“We already have the highest VAT in the world”, says IFI director

THE The director of the Senate’s IFI (Independent Fiscal Institution), Vilma Pinto, assessed that Brazil already has the highest VAT (Value Added Tax) rate in the world, but that the rate is spread across the various taxes charged by the government. For her, the difference is that now there will be more transparency about how much the population actually pays in taxes.

In an interview with Power360, Vilma addressed several issues related to the dynamics of the Brazilian economy: fiscal risk, tax reform, the Social Security “time bomb”, payroll tax relief and the public accounts of states and municipalities.

According to her, the measures adopted by the government to increase revenue are insufficient to offset the increase in spending. Fiscal adjustment on the revenue side may even bring temporary relief to public accounts, but if there is no control over expenses, the scenario will become unsustainable.

Vilma points out the need to revisit the debate on the structure of spending on Social Security, which will have the largest Budget in the Esplanade in 2025: more than R$1 trillion.

Read the full interview below:

Poder360: What is IFI’s assessment of Brazilian fiscal risk?

Vilma Pinto: We have to look at the fiscal issue from two perspectives: the scope of the rules – whether there is a risk of non-compliance in the short term – and their sustainability in the medium and long term.

When we look at the short term, there are some points to be analyzed: on the one hand, the government has been announcing measures that are moving towards increasing spending and, on the other, it is trying to compensate by increasing revenue.

The measures are successful, but they are often insufficient to achieve fiscal targets and offset increased spending. This is what we can see in Primary Revenue and Expenditure Assessment Report prepared by the Executive.

Revenue is growing, but below what is needed to meet the zero deficit target. From the government’s own perspective, it will be difficult to reach the stipulated target. The IFI is already foreseeing a scenario in which the target will not be met.

And in the medium and long term?

The new fiscal rule improves the country’s fiscal sustainability. However, the improvement is more gradual than necessary to stabilize the public debt/GDP ratio.

The new fiscal framework model improves the fiscal result, but will be limited in containing the growth of public debt in relation to GDP if nothing else is done.

There are limits on expenditure growth linked to revenue growth, but there are other expenses that grow according to different rules, such as the minimum wage adjustment.

Therefore, it will be necessary to debate again the need for structural reforms and revisit the evolution of spending to the detriment of the spending cap.

What is the most urgent structural reform?

The IFI does not make recommendations, but a relevant point of attention is Social Security, especially when we look at the Union Budget.

In 2023, when the government submitted the budget for the following year, there was a scenario of social security expenditure in the order of R$900 billion.

The IFI, however, had already calculated the expenditure at R$920 billion. We warn that the government’s figures were underestimated.

The government, in turn, signaled its intention to carry out a registry review to optimize resources.

In the 3 bimonthly assessments it has carried out so far, the government has increased the estimate of increase in social security spending.

And this is an expense that has a very significant impact on the Budget in relation to other expenses.

How do you assess the extension of the payroll tax exemption?

With the change in the tax base – from payroll to revenue – the tax relief created jobs, but at a very high cost.

Not that the merit of this policy is wrong, but the cost of maintaining it for the government was often higher than the cost to the worker.

A management committee had to be created to evaluate the tax relief policy. Social security was already in deficit, and there was already a lack of resources to cover it.

Without explicit and specific criteria, measures were approved to extend the tax exemption and increase the number of sectors benefiting.

Now, ending the tax exemption once and for all could have negative impacts on the job market and companies.

At the same time, gradually reimbursing taxes requires the need to prove that it will not affect fiscal rules.

All of this needed to be put on “clean sheets” to create a consensus that it was necessary to extend the exemption, but with compensation and a deadline to end.

Are the measures presented sufficient to compensate for the tax relief?

We have to do the math to check the effectiveness of the measures, but most of them are temporary.

So, the measures may help in the short term, but we have to see their impact until the end of the tax relief, at the end of 2027.

Not only that: we need to think about how the benefited economic sectors and the job market will be impacted after the tax exemption ends.

In my view, the concern is how the end of the tax relief in the future could affect economic dynamics. If the level of employment decreases, for example, there will be less social security revenue.

What did you think of the project that renegotiates the payment of state debts?

It is possible to observe a future impact for the Union in the flow of receipt of these resources, but the program will bring relief to the States and municipalities in debt flows.

I think this discussion needs to be analyzed from another point of view: how can we help the States without them having to resort to the Union again?

In the history of renegotiations of state debts with the Union in recent years, we have had many laws that have not resolved the problem.

It is necessary to improve the Fiscal Responsibility Law and implement measures to bring fiscal solidity to the States.

What measures, for example?

The Fiscal Responsibility Law provides for the creation of a management council to monitor, regulate and harmonize the fiscal rules contained in the legislation.

Although the advice is in the letter of the law, it has never been implemented. This creates inefficiencies. Each state audit court interprets and judges the law in a unique way.

In most states, the understanding of state audit courts is in the direction of relaxing the rules of the Fiscal Responsibility Law.

This contributes to weakening the fiscal situation of the States. Therefore, it is necessary to create a management council.

A PEC (Proposed Amendment to the Constitution) was also approved, which reopens the deadline for municipalities to pay their social security debts in installments. What is the impact?

IFI has not yet fully assessed [a PEC]but it is as I said about the States: the measure can bring relief to municipal management, but it will be temporary if it is not combined with the management of public finances to bring greater solidity.

The fiscal situation of municipalities became more fragile, especially with complementary laws 192 and 194, which imposed losses on the States and municipalities with the reduction in ICMS revenue. [Imposto sobre Circulação de Mercadorias e Serviços].

But some benefits helped municipalities, such as the increase in the percentage of FPM earnings [Fundo de Participação dos Municípios] and the new Fundeb [Fundo de Manutenção e Desenvolvimento da Educação Básica e de Valorização dos Profissionais da Educação].

Because of this, I believe that the fiscal situation of municipalities is still a little better than that of states.

Regarding tax reform, what is your assessment of the project approved by the Chamber that unifies taxes in consumption taxation?

The premise is that the tax burden on consumption will be maintained. During the transition period, the government will have an idea of ​​the revenue potential of the new regime based on the initial IBS rate. [Imposto Sobre Bens e Serviços] and CBS [Contribuição Sobre Bens e Serviços], that make up the dual VAT.

With the gradual increase in the tax rate and the reduction of other taxes, the tax burden is being calibrated so that, at the end of the transition, the amount collected by the government is exactly the same as under the previous regime.

This, however, does not guarantee that there will be no increase in the tax burden on consumption. Let me explain: despite the need to comply with the Union’s reference rate, each state and municipality may define its own rate, which may be higher than the reference rate. In this case, we would eventually have an increase in the local tax burden.

I hope that most states and municipalities follow the reference rate, especially in the initial period, so that the tax burden is maintained.

Another important detail is that if a state or municipality decides to increase its tax rate in relation to the reference rate, all goods and services in the CBS “universe” will be impacted. If there is an increase, it goes up for everything, not just for a specific good or service.

So, I believe it is possible that the tax burden will become unstable in proportion to GDP. [Produto Interno Bruto].

Is there a risk that Brazil will have the highest VAT on the planet?

Yes, but the issue is that the country already taxes a lot, but no one knows exactly how much it pays in taxes. We only have estimates.

To a certain extent, we already have the highest VAT rate in the world, but it is spread across the various taxes we pay.

Now we will have greater clarity. I have no doubt that it will be a very high rate, but the idea is that it will not be higher than it is today.