Fiscal overhaul focused on spending quality could free up to 2.8% of GDP

Imbalances can be corrected through robust measures without affecting programs over 10 years, Insper’s Sergio Firpo says

 

 

 

Economist Sergio Firpo, coordinator of Insper’s Public Spending Quality Observatory — Foto: Rogerio Vieira/Valor
Economist Sergio Firpo, coordinator of Insper’s Public Spending Quality Observatory — Photo: Rogerio Vieira/Valor

An adjustment to correct imbalances in public accounts can be both robust and avoid undermining programs that make Brazil’s budget more progressive, says economist Sergio Firpo, coordinator of Insper’s Public Spending Quality Observatory. On Tuesday (10), he is releasing a study containing 30 proposals that, taken together, would free up R$353 billion a year for the federal government, equivalent to 2.78% of GDP, once the measures have reached full implementation, after approximately 10 years.

The package proposed by the economist includes measures such as a comprehensive review of tax expenditures (R$40.5 billion), limiting congressional budget amendments to 0.25% of primary expenditure (R$39.8 billion), raising the minimum retirement age for women, rural workers, and survivors’ pension beneficiaries (R$101.6 billion), and eliminating personal income tax deductions for healthcare, education, and dependents (R$38.3 billion).

“If you are concerned only about fiscal issues, some of these measures are effective, such as reducing the size of Bolsa Família to pre-pandemic levels. But that does not necessarily improve people’s lives or the efficiency of public spending. Some of them, if implemented, would actually worsen spending quality,” explains Firpo, who served as secretary for Monitoring and Evaluation of Public Policies at the Ministry of Planning and Budget (MPO) from 2023 to 2025.

 

“Obviously, how much of this comes to fruition is a political question. My analysis focused on allocating public resources from the perspective of those who need them most,” he says. The study, available on the observatory’s website, approaches fiscal adjustment over a 10-year horizon, with savings increasing over time and thereby softening the impact of many of the measures listed.

The proposals are divided into seven thematic areas: fiscal rules, accounting for savings equivalent to 0.45% of GDP after excluding potential overlaps with other measures, revenue-sharing arrangements with states and municipalities, and other deductions; social security (0.97%); labor and social assistance (0.45%); public-sector personnel (0.26%); education, healthcare, and housing (0.19%); tax expenditures (0.63%); and subsidies (0.03%). From this total, Firpo deducts 0.2 percentage point, as a conservative measure, to account for the reversal of the increase in the Tax on Financial Transactions (IOF) and the return of oil revenues to the minimum funding level for healthcare.

There are also two subsidies that do not affect the primary balance (which excludes interest expenses) but do have a financial impact: eliminating subsidized credit provided by the Brazilian Development Bank (BNDES), the Funding Authority for Studies and Projects (Finep), and the Constitutional Financing Funds (FCF), as well as ending the implicit subsidy embedded in the Student Financing Fund (Fies). These measures would improve the nominal balance by 0.25 percentage point of GDP.

Of the estimated gross savings generated by the selected package, 35.4% would come from measures affecting the top of Brazil’s income distribution or those earning above the median. In addition to the measures already mentioned, these include proposals such as ending the personal income tax exemption on retirement benefits and pensions received by people with serious illnesses (R$10.2 billion), limiting interest on equity payments (R$10 billion), and enforcing the public-sector salary cap while eliminating excessive compensation (R$10.2 billion).

By contrast, 13.9% of the savings would come from measures affecting middle- and lower-income groups, including a series of reviews and tighter eligibility rules for social programs, such as reassessments for disability benefits (R$9.9 billion), the Continuous Cash Benefit (BPC) for people with disabilities (R$15.2 billion), and the closed-season fishing benefit (R$2 billion).

Pool of proposals

 

The 30 measures included in Firpo’s package were selected from a pool of 44 proposals that have circulated over the past two years, originating from the government itself, academia, research centers, and the financial market. Some were also developed by Firpo. Taken together, the original proposals would generate R$910.1 billion in savings, or 7.17% of GDP.

The innovation lies in the way he narrowed down the selection, applying an analytical criterion that prioritizes cuts to underperforming policies while preserving those with better evaluations. Broadly speaking, the exercise assigns each measure a score from zero to 10 based on five criteria: effectiveness, efficiency, overlap with other policies, distributional effects, and sustainability. The proposals are also classified according to the strength of the available evaluation evidence for each policy. Measures scoring below the group average are then discarded.

Of the 38 proposals that passed this screening process, six were ultimately excluded because their effects depend heavily on the final design adopted by policymakers or because they are mutually exclusive. Eliminating the wage bonus, for example, would generate R$22.3 billion in savings and was selected over proposals to merge the benefit with other programs.

Two other proposals do not generate spending savings. This category includes reducing the ceiling for real growth (above inflation) in expenditures under Brazil’s fiscal framework from 2.5% to 1.5%, a measure currently under consideration by President Luiz Inácio Lula da Silva’s economic team.

In Firpo’s calculations, this is because of a key assumption adopted in the simulations: revenue grows by 2% a year in real terms. Since current rules allow spending to grow by 70% of primary revenue growth, the resulting increase would be 1.4%, still below the proposed new ceiling.

Although it would not generate savings under the assumptions adopted, the change would have two positive effects, the economist says. First, it would prevent years of stronger revenue growth from translating into permanent spending increases. For example, revenue growth of 3.6% in a given year would allow spending to increase by just 1.5%, rather than the current 2.5%.

Second, it would reduce the potential fiscal space available for new spending. “One concern behind the adjustment is precisely to prevent the fiscal space created from being filled by other expenditures. For example, if funds are left over from congressional amendments but are then used for other spending, the adjustment is undermined,” he explains. “By lowering the ceiling, the available fiscal space also becomes smaller.”ç.;;;

The economist favors even lower ceilings for real spending growth, provided they do not affect priority expenditures. “And there is no point in lowering that ceiling if mandatory spending continues to grow unchecked. That would only squeeze discretionary spending,” he adds.

The six measures whose impact depends heavily on the final political design include issues such as restoring payroll taxes, changing the constitutionally mandated minimum level of healthcare spending, and revising the minimum wage adjustment rule.

Although the final package does not include a specific rule for the minimum wage, the economist outlines possible scenarios based on assumptions currently being discussed publicly. If the existing rule remains in place—with real increases limited to the fiscal framework’s 2.5% ceiling—the package would continue to generate savings equivalent to 2.78% of GDP. If the ceiling for real spending growth were lowered to 1.5%, savings would rise to 2.92% of GDP. If real minimum wage increases were capped at 1%, as economist Manoel Pires advocates, savings would reach 3.11%. And if the policy were limited to inflation adjustments alone, they would climb to 3.49%.

Decoupling under debate

 

Regarding the proposal to decouple retirement benefits from the minimum wage, there is debate over whether the measure would violate one of the Constitution’s entrenched clauses, which cannot be abolished through constitutional amendments. Some analysts believe it may be possible to circumvent this restriction. Firpo adopts the opposing interpretation in his proposal and therefore leaves the measure out. “Ideally, there should be different minimum benefit levels for the labor market, social security, and social assistance. But the Constitution links everything to the minimum wage. So there is no point in considering that,” he says.

Brazil’s demographic trends underpin the decision to freeze education spending in real terms, but not healthcare spending. In the case of education, the country’s declining birth rate justifies the choice. At the same time, Firpo notes that federal spending in the sector is partially protected by the expansion of Fundeb, Brazil’s basic education funding fund.

“Higher education is the sector that would be adversely affected. But part of that impact could be offset by charging tuition for undergraduate students whose household per capita income exceeds two minimum wages,” he argues.

 

According to the World Bank, 65% of students at federal universities belonged to the wealthiest 40% of the population in 2017. Meanwhile, tuition fees charged under the proposed model would preserve free access for approximately three-quarters of students in public higher education, according to Firpo’s own calculations.

In healthcare, demographic trends point in the opposite direction, with an aging population. Another factor is that healthcare spending is rising worldwide because of technological advances. Firpo therefore argues that spending should be allowed to continue growing, but under a revised rule.

“I support decoupling it from Net Current Revenue [RCL]. We could consider something like the Extended National Consumer Price Index [IPCA] plus some additional percentage increase. After all, under the current system, spending is procyclical: during recessions, perhaps precisely when the sector is most needed, fewer resources are available,” he explains.

In addition to listing the measures, Firpo’s study outlines the legislative path required for each proposal and estimates how much they could save if constitutional amendments and lower-level regulations took effect in 2027, while ordinary and complementary laws were approved in 2028. By 2029, two years after implementation began, the package would generate savings equivalent to 0.72 percentage point of primary spending. Five years after implementation began, in 2032, that figure would reach 1.79 percentage points. By the tenth year, in 2037, it would amount to 2.74 percentage points, close to the package’s maximum projected impact.

He also calculates the cost of delays. If approval of the measures were postponed by one year, primary balance savings in 2029 would fall to 0.16 percentage point of GDP and reach 1.60 percentage points in 2032. With a two-year delay, the savings would amount to 0.05 percentage point and 1.41 percentage points of GDP, respectively.

“The problem is that the longer fiscal adjustment is delayed, the more emergency measures are needed. More spending freezes, budget contingencies, phased implementation, and last-minute cash-flow savings. It means a supplier you decide not to hire, a construction project that is never completed… And that also affects the quality of public policy,” Firpo says.

“That is my biggest concern. Fiscal adjustment cannot simply be ignored. The longer it is postponed, the higher interest rates rise, the worse household debt becomes, and the greater the pressure to adjust. But making it under pressure is a recipe for lower quality. So it is better to have a plan and avoid significantly affecting the public services and policies being provided,” he adds.

*By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Viridis advances funding plans with rare earths deal for Europe

Offtake agreement with Solvay guarantees cash flow from Brazilian project, helping secure loans

 

 

 

 

Rafael Moreno — Foto: Divulgação
Rafael Moreno — Photo: Divulgação

Australian mining company Viridis signed a rare earths offtake agreement on Wednesday (November 4) to supply material from its project in Minas Gerais to Belgian chemicals company Solvay’s plant in La Rochelle, France. The seven-year deal is expected to begin with shipments in 2028 and ensures the miner will have a source of cash flow once operations start. The project requires an investment of $449 million (R$2.4 billion at the current exchange rate) and is still in the pre-production stage.

The agreement is important because it will serve as a guarantee for banks with which the miner is in talks to secure loans—a challenging but crucial step for projects that have yet to begin production. “If you don’t have guaranteed cash coming in, nobody wants to lend you money,” Rafael Moreno, Viridis’s CEO, told Valor. “We wouldn’t exist in 2030 if we couldn’t secure the offtake agreement; without it we can’t get financing,” he added.

The miner’s project is part of Brazil’s nascent rare earths industry and is considered one of the next developments likely to begin operating. The only rare earths mine currently in commercial operation in the country belongs to Mineração Serra Verde, which was sold this year to U.S.-based USA Rare Earth.

Viridis’s project is located in the Poços de Caldas Alkaline Complex, a geological formation associated with an ancient volcano in Minas Gerais. The area is also home to a rare earths project owned by another Australian company, Meteoric Resources, which has planned investments of $498 million (R$2.7 billion). Last month, Meteoric announced its sale to Lynas in a deal valued at R$3.5 billion.

The partnership between the Australian miner and the Belgian chemicals company, announced on Wednesday, comes as Western countries seek to break China’s dominance of the rare earths supply chain. Refining, one of the industry’s most complex stages, remains largely concentrated in China.

Solvay’s plant in France, Europe’s first industrial-scale rare earths processing facility and one of the largest outside China, will refine Viridis’s rare earth carbonates—an intermediate product from the mineral processing stage—and turn them into individual oxides with industrial applications.

Under the agreement, Viridis will supply Solvay with at least approximately 70% of its output of light rare earths neodymium and praseodymium, as well as the heavy rare earths dysprosium and terbium. Solvay will also have a right of first offer on the remaining production. The miner expects to produce a total of 2,960 tonnes of rare earth oxides contained in carbonates annually.

The Belgian chemicals company will also license its technology and support Viridis in producing the carbonates. “The agreement allows us to move further down the processing chain in Brazil, as we are bringing its solvent extraction technology to the country,” Moreno said.

Viridis plans to back the project with a capital structure comprising 70% debt and 30% equity. It secured the equity portion in August, raising $154 million (R$843.4 million). The amount includes the company’s own cash, investment commitments from global asset manager One Investment Management (OneIM) and institutional investors, including unnamed Brazilian investors, as well as advance funding commitments from Brazilian asset managers ORE and Régia Capital.

Securing most of the remaining investment through debt remains the company’s biggest challenge. Viridis has already received formal support from export credit agencies in France, Australia, and Canada. It said it is also in talks with European lenders, including the European Investment Bank (EIB), and three Brazilian banks, among them the Brazilian Development Bank (BNDES).

“The EIB has visited the project in Brazil several times, and they are strong supporters of the venture,” Moreno said. “Even with the banks we are talking to, including BNDES, if there is no guaranteed cash coming in, nobody will lend you money,” he added. In September, the company announced it had secured R$77.5 million in financing from the Brazilian development bank for its pilot plant.

The project’s final investment decision still depends on completing the debt financing package and obtaining an installation license from Minas Gerais’s environmental agency. Viridis expects the permit to be issued by December or January 2027.

Asked whether Lynas’s acquisition of Meteoric could pave the way for a wave of consolidation and whether Viridis itself would consider a merger or sale, Moreno said the deal validates Brazilian projects but stressed that the company’s priority is to remain independent until production begins. “If consolidation becomes the best option for shareholders, we will consider it. But for now, our entire focus is on production, and we have no plans for a change of control,” he said.

Moreno also praised Brazil’s National Policy on Critical and Strategic Minerals (PNMCE), enacted in September to accelerate investment in the sector. The policy is due to be fully regulated by December. The executive said he was not concerned that the Solvay agreement, which already commits more than two-thirds of the project’s output to Europe, might raise concerns within the federal government.

“The day they do that [intervene], not another dollar will come into Brazil. I think they understand that, so I’m not worried. Expectations are clear, and we are doing what was asked of us: bringing processing technology into the country,” he said. “Besides, there isn’t even domestic demand for this material at the moment. So even if I sell the remaining 30%—which we will probably do in Brazil—where would it go?” he added.

*By Michael Esquer — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Petrobras seeks transition period to understand tax reform

CEO Magda Chambriard said oil company is submitting questions and proposed transition period during which no fines would be imposed

 

 

 

Magda Chambriard — Foto: Leo Pinheiro/Valor
Magda Chambriard — Photo: Leo Pinheiro/Valor

Petrobras CEO Magda Chambriard said on Monday (9) that the state-owned oil company had submitted questions regarding the tax reform to the Ministry of Finance, whose implementation will be phased in across the country.

Speaking at a legal conference at the Rio de Janeiro State School of Magistracy (Emerj), she said the company had raised concerns and questions about the tax reform, while several provisions are set to take effect beginning in 2027. In light of this, Chambriard said Petrobras had proposed to the Ministry the adoption of a transition period during which fines would not be imposed, allowing companies time to understand the changes.

The executive did not provide examples of the specific questions submitted but noted that uncertainties create room for risks, particularly when considering the company’s operations across different Brazilian states. “We do not really know what will happen [when the tax reform comes into effect]. We are taking risks, and risk is priced in,” she said.

However, Chambriard indicated that some of the company’s questions concern ICMS, a state-level tax, and the cumulative taxation of the levy. She emphasized that Petrobras paid a total of R$278 billion in federal and state taxes last year.

In her remarks, Chambriard highlighted the split payment mechanism, a new provision that separates the amounts corresponding to the new taxes (IBS and CBS) when a commercial transaction is financially settled. The mechanism would allow tax credits to be reimbursed more quickly.

According to her, the tax reform shifts ICMS revenue collection from producing states to consumer states. “When we look at a refinery, for example, we see ICMS being paid to the producing state on inputs, energy, and services.”

Chambriard added that the questions also concern how tax credits will be reimbursed. “This is an issue that will come up alongside the single-phase taxation system and the tax reform. We need to discuss this matter.” During her participation in the event, Chambriard referred to a “fiscal reform,” but Petrobras subsequently clarified that her remarks concerned the tax reform.

“There will be a period during which two tax systems will coexist, which will certainly generate various questions. Companies in general, including and especially Petrobras, have concerns about how this transition will take place. Initially, we believe that any differences in interpretation should not result in potential fines, but rather in constructive dialogue aimed at reaching a common understanding,” CEO Magda Chambriard said in a clarification.

Energy security

 

Chambriard emphasized that renewable energy must “move forward in parallel” with oil production to ensure energy security, reiterating the need for Brazil to pursue a just energy transition.

The executive stated that Petrobras is an energy company, that it was responsible for developing the country’s first onshore wind farm, and that renewable energy “must be affordable for society.”

The Petrobras CEO also pointed out that, during geopolitical conflicts, Brazil maintained stable diesel and gasoline prices and supplies, whereas other countries introduced measures to curb consumption of these fuels. She noted, for example, that diesel in the United States is currently costing “R$9 or R$10.”

*By Fábio Couto — Rio de Janeiro

Source: Valor International

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Bankruptcy protection cases in Brazil hit record high in Q3

Agribusiness and manufacturing drive a 21.2% annual increase, with experts warning of another surge in early 2027

 

 

 

Claudio Damasceno — Foto: Gabriel Reis/Valor

Claudio Damasceno — Photo: Gabriel Reis/Valor

Agribusiness and manufacturing drove another surge in bankruptcy protection cases in Brazil during the third quarter, pushing the number of companies undergoing court-supervised restructuring to a record high. A total of 432 businesses filed for protection during the period, including 197 from those two sectors, bringing the nationwide total to 8,478. The figure represents a 21.2% increase from the same quarter of 2025, the RGF-BIZDOC Monitor showed in data obtained exclusively by Valor.

Experts expect the numbers to climb further, partly because companies tend to postpone restructuring decisions ahead of elections. Many business owners prefer to wait for greater political certainty before seeking court protection. This backlog also helps explain why financial distress is increasingly spreading to the commerce sector, typically among the last links in the production chain to feel the effects of a downturn.

By the end of September, commerce had the largest number of companies under bankruptcy protection, at 1,737, followed by manufacturing (1,647), agriculture and livestock (1,416), and construction (1,103).

Fabio Bentes, chief economist at the National Confederation of Trade in Goods, Services and Tourism (CNC), attributes the growing number of companies seeking protection largely to the monetary tightening brought about by years of high interest rates. Expensive borrowing raises working capital costs and makes it harder for businesses to meet their financial obligations.

“Changes in consumer habits, with people increasingly favoring services over goods, are also difficult to reverse,” Bentes said.

Regional disparities

Mato Grosso stands out as the state with the highest proportion of companies under bankruptcy protection, at one per 1,000 businesses. Goiás follows with 0.61 per 1,000, while Alagoas ranks third at 0.52.

In absolute terms, Paraná saw the most new cases during the quarter, with 88 companies entering proceedings, followed by São Paulo with 55 and Minas Gerais and Goiás with 52 each. Overall, 21 of Brazil’s 26 states and the Federal District (Brasília) saw an increase in the number of companies under court protection.

For Claudio Damasceno, a senior partner at consulting firm RGF-BIZDOC, the consequences extend well beyond the companies directly involved.

“Every company undergoing court-supervised restructuring also means a portfolio of receivables tied up for suppliers, banks and service providers,” Damasceno said.

The financial difficulties of businesses currently under protection are therefore likely to spread to their creditors, creating further pressure on other companies.

The study identifies “customer defaults” as the most frequently cited reason for seeking bankruptcy protection, accounting for 55% of cases. “Declining revenue and demand” and “borrowing costs and interest rates” follow, each representing 16%.

The increase continues to be driven by microenterprises (188), small businesses (137) and medium-sized companies (292). Relative to the total number of businesses operating in Brazil, however, restructuring remains uncommon in these categories.

The opposite is true for large (63) and very large companies (21). Although relatively few are undergoing restructuring, their share of the total number of businesses in their respective size categories is considerably higher.

Delayed fallout

Juliana Bumachar, of law firm Bumachar Advogados Associados, sees the figures as evidence that Brazil’s current restructuring cycle is entering a more mature phase. Large companies have faced significant financial restructuring pressures over the past two years, but the effects typically take time to reach smaller businesses.

“Every major player has small and medium-sized companies in its supply chain. When a large company needs restructuring, it directly affects those suppliers and customers. That triggers a delayed wave of restructuring among small and medium-sized businesses, and we’ve been seeing that since the second quarter of this year,” Bumachar said.

Out-of-court restructuring, often presented as a leading alternative to formal bankruptcy protection proceedings, increased only marginally in the third quarter, from 13 to 15 cases, the RGF-BIZDOC Monitor showed.

Bumachar said the advantages of this approach are clear.

“It’s faster, consensual, cheaper and doesn’t directly damage the company’s reputation. The market’s immediate response is always positive, and prior negotiations with creditors tend to be well received.”

But Damasceno cautioned that the option is not suitable for every company. It generally works better for larger businesses and can serve as a preliminary stage before more extensive restructuring efforts, sometimes followed by formal bankruptcy protection filings.

“In most cases, the company buys time to renegotiate its debts,” he said.

Recovery outcomes

Another finding that caught experts’ attention was the number of companies emerging from bankruptcy protection. During the third quarter, 157 businesses successfully completed the process and remained active, while another 112 had their proceedings converted into bankruptcy.

Since the survey began in March 2023, 19% of companies that sought bankruptcy protection have successfully recovered, a total of 2,085 businesses.

For Damasceno, the figures underscore the importance of seeking court protection before a company’s financial position has deteriorated beyond repair, giving it a better chance of recovery.

Meanwhile, bankruptcy petitions declined from 456 in the second quarter to 306 in the third. Commerce and manufacturing accounted for 60% of bankrupt companies, the report found. Both sectors rely heavily on working capital, making them particularly vulnerable to supplier credit constraints and weakening demand.

Outlook for 2027

The outlook for the fourth quarter and 2027 is bleak. Experts expect another rise in bankruptcy protection filings, particularly as financial distress spreads through supply chains.

Damasceno pointed to an additional 159 requests for precautionary court measures identified in the report. These have not yet become formal bankruptcy protection cases but are expected to add to the total in coming quarters.

External factors will also shape the outlook for Brazilian businesses. In supply chains exposed to international prices, exchange rates, foreign demand and logistics conditions, the effects of adverse developments tend to emerge with a lag.

Companies first experience cash flow pressures, then seek court protection, and only later appear in Federal Revenue Service records, which form the basis of the survey.

Bumachar said one striking feature of companies approaching her law firm is the growing urgency of their requests for help with restructuring.

“Sometimes the company’s situation isn’t even that serious yet, but it’s urgent and can’t wait,” she said.

The lawyer believes there is a high probability of another sharp surge in filings in the first quarter of 2027. With the judicial recess approaching, few companies are likely to risk filing a request now that will not be reviewed until next year.

“The probability is high that the number will explode again in the first quarter of 2027,” Bumachar said.

*By Luiza Calegari — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Brazil risks missing rare earths boom without industrial reforms

Researchers at Fundação Dom Cabral warn that labor, logistics, energy, tax barriers could prevent country from developing processing capacity

 

 

Paulo Vicente Alves — Foto: Divulgação
Paulo Vicente Alves — Photo: Divulgação

Brazil sits atop one of the world’s greatest mineral resources, but risks watching the technological revolution now underway from the sidelines, serving merely as a supplier of raw materials. With the world’s second-largest mapped reserves of rare earths, estimated at 21 million tonnes, the country has enormous strategic potential amid the global race for critical minerals, driven by the energy transition and artificial intelligence. Researchers at Fundação Dom Cabral (FDC), however, warn of a structural gap between Brazil’s geological potential and the State’s actual ability to lead an industrial policy in this direction.

For the experts, their skepticism stems from Brazil’s longstanding inability to overcome systemic constraints in its business environment. “It is difficult because Brazil’s economic environment is not conducive to industrial development. We have labor and logistics bottlenecks. For investors with the capacity to put money into the sector, the most pragmatic approach is to come to Brazil to extract rare earths and take them elsewhere for processing, to Paraguay, for example, where there is sufficient energy, cheaper land and better tax conditions for manufacturing,” said FDC professor Paulo Vicente Alves, a former deputy secretary for planning in Rio de Janeiro state.

“It is unlikely that Brazil will get out of this predicament without a complete overhaul of its economy,” Alves added. “It would have to pursue a strategy similar to the one China adopted back in the 1980s, creating special economic zones where, as a rule, a different set of laws would apply, instead of Brazilian legislation, to encourage the industrial processing of rare earths within the country. I see no appetite whatsoever in the government for doing that.”

Despite their skepticism, FDC researchers dismiss the risk that the country’s substantial mineral reserves across several regions could trigger “Dutch disease,” a macroeconomic phenomenon in which a commodity export boom drives up the national currency and undermines the competitiveness of other industrial sectors.

“For Dutch disease to occur, the rare earths sector would have to account for a significant share of Brazil’s economy, siphoning resources away from other parts of it,” said Carlos Primo Braga, an associate professor at FDC and a former director of economic policy and debt at the World Bank. “In Brazil’s case, Dutch disease is much more closely associated with what happened with the pre-salt oil reserves and the expansion of the oil industry. Brazil is a vast country, and the rare earths sector does not have that kind of weight,” he added.

In the experts’ view, the immediate risk is not excessive currency appreciation caused by an influx of foreign exchange from rare earth exports, but rather a repeat of the extractive model in which Brazil mines raw ore, exports it and later imports finished products or pays royalties for technological services developed abroad, without building its own processing capacity.

“The most likely outcome is that we will end up repeating what happened with our iron ore reserves. We are exporters, but we do not add value. One of Brazil’s problems is its chronic inability to move up the value chain,” Alves said.

He points out that the main bottleneck for any industrial policy involving rare earths and critical minerals is not mining or the discovery of deposits, but high-purity processing—a capital-intensive activity requiring massive scale that is dominated by China, which controls about 85% of processing capacity. To overcome this entry barrier, countries seeking to establish themselves in the sector face high setup costs and must compete with Chinese assets that have already been fully depreciated.

“Once a competitor has achieved scale, entering the market as a second mover means overcoming a very difficult barrier to entry. Can we start small? That doesn’t work. You either come in at scale or you don’t come in at all,” Alves said.

In Brazil’s case, the challenge of developing processing capacity is compounded by a domestic business environment that FDC experts describe as “hostile” to manufacturing. They cite chronic logistics and infrastructure bottlenecks, structural shortcomings in the training of skilled workers, high energy costs, and “dramatic” tax complexity, which places Brazil among the lowest-ranked countries in the World Bank’s Doing Business index.

“The main issue in Brazil is that the business environment remains one of the most challenging in the world. In the latest edition of the Doing Business report, Brazil ranked 124th out of 190 economies. In the specific area of taxation, it ranked 184th. That gives you an idea of how difficult it is to produce and export in Brazil,” Braga said.

Carlos Primo Braga — Foto: Divulgação
Carlos Primo Braga — Photo: Divulgação

According to the professor, Brazil’s institutional rigidity stands in contrast to the track record of Asian countries that led industrialization drives in the last century. While South Korea tied subsidies and government protection to strict benchmarks for international market access and performance, Brazil’s industrial policy has historically focused on the domestic market, shielding companies from inefficiencies without requiring them to compete globally in return.

“Looking at the growth experience of Brazil and South Korea from 1950 to 1980, industrial expansion in both countries was very similar. But the difference is that Brazil’s industrial policy has historically been inward-looking, focused on exploiting the domestic market. In South Korea, there were subsidies and protection, but subject to a very simple rule: favored industries had to perform in international trade to keep receiving incentives,” Braga said.

The FDC professors consider it unrealistic, given the current stage of Brazil’s economy, to aim to develop the entire supply chain, from rare earth mining to the manufacture of semiconductors and robots. Instead, they suggest that a viable approach would be to specialize in strategic stages of mineral processing and industrial production. This could mean focusing on specific niches in assembly, components, or strategic support services, in partnership with Western powers seeking to diversify their suppliers beyond China.

Both experts emphasize that Brazil should pursue the creation of “islands of efficiency,” such as Export Processing Zones (EPZs), which function as industrial districts designated as free-trade areas for international commerce. Braga noted that Brazil already has successful examples, including the Ceará EPZ, within the Pecém Industrial and Port Complex (CIPP), as well as special tax regimes that have benefited Embraer.

“How is it possible for Embraer to be the world’s third-largest aircraft manufacturer in a country like Brazil? It has a lot to do with the special treatment the company receives. About 60% to 65% of the value added in its sophisticated aircraft comes from imported foreign components. When those products arrive in Brazil, they are cleared for delivery to the factories within 24 hours. From Embraer’s perspective, Brazil operates like Singapore. For most Brazilian companies, however, it operates with extreme bureaucracy,” Braga said.

The Fundação Dom Cabral researchers concluded that the window of opportunity created by global demand for rare earths will not remain open while Brazil waits for slow-moving reforms. “I wish I could say otherwise, but I think it will be very difficult for Brazil to ride this wave in the right way,” Alves said.

  • By Rafael Vazquez— São Paulo
  • Source Valor International
  • https://valorinternational.globo.com/
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Brazil’s market sees rates holding at 13.75% through 2027

Major banks, investment firms see little room for Selic rate cuts amid worsening inflation prospects, fiscal uncertainty

 

 

 

Central Bank’s communication following latest Copom meeting increased market concerns
Central Bank’s communication following latest Copom meeting increased market concerns — Photo: Rodrigo Oliveira/Caixa

Market sentiment toward the government remains sour, signaling that the room for Selic rate cuts has become extremely limited as the inflation outlook deteriorates. Major investment firms in São Paulo’s financial district, known as Faria Lima, now forecast that the benchmark interest rate will remain at 13.75% throughout 2027. Meanwhile, the interest-rate market continues to price in the risk of the Selic returning to 15% next year.

The yield curve reflects an implied increase of about 25 basis points in the Selic by the January meeting, followed by further hikes throughout 2027, pushing the rate to around 15% by the end of next year.

Economists’ forecasts, however, rarely include rate hikes next year. The scenario increasingly taking hold, particularly after the Central Bank’s communication at its latest policy meeting, is that rates will remain at 13.75% through the end of 2027.

Firms that do not expect rate cuts include Ace Capital, BTG Pactual, Genoa, Itaú, Legacy, Morgan Stanley, Truxt Investimentos, and XP.

The rationale rests on two main concerns. The first is the deteriorating outlook for Brazil’s public debt following President Luiz Inácio Lula da Silva’s unexpected reelection.

Markets also widely perceive that the inflation outlook is deteriorating. Beyond currency depreciation, economists point to a series of factors that could put upward pressure on inflation in 2027. These include oil prices, the El Niño weather pattern, tax reform, and the proposed end of the six-day workweek with one day off, known as the 6×1 schedule. The update to the basket of goods and services and the weights used to calculate the Extended Consumer Price Index (IPCA), based on the 2024-2025 Household Budget Survey (POF), could also push inflation higher, depending on the new composition and price trends, some economists say.

Arthur Carvalho, chief economist at Truxt Investimentos, forecasts IPCA inflation of 6.5% next year. In a more adverse scenario for food and fuel prices, inflation could reach 8% in 2027.

Arthur Carvalho, of Truxt — Foto: Leo Pinheiro/Valor
Arthur Carvalho, of Truxt — Photo: Leo Pinheiro/Valor

“Cutting interest rates in an environment of accelerating inflation and unanchored expectations does not seem like prudent monetary policy. The Central Bank demonstrated that in its latest decision, when it chose to pause its rate-cutting cycle,” the economist noted.

In his view, the monetary authority should resume raising rates next year, even though Truxt’s baseline scenario is for rates to remain unchanged. “The bar they have set for further rate hikes is very high, with the Selic described as ‘substantially contractionary.’ I believe that assessment is mistaken. If a worse inflation scenario materializes, it will become clear that the real interest rate—the one that actually matters to the economy—is not as contractionary as the Central Bank believes. Once policymakers recognize that, the debate over rate hikes should resume,” he said.

Among the institutions tracked by Valor, Oby Capital is one of the few forecasting interest rate hikes in 2027, projecting that the Selic will reach 14.50% next year.

Camilo Cavalcanti, of Oby Capital — Foto: Masao Goto Filho/Valor
Camilo Cavalcanti, of Oby Capital — Photo: Masao Goto Filho/Valor

Camilo Cavalcanti, a partner and portfolio manager at the firm, said the Central Bank should have spelled out what outcomes it expects to see when describing the rate as “substantially contractionary,” how long it expects those conditions to take to materialize, and what deviations would warrant a change in strategy. “Without those criteria, the expression risks becoming a conclusion shielded from the evidence that should be used to test it. Commitment to the inflation target requires more than simply stating that interest rates are high. It requires showing why they are high enough and how long they will need to stay that way,” he argued.

Expectations of rate hikes are also limited by the prospect of increasingly weak GDP growth in 2027. In recent days, revised forecasts released by financial institutions have pointed to economic growth of less than 0.5%, with some firms already projecting a contraction next year, including Genoa.

Leonardo De Paoli, a partner and economist at Legacy Capital, said stagflation in 2027 is the firm’s baseline scenario. The Selic’s prolonged stay at a high level should further slow consumption and constrain corporate investment, resulting in zero GDP growth. On the inflation front, a series of shocks related to the exchange rate, taxes, and labor costs, as well as higher oil prices throughout 2026, will keep IPCA inflation in a range of 5.5% to 6%. Legacy currently forecasts inflation of 5.7% in 2027, with risks tilted to the upside.

Leonardo De Paoli, of Legacy Capital — Foto: Ana Paula Paiva/Valor
Leonardo De Paoli, of Legacy Capital — Photo: Ana Paula Paiva/Valor

Against this backdrop, the Monetary Policy Committee (Copom) is likely to keep the Selic unchanged at 13.75%, but confidence in that forecast is low, De Paoli said. “There is uncertainty about the economic policy the government will pursue going forward, particularly because the measures announced during this election cycle, if implemented, are likely to make the challenge of fiscal consolidation even greater,” he warned.

De Paoli also notes that, despite the deterioration in the inflation outlook, the monetary authority has shown to be sensitive to the economic slowdown. “It seems to be a Central Bank that would need to see a much greater deterioration than what has occurred since the second-round election results before increasing the degree of monetary policy restraint,” the economist said. “Economic activity appears to carry significant weight in its reaction function. Unless there is a substantial worsening in the exchange rate, the Central Bank is unlikely to move,” he concluded.

The Legacy economist emphasized that, beyond fiscal problems and the economic cycle, the market is concerned about the government’s appointments to lead the Finance Ministry and, in particular, to fill vacant seats on the Central Bank’s board. In his view, the Planalto Palace’s overtures to figures associated with heterodox economic views, along with discussions about changing the 3% inflation target, have unsettled market participants in recent weeks. Investors fear the Central Bank could adopt a reaction function that places less emphasis on inflation.

“This is a concern in the market. The names the President Lula appoints to the Central Bank could matter even more to investors than his choice for the Finance Ministry,” he noted.

Among the names under consideration, economist André Roncaglia, currently Brazil’s representative at the International Monetary Fund (IMF), has caused concern among market participants. De Paoli also believes that resuming the rate-cutting cycle would be challenging even if the government pledged credible spending-side fiscal adjustments, since the market would demand their “effective implementation,” a process that would take time. “There would obviously be a significant easing of risk premiums, especially because the bar for positive surprises from the government is very low,” he added.

According to XP Investimentos, the exchange rate will be crucial to the Selic’s trajectory next year. “The Copom could resume monetary easing if financial assets stabilize and the inflation outlook improves. Alternatively, it could raise rates again if economic fundamentals warrant it,” said economist Rodolfo Margato.

Morgan Stanley does not expect any Selic cuts in its baseline scenario, as fiscal uncertainty and its implications for inflation expectations are likely to limit the scope for monetary easing. The bank nevertheless acknowledges that risks are tilted toward lower rates because of weakening economic activity.

The U.S. bank’s strategy team notes that Brazil’s yield curve commonly incorporates rate-hike premiums during periods of intense fiscal uncertainty. “But those increases materialized only in the two previous episodes of perceived fiscal dominance, in 2015-2016 and 2024, when the Central Bank was already raising interest rates. In other words, a higher hurdle would have to be overcome to shift from rate cuts to hikes this time,” the team said.

In Morgan Stanley’s assessment, the Central Bank could be forced to raise rates if volatility in the real increases again and inflation expectations for 2029 reach 4.50%, the upper limit of the tolerance band around the inflation target.

“According to the latest Focus survey, expectations for 2029 are around 4%, up approximately 0.5 percentage point since the election. We note, however, that they have already reached this level in previous years, including during the debate over the inflation target in 2023. A level of 4.5%, by contrast, would signal an unprecedented de-anchoring of long-term expectations in recent history and could be enough to force the Central Bank to reaffirm its commitment to the inflation-targeting regime,” the team concluded.

*By Gabriel Roca,  Gabriel Caldeira and Victor Rezende , Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Economists say fiscal discipline can coexist with social protection

Slowing mandatory spending growth, rather than cutting benefits, is key to stabilizing Brazil’s debt and preserving social programs, experts say

 

 

 

Rafaela Vitória — Foto: Washington Alves/Valor
Rafaela Vitória — Photo: Washington Alves/Valor

Bringing Brazil’s public finances under control will require slowing the growth of mandatory spending, but economists interviewed by Valor say that does not mean dismantling the social safety net guaranteed by the Constitution. Rather, fiscal consolidation is essential to preserving social programs over the long term and ensuring the government has resources to respond to emergencies.

This is the first article in “False Dilemma”, a series exploring how Brazil can reconcile fiscal responsibility with efforts to reduce inequality. The reports will examine the challenges of keeping social protection programs sustainable, tackling privileges and improving public-sector efficiency. Other articles will explore the economic costs of inequality, including its impact on productivity, as well as indicators of violence in Brazil, among other issues.

Unchecked public spending can fuel inflation, which hits low-income households hardest, said Rafaela Vitória, chief economist at Inter. “Inflation is not out of control today, but we are paying the price of high interest rates to keep it low. Households are burdened with debt because of this. Fiscal discipline matters because it helps improve the well-being of low-income people. It is an indirect form of social welfare.”

Bráulio Borges, a director at LCA and researcher at the Brazilian Economics Institute of the Getulio Vargas Foundation (FGV Ibre), warned that prolonged fiscal instability could ultimately force the government to print money to service its debt.

“That results in too much money circulating in the economy, the currency depreciates and inflation rises. And the inflation tax is regressive.”

The proposals for curbing spending growth bear little resemblance to the sweeping cuts to primary expenditure imposed by Argentine President Javier Milei in 2024. Instead, economists point to changes in Brazil’s minimum wage policy as one of the most important steps toward fiscal consolidation. Their proposals would preserve purchasing power while allowing annual increases of between 0.5% and 1.5% above inflation.

Some argue that the best approach would be to sever the link between the minimum wage and pension and social assistance benefits. Other recommendations include ending the automatic link between health and education spending and government revenue, imposing an effective ceiling on total expenditure, eliminating fraud and reducing overlap among social programs.

Although the economists differ on how these changes should be implemented, they agree that fiscal responsibility and social protection are not mutually exclusive.

Borges pointed to President Luiz Inácio Lula da Silva’s first administration as evidence. “When he took office in 2003, he raised the primary surplus target from 3.75% to 4.25% and created [cash-transfer program] Bolsa Família. That shows there is no incompatibility between fiscal and social policies.”

Marcos Lisboa, former president of Insper and economic policy secretary during Lula’s first term, said constitutional and legal restrictions make substantial cuts to major spending categories difficult. Wages and pensions cannot be reduced, while pension, health and education spending are subject to their own adjustment formulas and revenue-linked requirements.

Slowing expenditure growth is therefore the more viable option, although Lisboa also favors removing those automatic links.

Carlos Kawall, founding partner of Oriz, noted that no presidential candidate had advocated a draconian fiscal policy involving an immediate reduction in benefits equivalent to 2% or 3% of GDP.

“What is being proposed is a policy to contain the growth of social spending, keeping that expenditure from rising as a share of GDP, and changing indexation rules so that, within five years, we can put public debt on a path toward stabilization. That signal would bring interest rates down and prevent the crisis we could face if we stick to the cosmetic measures suggested so far.”

Debt pressures

Economists warn that Brazil’s current debt burden and the pace at which it is growing are unsustainable.

Central Bank data show that gross general government debt reached 82.93% of GDP in September, up 5.09 percentage points from a year earlier. In December 2022, the ratio stood at 71.68%.

The 12-month nominal deficit reached 9.5% of GDP in September, compared with 4.6% in December 2022, reflecting the burden of high interest rates. At its most recent meeting, the Central Bank’s Monetary Policy Committee (Copom) held the benchmark Selic rate at 13.75%, interrupting its previous easing cycle.

Samuel Pessôa, an economist at BTG Pactual and researcher at FGV Ibre, said an economy operating with a real benchmark interest rate of 8% a year cannot be considered healthy.

“The Brazilian economy is sick. Unless we bring interest rates down, we will enter a crisis. No economy can withstand interest rates this high for very long. And if we force the Central Bank to cut rates, inflation will return. We have done that before.”

Economists say stabilizing public finances will require slower spending growth, including on pensions and social assistance, given their weight in the federal budget.

A report by the Independent Fiscal Institution (IFI) shows that pension benefits totaled R$1.03 trillion in 2025, while spending on the Continuous Cash Benefit (BPC), a social assistance program, reached R$127.2 billion.

Together, the two programs accounted for 9.1% of GDP and 48.2% of central government primary expenditure. The proposed 2027 budget projects combined spending of 9.2% of GDP.

“The debate is not about whether social protection should be maintained. It is about how quickly that protection should improve. I support a 0.5% annual real increase in the minimum wage. That was the average growth rate of labor productivity over the past 40 years,” Pessôa said.

Productivity, he explained, determines the pace at which resources expand in the economy. “Some advocate a 2% real increase, but that is incompatible with what the economy can deliver.”

Since 1995, the minimum wage has risen 195% in real terms, while labor productivity has increased just 22%, he said.

Minimum wage reform

Under current rules, real increases in the minimum wage automatically raise the floor for pensions and social assistance benefits such as the BPC. As a result, pay increases for active workers also drive up a substantial portion of federal spending.

Fernando Veloso, research director at the Institute for Social Mobility and Development (IMDS), said this arrangement has no parallel in other countries, where pension adjustments generally aim only to preserve purchasing power.

Brazil’s current formula adjusts the minimum wage for inflation plus GDP growth, subject to a cap of 2% on real gains. Veloso argues that linking benefits to the minimum wage makes wage increases more expensive for the government and complicates spending control.

He proposes adjusting the minimum wage for inflation, as measured by the IPCA consumer price index, with real gains tied exclusively to labor productivity. Pensions, meanwhile, would receive inflation adjustments plus a real increase that would not necessarily match the minimum wage.

Gabriel Leal de Barros, chief economist at ARX, also supports real minimum wage increases of 0.5% a year, reflecting productivity growth. But he believes the best solution is to eliminate the link between the minimum wage and pension and social assistance spending, even if doing so requires the government to invest political capital in a constitutional amendment.

“We need to cut that umbilical cord. It is worth the effort because the impact on market expectations would be enormous. It would radically change the trajectory of public finances, affecting the yield curve and the Treasury’s borrowing costs.”

The goal, Barros emphasized, is to preserve the purchasing power of pension and social assistance benefits, “without any loss in real terms.”

Fabio Giambiagi, also a researcher at FGV Ibre, proposes creating a separate national wage floor for the labor market. Initially set at the same level as the minimum wage, it would subsequently increase at a faster pace, without automatically passing the full adjustment on to minimum pension benefits.

The arrangement would allow wages for active workers to continue rising in real terms while limiting the impact on pension spending.

“This is not a squeeze on retirees. A squeeze means a reduction,” Giambiagi said. “The minimum wage and the pension floor would continue to rise, but the increase would be larger in the labor market.”

Giambiagi also advocates freezing spending growth in real terms in 2027, the first year of Lula’s fourth term, followed by a rule limiting annual increases to inflation plus 1.5%.

He stressed that the proposal is fundamentally different from an abrupt spending-cutting program.

“Milei reduced Argentina’s primary spending by 27% in real terms in 2024. In Brazil, that would not only be unworkable but an aberration,” he said.

For Giambiagi, a commitment to zero real spending growth in the first year would provide an opportunity to put public finances in order and signal a change in fiscal direction, without triggering a contraction comparable to Argentina’s.

Budget rigidity

Beyond minimum wage reform, economists broadly agree that Brazil’s current fiscal framework has lost coherence because its overall spending ceiling coexists with expenditure commitments linked to revenue growth, particularly in health and education.

As a result, measures designed to boost tax revenue also increase some mandatory expenses, which account for more than 90% of spending in an already highly rigid budget.

The government has also introduced mechanisms allowing certain expenditures to be excluded from the fiscal rules, further weakening the framework’s ability to restrain total spending.

For health care, Giambiagi proposes aligning the minimum spending requirement with the overall expenditure ceiling. In other words, mandatory health spending would follow the same adjustment formula as the fiscal framework.

The government could still allocate additional resources to the sector, but those funds would have to compete with other budget priorities.

In education, Giambiagi recommends adjusting federal contributions to the Fund for the Maintenance and Development of Basic Education (Fundeb) by inflation alone.

His argument is that Brazil’s school-age population is shrinking because of demographic changes, making it possible to increase spending per student in real terms even if total funding remains constant after inflation.

Barros said reforms to health and education spending must involve not only the federal government but also states and municipalities.

Borges noted that congressional earmarks and spending through the Federal District Constitutional Fund (FCDF) are also linked to revenue and should be reviewed.

Together, changes to those spending links and the minimum wage policy would account for “70% of the spending-reduction package,” he said.

Borges considers limiting annual real minimum wage increases to between 1% and 1.5% “feasible.”

Braulio Borges — Foto: Anna Carolina Negri/Valor
Braulio Borges — Photo: Anna Carolina Negri/Valor

Social program efficiency

Alongside efforts to restrain expenditure growth, economists advocate improving the design and targeting of social programs.

Veloso argues that their success should be measured by how effectively they reduce poverty, rather than by the amount of money spent.

He described Bolsa Família as an internationally recognized anti-poverty program that delivers results at a relatively low cost. But he believes its targeting has deteriorated since the pandemic.

One of his main criticisms concerns the introduction of a minimum benefit per family, dating back to the R$600 payments under “Auxílio Brasil” during the pandemic.

Combined with an increase in single-person households receiving benefits, the policy has reduced the extent to which payments vary according to family income and household composition.

Barros also sees a need to redesign social programs to eliminate overlapping benefits and combat fraud.

He estimates that each of these measures could potentially save between R$25 billion and R$30 billion a year.

Revenue measures

Pessôa cited several possibilities, including taxing currently exempt securities, reducing tax expenditures such as personal income tax deductions for health and education, and taxing dividends distributed by companies operating under special tax regimes, including Simples and the presumed-profit system.

While economists agree that fiscal consolidation must focus primarily on slowing spending growth, they acknowledge that revenue measures could also help.

Although the additional revenue would offset the higher spending and prevent the fiscal deficit from worsening, it would do little to contain aggregate demand.

He cautioned, however, that raising taxes to finance a 2% real increase in the minimum wage would not be the best approach.

That is because minimum wage recipients tend to spend virtually all their additional income, sustaining pressure on the economy.

Inflation and interest rates would therefore remain elevated.

*By Marta Watanabe and  Vinícius Lucena — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Analysis: Brazil’s car tax breaks enter a new chapter

New Selective Tax rules extend benefits to certified sustainable vehicles, continuing a long-standing pattern of incentives for the auto industry

 

 

 

In Brazil, tax breaks have historically been granted to cars purchased by people with disabilities, professional drivers such as taxi operators, and other groups—the latter category often linked to programs negotiated between the government and automakers. This time, the provisional presidential decree No. 1,399/2026, published on Wednesday (4) and addressing the excise (or the Selective Tax), includes vehicles with a sustainable-version certification issued by the Ministry of Development, Industry, Trade and Services (MDIC).

The sustainable-version certification is tied to the Sustainable Car program, launched in July 2025. The initiative, which exempted a list of models from the Industrialized Products Tax (IPI), was created with an environmental goal in mind. It granted tax exemptions to cars with low pollutant emissions and a high proportion of recyclable materials. In practice, however, it was designed to boost sales at a time when the market was sluggish.

lthough electric cars also produce low emissions, they were excluded because the program was limited to vehicles manufactured in Brazil. No electric cars were being produced in the country at the time, and under the program’s criteria, even models that are now imported in semi-knockdown (SKD) form for final finishing in Brazil remain ineligible. In other words, all Chinese models were excluded. The measure prompted complaints at the time from EV brand representatives.

The program initially covered a limited number of models—mostly smaller, lower-priced cars. Following lobbying efforts by automakers in Brasília, the list was subsequently expanded to include additional configurations and models launched after the program was created.

The list of eligible vehicles now includes 14 versions of the Chevrolet Onix, Fiat Mobi, Fiat Argo, Citroën C3, Hyundai HB20, Renault Kwid, Volkswagen Polo, and Volkswagen Tera. With the IPI exemption, these models—whose entry-level versions are priced at around R$70,000, although higher-end trims can cost considerably more—received discounts ranging from R$3,000 to as much as R$13,000.

The addition of new models was even announced by Geraldo Alckmin, the vice president and then head of the MDIC, on his Facebook account. Alckmin is one of the program’s strongest supporters. After its launch, he began visiting car dealerships on Saturdays to monitor sales performance.

The program did, in fact, attract consumers. According to the National Association of Vehicle Manufacturers (Anfavea), sales of eligible models rose 28.9% from January to September. Over the same period, the market for passenger cars and light commercial vehicles grew 16.6%.

The market expansion prompted Anfavea to revise its full-year projections. In 2026, sales of new vehicles are expected to exceed 3 million units for the first time in 14 years.

Car rental companies benefited from the program as well, and to a greater extent than end consumers. Anfavea data show that of the 374,000 eligible vehicles sold from January to September, 277,000 were sold through direct sales and 97,000 through retail channels.

Over the years, the automotive industry’s tax system has been shaped by rules tailored to specific types of vehicles. These rules have also almost invariably been followed by expansions of the lists of eligible products. In some cases, automakers have even adapted product development and launch plans to ensure their vehicles qualify.

The best-known example was the economy car program. It was launched in 1993 after then-President Itamar Franco asked Volkswagen executives to bring back the Beetle. In return, he would grant the model an IPI exemption.

Volkswagen promptly agreed to the president’s request. Itamar Franco, an honored guest at the relaunch celebration, rode in a convertible Beetle, echoing Juscelino Kubitschek’s appearance at the inauguration of Volkswagen’s factory in São Bernardo do Campo in 1959.

What followed, however, was an intense, prolonged lobbying effort by all automakers to have their own models included in the tax benefit. Legislation was then introduced for economy cars, exempting not only the Beetle but also vehicles equipped with 1.0-liter engines from the IPI.

In the next phase, automakers adapted their new models to fit the category, eventually expanding the list of IPI-exempt vehicles far beyond the original idea of a bare-bones, no-frills car. The industry then came up with the 1.0-liter turbo engine, demonstrating that when tax breaks are at stake, automakers can learn—and do—just about anything.

Brazil’s car tax breaks reflect decades of automakers’ influence on policy — Foto: Pixabay
Brazil’s car tax breaks reflect decades of automakers’ influence on policy — Photo: Pixabay

*By Marli Olmos, Valor — São Paulo
Source: Valor International
https://valorinternational.globo.com/

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Industrial trade group lobbies Senate to lower CBS tax rate

National Confederation of Industry says 11.3% rate set by Federal Court of Accounts for Goods and Services Contribution is too high

 

 

The National Confederation of Industry (CNI) criticized the 11.3% rate set for the Contribution on Goods and Services (CBS), which is scheduled to take effect in January 2027, saying it is higher than necessary to maintain the current rate. The organization argued that the Senate should discuss lowering it to prevent additional costs for businesses.

The Federal Court of Accounts (TCU) announced that the benchmark rate for the tax would be 11.3%. The CNI acknowledged the unprecedented assistance provided by the court in setting the rate, but believes the figure is higher than necessary to maintain the tax rate

“Further discussion is needed to determine the final rate, which will be set by the Senate by December 15,” the CNI said in a statement.

In the confederation’s view, the Senate’s review must “weigh political and technical considerations,” drawing on TCU’s study, and “strike a balance between the expectations of consumers and those of productive sectors.”

The confederation said the tax rate already is above the threshold appropriate for a developing country and warned against the “shortsighted view that there are no limits to imposing new costs on consumers.”

If senators do not approve the rate by December 15, the figure set by the TCU will take effect.

The tax reform replaces the Social Integration Program (PIS), the Contribution for the Financing of Social Security (Cofins), the Tax on the Circulation of Goods and Services (ICMS) and the Tax on Services (ISS). It also reduces the rate of the Tax on Industrialized Products (IPI) to zero for most products. The reform creates the CBS and the Tax on Goods and Services (IBS) to replace these levies.

According to CNI, TCU’s projection was based on the average tax rate from 2012 to 2021. However, PIS-Cofins revenue was boosted because ICMS and ISS were included in its calculation base. As a result, the tax rate calculated by the court is higher than what would have been reached, according to the CNI, had a more recent reference period been used.

“From a technical standpoint, the need for further discussions is justified by the nature of projection exercises, which are subject to variables involving a range of uncertainties,” the CNI said.

In the confederation’s view, discrepancies in the projections may stem from variables such as the reduction in tax evasion expected from the reform, the discount applied to public-sector purchases, and assumptions about revenue from the Selective Tax and the residual IPI.

CNI said current tax rate already is above the threshold appropriate for a developing country — Foto: Pixabay
CNI said current tax rate already is above the threshold appropriate for a developing country — Photo: Pixabay

*By Hamilton Ferrari— Brasília
Source: Valor International
https://valorinternational.globo.com/

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Under pressure, Lula calls for fiscal responsibility to draw foreign capital

Statement comes after meeting with former ministers and economists close to the president to discuss economic guidelines for his fourth term

 

 

 

Finance Minister Dario Durigan says no concrete measures have been discussed so far — Foto: Reprodução/GloboNews

Finance Minister Dario Durigan says no concrete measures have been discussed so far — Photo: Reprodução/GloboNews

President Luiz Inácio Lula da Silva said Thursday (5) that fiscal and legal responsibility are necessary to attract foreign investment to Brazil. Amid growing market concerns over fiscal policy, he made the remarks just hours after meeting with Vice President Geraldo Alckmin, ministers, former ministers, and economists close to him.

“We must have legal responsibility and fiscal responsibility. That is why we cannot treat partnerships as a game,” he said during the first meeting of the National Council for the Industrialization of Critical and Strategic Minerals (Cimce), at the Planalto Palace. “We know that, to attract investment, we need to have our economy in order. People want to know whether we are serious.”

Earlier in the day, at the Alvorada Palace, Lula met with former Finance ministers Fernando Haddad and Guido Mantega; Alckmin; Finance Minister Dario Durigan; Planning and Budget Minister Bruno Moretti; Chief of Staff Miriam Belchior; Management and Public Service Innovation Minister Esther Dweck; Brazilian Development bank (BNDES) President Aloizio Mercadante; and former BNDES president Luciano Coutinho.

Also in attendance were economists Laura Carvalho, a professor at the University of São Paulo (USP) and an associate researcher at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), and Eduardo Moreira, founder of news portal ICL. The meeting participants are economists with heterodox views. Further meetings with civil society and different sectors of the market will be held, Durigan said.

“There was no discussion of specific measures, and this is not yet the time to address any specific measures,” the minister told reporters after the meeting, adding that participants agreed on their assessment of the economy and the paths to be followed in the coming years. He did not confirm, however, whether the federal government intends to submit proposals to the National Congress this year.

The gross general government debt (DBGG) reached 82.9% of GDP in recent months, more than 10 percentage points higher than at the start of Lula’s third term, and projections continue to point to further increases in the coming years. The central government’s 12-month cumulative primary deficit stands at R$49.5 billion, or 0.38% of gross domestic product (GDP).

Proposals under way

 

Despite the lack of concrete proposals at the meeting, it marked the first step toward defining measures that could be adopted. Until now, discussions with the president had focused on trying to convince him of the need to adjust public finances. But Lula has shown little urgency in moving forward with the issue, according to government sources who spoke to Valor.

The proposals are expected to be presented to the president after he returns from trips to Turkey and the Philippines next week, Durigan said. The finance minister and Moretti will be responsible for organizing suggestions based on the meeting’s discussions. According to government sources, both had already been working on assessing possible measures, discussing their effects individually and seeking to identify alternatives that Lula might accept.

The challenge is to find a middle ground that improves the trajectory of public finances without imposing losses on the population or undermining social programs, measures to which Lula has shown resistance. Economic officials, however, believe it is important to make progress on structural changes to public spending, particularly mandatory expenditures, which are on an upward trajectory and put pressure on the budget, making it harder to stabilize public debt.

Proposals discussed so far, such as using the midpoint of the fiscal target as the benchmark for budget freezes and allowing mandatory spending to be frozen, are considered important to give budget management some breathing room. Public finance experts, however, believe these measures must be accompanied by more far-reaching changes to send a consistent signal that public finances are sustainable. There is still no agreement on which measures Lula will be willing to accept.

Defining these measures also hinges on the president’s political priorities. Until now, Lula had been less focused on fiscal discussions and more concerned with responding to what he interpreted during the second round of the elections as a public desire for changes in the way the government operates, expressed above all in the streets and through mobilization on social media. Government sources say Lula’s political timetable differs from that of the economic team, requiring caution in presenting proposals.

In this context, ministers have adopted an approach described as almost “educational” to explain to the president why spending needs to be reviewed. Their argument is that public spending will have to be “rationalized” to ensure the sustainability and continuity of social programs. In their conversations, they have avoided even using the expression “fiscal adjustment.”

Among the spending “rationalization” measures under consideration is the possibility of creating greater coordination between the constitutionally mandated minimum spending levels for health and education, allowing states and municipalities to adjust some expenditures to their demographic needs.

On the revenue side, discussions continue over taxing securities such as Real Estate Credit Bills (LCIs) and Agribusiness Credit Bills (LCAs). One faction within the government argues that the tax should be levied through the income tax system, which would require debate in Congress, rather than through the Tax on Financial Transactions (IOF), on the grounds that the latter would be poorly received by financial markets.

Also under discussion is strengthening the agenda to combat special privileges, particularly excessive salaries in the judiciary, military pension benefits and congressional budget amendments. In his remarks after the meeting, Durigan said topics discussed included improving fiscal results, the quality of public spending, interest rates, international pressures on fuel prices and the cost of living for the population.

Asked about changing the parameters of the fiscal framework, the minister declined to disclose any decisions in advance. He said, however, that the government wants to move toward primary surpluses in the coming years by reinforcing the current fiscal rules. The primary balance targets in the Budget Guidelines Bill are surpluses of 0.5% of GDP in 2027, 1% in 2028, 1.25% in 2029 and 1.5% in 2030.

*By Giordanna Neves, Lu Aiko Otta, Mariana Andrade and Lucas Teixeira — Brasília

Source: Valor International

https://valorinternational.globo.com/

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