Brazil To Rein In Fiscal Support As Economy Improves

by Mike Godfrey, Tax-News.com, Washington

16 September 2009

The Brazilian government has disclosed that, following a return to strong growth in Q2 2009, along with promising signs of economic recovery, it will allow previously introduced temporary tax breaks to expire and instead stimulate the economy through marginally increasing spending and easing the cost of borrowing.

Data released by the Brazilian Census Bureau, or IBGE, on September 11, showed that fiscal measures, introduced by Prime Minister Luiz Inacio Lula da Silva during 2008, have had the desired effect in stimulating a return to growth, reporting that the country's economy expanded by 1.9% in Q2. Brazil’s manufacturing sector showed the most promise, expanding 2.1% in the first quarter, while services grew by 1.2%. Waning global demand for agricultural products, however, saw the industry contracting marginally by 0.1% in Q2 on the previous quarter.

The report hailed tax breaks on auto sales, manufacturing supplies, and a cut to IPI industrial tax on household appliances for contributing greatly towards Brazil’s rapid recovery from its first recession in 17 years.

Speaking to national paper Estado this week, Brazilian Finance Minister Guido Mantega disclosed that despite helping keep the economy afloat, the time for tax breaks is coming to a close, and that fiscal stimulus would be reined in in order to retain Brazil’s comparatively low debt. Mantega said that many temporary cuts aimed at supporting manufacturers and construction would not be further extended, and that support for the automotive industry would be phased out from December 2009.

On future stimulus measures, Mantega said that whilst there is “not much room from the tax perspective,” the government will instead encourage continued economic growth through a policy of low interest rates and loan incentives. The government, he explained, will formulate a stimulus package in 2010 equal to around 1% of GDP formed primarily of increased spending across the board, including on welfare, which the government believes will both encourage increased economic activity and pay for itself by bolstering tax receipts. The minister noted that Brazil’s tax take, which has diminished over the past nine months, is expected to recover swiftly during 2010 as the economy regains vitality.

According to an OECD report published in July, which forecasted that Brazil would see 4% growth in 2010, following a contraction of 0.8% in 2009, Brazil is resisting the global downturn better than many other countries.

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