target, but outside the 3% center”, he assesses.

Along with this, adds the professor, we have around this topic, the economic growth rate. The Brazilian Gross Domestic Product (GDP) registered an increase of 0.1% in the third quarter of 2023 compared to the second quarter of 2023. The index grew 0.9% in the 2nd quarter of the year, according to the IBGE.

“GDP is projected to grow at around 3%, but it has clearly been cooling at the margin. Family consumption and government consumption have maintained GDP, but private investment has fallen. Part of this is the interest rate itself; with it reducing, it releases the effect of investment”, says Nogueira.

Three themes are connected to the interest rate scenario, with a favorable fall, but which started late, with a more conservative central bank and defender of the maxim ‘contain inflation to lower interest rates’. Marco Rocha, economist and professor at the Unicamp Institute of Economics, lists some points:

“First was the space created by the reduction in the North American interest rate at the beginning of the year and the reduction in global inflation after the worst moment of the peak and in energy prices due to the conflict in Ukraine. Energy and food prices also began to drop a little. International inflation went through the same process, this allowed, in a way, to also open space for the reduction of interest rates in Brazil”, he states.

The behavior of the trade balance was also favored by the price behavior of both agriculture and the extractive industry was another of these components that had a positive impact on the formation of GDP, also creating a greater horizon of certainty regarding the behavior of the exchange rate and future interest rates.

In addition, there is the behavior of internal prices. “Brazil had a very good food harvest, which meant less pressure on the Food item in inflation indices, and this also enabled a reduction in the interest rate, remembering that the Food item was one of the factors that put pressure on inflation in previous years”, argues Rocha.

DOLLARS BELOW R$5

To improve, the much criticized dólar also moved as a result of the points above. In the final stretch of 2023, the currency continues to perform differently from market expectations 11 months ago, when the Focus Bulletin announced an exchange rate projection of around R$5.30. In the first half of December, the Market Report research showed that the expectation is different: the exchange rate in 2023 rose to R$4.95 and in 2024, to R$5.

“All of this contributed, in a certain way, to the reduction in interest rates and also to the reduction of the exchange rate; in essence, the behavior of the North American economy and the accommodation of certain global tensions also made the dollar somewhat cheaper, which in turn also contributes to the items in which the dollar has repercussions within the inflation index”, explains the economist.

FRAMEWORK AND GOALS

At the same time, the current economic team fought in the National Congress to approve two essential proposals for the country: the fiscal framework, which replaces the old spending cap; and the tax reform, discussed for at least 30 years, and which simplifies taxes on the consumption.

For Rocha, the great victory of the Lula 3 government so far has been the PEC da Transição, responsible for funding priority social programs, such as Bolsa Família, Farmácia Popular, among others. It is also responsible for the economic scenario, according to experts.

“It is guaranteeing, in a way, good growth this year, in addition to the behavior of exports, in general, but it is accommodating a series of policies that are allowing the government to carry out certain measures that, in the end, are also contributing to a positive result above expectations in the economy”, he explains.

The new rule, enacted in August, authorizes the increase in expenses above inflation, unlike the spending cap. With it, the Minister of Finance, Fernando Haddad, began the search for zero deficit in the government's accounts with an eye on 2024. The measure was also a 'demand to calm the market'.

“The new fiscal framework has the merit of placing a horizon of security on the behavior of debt and public accounts, which was a demand mainly from the financial market, and with this the government managed to create a horizon, let's say, of negotiation with this sector and a certain goodwill, which ended up having repercussions on long-term interest rates”, says Rocha.

For him, however, the framework is not very countercyclical. "When the economy is growing, the government is able to accommodate spending, it is able to recover its capacity to carry out policy; with the economy entering stagnation or entering into crisis, the fiscal capacity to implement policies against the crisis and against economic stagnation, due to the way the new framework works, is also somewhat impaired. The minimum spending limit, at least in my reading, is very little, in the case, for example, of a crisis or a process of stagnation. And that ends the capacity of fiscal policy acting in these moments also being harmed”, analyzes the professor.

TAX REFORM

The Chamber of Deputies approved the tax reform (PEC 45/19), which simplifies taxes on consumption, provides funds for regional development and to finance ICMS credits until 2032, in addition to unifying the legislation for new taxes.

The reform unifies five taxes into two: Tax on Industrialized Products (IPI), Social Integration Program (PIS) and Contribution for the Financing of Social Security (Cofins) will be unified into a Contribution on Goods and Services (CBS), from the Federal Government. The Tax on Circulation of Goods and Services (ICMS) and Tax on Services (ISS) will be unified into the Tax on Goods and Services (IBS), borne by states and municipalities.

One of the biggest controversies, with back and forth between the Legislative Houses, was the creation of the national basic food basket, with zero tax. A Constitutional Amendment Proposal is still awaited to define the list of ‘essential food items’.

Another important point was maintaining the IPI for products from the Manaus Free Trade Zone, being an exception in relation to products from other regions, thus guaranteeing tax incentives.

The approval also provides for the creation of a Selective Tax, called the “sin tax”, on goods and services that harm health and the environment, such as cigarettes and alcoholic beverages, aiming to discourage the consumption of these products; the collection of taxes for those who own jets and yachts and snacks, through IPVA, in addition to taxing inheritances.

For some experts, the impact may not be 100% positive.

“I wouldn't say that the tax reform would have the strength to change the country's direction, but it will have positive effects on the economy due to the modernization and simplification of the system. Ordinary citizens will not directly feel the effects of the reform, since the simplification will not bring about a reduction in the tax burden, on the contrary, it could lead to an increase in taxation in the services sector in general. The expectation is that it will produce positive effects with less litigation, complexity and conflict between entities taxed (Union, States and Municipalities)”, assesses Eduardo Maneira, from Maneira Advogados.

Nogueira, from Ibmec, warns that the reform is approved at a time of serious fiscal crisis and the need to generate revenue.

“It is a reform that it offers, mainly with the potential to generate, an increase in taxation on the services sector. It brings simplification to a system that is admittedly complex, the main point used for its approval and is the main reason for its acceptance. On the other hand, it should generate an increase in the Brazilian tax burden”, concludes the professor.

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