Haddad Seeks Deal With Congress on Payroll Tax Bill in Next Week

Martha Beck
·3 min read
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(Bloomberg) -- Brazil’s Finance Minister Fernando Haddad said the government is negotiating the “form and content” of the payroll tax bill and expects to work out an agreement with congress sometime this week or next.

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Haddad said in an interview with TV Cultura late Monday that he is confident in the government’s capacity to bring the fiscal deficit to zero this year as pledged.

“I have a goal, but it doesn’t just depend on me — it depends on the judicial, executive, legislative powers,” he said. Haddad also denied that changing the fiscal rule was discussed with President Luiz Inácio Lula da Silva.

After winning the approval of a series of tax measures last year, Haddad is now struggling to convince lawmakers to raise the additional revenues necessary to fulfill his pledge to zero Brazil’s primary fiscal deficit, which excludes interest payments, in 2024.

Read More: Brazil Congress Gets Haddad Closer to Zero 2024 Fiscal Deficit

The latest setback has come from the Senate, which has threatened not to vote on a bill that Haddad estimates would help fill a gap of 32 billion reais ($6.5 billion) that resulted from lawmakers’ move to override Lula’s veto of a payroll tax exemption.

The proposal, which Haddad unveiled in late December, includes a gradual resumption of payroll levies, a limit on tax credit compensation and revisions to tax relief for the events sector. The government is considering changes to win congressional support, and Haddad has spent the last week locked in negotiations with legislative leaders.

The zero-deficit target — Haddad’s top priority for 2024 — has been the subject of debate within Lula’s administration since the leftist leader cast doubt on the government’s ability to hit the mark in late October. While Haddad won an internal battle to maintain the goal, markets are already pricing in an eventual change to a deficit of 0.8% of gross domestic product, according to a central bank survey of analysts.

Political Tensions

Markets initially viewed Haddad’s appointment as finance minister with skepticism, but the combination of new fiscal rules, massive tax reform legislation and plans to shore up Brazil’s public accounts have helped him grow on investors.

Read More: Brazil Finance Chief’s Market-Friendly Pose Alienates the Left

Those initiatives, however, have upset some Lula allies, who see them as a barrier to the president’s plans to boost social spending. Haddad is also widely considered a potential successor to Lula, a status that has generated tensions in his relationships with other ministers and some members of the leftist Workers’ Party.

Interest Rates

Haddad is still pushing Brazil’s central bank to lower interest rates as a way to boost economic growth, especially in the face of sluggish forecasts for this year.

After leading one of the world’s most aggressive tightening campaigns in the wake of the pandemic, the monetary authority in August kicked off an easing cycle that has reduced the benchmark Selic rate to 11.75%. It has signaled two more half-point cuts through March.

In the interview, Haddad said he defended an earlier rate cut by the central bank but now recognizes that external environment did not make it possible.

Read More: Lula Gets New Nemesis in Inflation Fight as El Nino Brings Rain

Brazil’s annual inflation rate ended 2023 within the central bank’s target range for the first time in three years. Still, adverse effects from the El Nino weather phenomenon are threatening that progress, with recent price spikes for staple food items hitting Brazil’s poorest people hardest. Central bankers, meanwhile, caution that deeper rate cuts are unlikely while inflation estimates remain above this year’s goal.

The minister said the government still hadn’t made a decision on the next central bank president, but signaled that one of the current directors appointed by Lula could take over when Roberto Campos Neto’s mandate ends at the end of this year.

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