Brazil powerbrokers sense chance to kickstart economic reforms

With Brazil’s coronavirus outbreak widening and the economy forecast to face its worst recession on record, politicians and officials have suspended the infighting that stalled the country’s ambitious reform agenda and are determined to seize the momentum to push the programme through.

“The next 18 months will go down in the history of the Brazilian economy as 18 months of economic reforms,” Adolfo Sachsida, Brazil’s secretary for political economy, told the Financial Times.

The sweeping plans, which include an overhaul of the byzantine tax system and dominated political debate last year, are aimed at slashing red tape to spur growth while promoting fiscal discipline to attract private investment. But progress was halted after President Jair Bolsonaro pushed his government close to a constitutional crisis with Congress and the Supreme Court and by the arrival of Covid-19, which has so far killed some 75,000 in a country that is among the world’s worst hit.

Economists and policymakers see the agenda as a crucial step towards restoring investor confidence and kickstarting growth in Latin America’s largest economy, which last year expanded only 1.1 per cent. The programme — which also includes changes to the machinery of government and a proposal for central bank independence — has gained more urgency as a result of the pandemic, which is likely to trigger a contraction this year potentially as large as 8 per cent, according to the World Bank.

As political pressures subside, influential officials and Congress powerbrokers appear to be uniting around the need to pass the reforms.

Rodrigo Maia, speaker of the lower house, wants a tax overhaul completed before he finishes his term in February. “Our priority is tax reform. We don’t have time to waste,” he said on Twitter last week.

The push has also been endorsed by leaders of the powerful centrão political bloc, composed of 221 of the lower house’s 513 lawmakers, which has aligned itself in recent months with Mr Bolsonaro in exchange for a series of political appointments.

“Tax reform is necessary, everyone wants it, I believe it will be a priority after this pandemic period,” Arthur Lira, a senior centrão figure, told local media.

Reforming Brazil’s tax system has long been an objective of economic policymakers, who say simplifying tens of thousands of federal, state and local rules would create efficiencies and improve the business and investment environment.

But a series of efforts over the years have foundered under pressure from political lobbying and vested interests, while lack of trust has fuelled resistance by the nation’s 27 governors and thousands of mayors to any attempt to centralise tax collection.

“It is a very complex topic. To really agree on a common position is a big challenge, but I recognise that in parliament there is a political will to move forward,” said Efraim Morais Filho, leader of the centre-right Democratas party in the lower house.

Brazil’s economy ministry has yet to present a tax reform proposal, so attention is focused on a plan drafted by members of the lower house, which wants to create a general tax on goods and services by unifying five different levies.

“I think it has the conditions for a solid majority. It seems to me the government has made a choice not to present its own proposal and only to contribute improvements,” said Mr Morais Filho.

But analysts are sceptical about how quickly reform can be achieved given the complex issues and vested interests involved. Lawmakers have also insisted reform should not be used as an opportunity to increase taxes, including by introducing a financial transaction tax, an option that has gained traction because of the fiscal impact of the government’s coronavirus crisis programmes.

Brazil’s gross debt is likely to jump 19 percentage points to 95 per cent of GDP this year, according to Luciano Rostagno, chief strategist at Mizuho Bank. The economy ministry’s R$1.2tn ($222bn) emergency support package for the pandemic has alone eclipsed projected savings from last year’s hard-won pension reform.

“The question of a tax on financial transactions seems to be the great Satan of the tax reform push. Nobody wants to hear about it. But sooner or later this will be placed on the table,” said Hamilton Mourão, the vice-president, earlier this week.

Andre Perfeito, chief economist at broker Necton, said: “Nobody [wants] to talk about the fiscal situation. The government wants to keep the reform rhetoric alive to show they are doing their best. In my opinion, they are in denial. We have a lot of problems and the clock is ticking. A liberal economic agenda does not work in the short run.”

Zeina Latif, a prominent economist in São Paulo, said she was sceptical about the chance of tax reform given mounting pressure from private sector lobbyists. Municipal elections in November were also likely to complicate political intentions.

“There may be some reforms, but they won’t be soon,” she said. “And whatever they are, they will be small and very dependent on the economic situation.”

Additional reporting by Carolina Pulice