(Bloomberg) — Brazil’s government said it will issue an interim measure to offset the cost of a controversial payroll tax cut as it seeks to preserve the gains from derailing efforts to meet its primary budget target this year.
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The measure limits the compensation of tax credits for companies, the Ministry of Finance announced on Tuesday.
The payroll tax exemption for municipalities and 17 economic sectors has been a source of tension between Congress and the government of President Luiz Inacio Lula da Silva, which wanted to end it as part of Finance Minister Fernando Haddad’s efforts to to eliminate the country’s primary budget deficit. interest payments, in 2024.
After opposition from lawmakers and businesses, the government ultimately decided to phase out the exemption, which the Finance Ministry forecasts will cost 26.3 billion reais ($5 billion) this year. The new interim measure will have a budgetary impact of 29.2 billion reais to cover costs, the report said.
Haddad has faced skepticism from markets and investors about his ability to achieve the zero deficit target, especially as Lula has sought to increase spending to stimulate Latin America’s largest economy.
It is essential to meet the budget target, especially given the global economic volatility caused by the Federal Reserve’s caution on US interest rates, the ministry’s executive secretary Dario Durigan said at a press conference in Brasilia on Tuesday.
–With help from Bruna Lessa.
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