“The framework will lead to a brutal increase in the tax burden,” says the former head of the central bank.

the former president of central bankAnd Afonso Celso Pastore It is estimated that the government will need to increase the tax burden so that it is tax framework Provided by the economic team manages to reduce the ratio between debt and gross domestic product from the state. If the government agrees to this framework, it gets a license to increase spending. If he does not increase the tax burden, said Pastore, the primary surplus will not be generated.

When announcing the financial regulations, the Minister of Finance said: Fernando Haddadstated that he would propose new measures to end “tax turtles” and increase collection by R$150 billion—the new framework depends on increasing government revenue to be successful.

We will have to increase the tax burden, and the question that will remain for the minister to answer is, perhaps, who will choose to raise the burden. Pastore said that this equation ends only with a brutal increase in the tax burden.

The following are key excerpts from the interview provided to Estadao.

what is the evaluation of mr. Regarding the financial framework presented by the economic team?

The purpose of the framework is to reach a primary surplus that allows for a reduction in the debt/GDP ratio. The only way, within this framework, to achieve the primary results that reduce this percentage is to significantly increase the tax burden. I’m looking at a simulation by Marcos Lisboa and Marcos Mendes (published in Brazil) that suggests an increase of about 5.2 percentage points in GDP. this is not possible. This framework has impeccable calculations, through which Minister Haddad was able to prove that if spending grows less than revenues, then it generates primary surpluses, but it has a flawed economy, and it does not guarantee the result.

Is this decline in the debt/GDP ratio not going to happen?

The government’s goal is to increase spending. I think it achieves this goal. Now, don’t hit the target of lowering the debt/GDP ratio.

In your reading, is this framework then not allowing for lower interest rates?

First, the mere fact that the framework exists does not lead to a reduction interest rate. Even if the framework was good, the central bank could not take any initiative. He will have to wait for inflation to drop before he can lower interest rates. I don’t expect any sign in this direction from BC. I just don’t understand how the financial market has had such a positive reaction to this framework. This do not understand. It’s something we’ll see in the coming weeks.

Will there be market disappointment later?

I’m not a psychologist, and I can’t explain how people view economic events. Now, I say this: If you look at arithmetic, you can have a positive reaction, but if you look at economics, the reaction must be very negative.

Why?

Minister Haddad emphasized that if they were thinking of increasing the tax burden and raising the tax rates that already exist, there would be no increase. Secondly, he said he was going to go look for turtles. One of these turtles are the so-called exclusive chests. I have no problem with exclusive funds being taxed. In fact, it generates revenue without reducing demand within Brazil. The R$ 150 billion that the government wants to increase revenue, maybe it will get, with taxes on electronic bets, etc. Now, you will need to return 5% more annually in the following years. Then you should go to the tax credits. We will have to increase the tax burden, and the question that the minister must answer is perhaps who will choose to increase the burden.

There is a significant political cost to moving to tax breaks.

It’s complicated, but it must be done. If he wants to take that framework he’s going to have to overload, he’s going to have to decide where he wants to overload. I say that it is better, rather than raising a regressive tax in its occurrence, as is the case with consumption tax, it is better to resort to tax breaks.

And the space is small to increase the load?

If the government agrees to this framework, it gets a license to increase spending. If he does not increase the tax burden, the primary surplus will not be created. If the primary surplus is not generated, then we go to two scenarios: either inflation rises, which increases revenues and leads to lower spending in real terms, or it becomes a further slowdown in economic growth, because the central bank, while maintaining its independence, continues with a restrictive policy.

what scenario does mr. I think more likely?

Any scenario is possible. If the government can equip the central bank and generate a majority of managers to carry out the monetary policy they want the BC to carry out, then inflation will rise easily.

and what is the drop mr. for the interest rate?

I don’t see a decrease this year. I will see a decrease in the future in 2024.

What about the economy without expecting a fall?

Agriculture’s GDP will grow tremendously. Our farming is efficient, we are exporters of agricultural products, international prices are very good, Sao Pedro has helped us. The weather was perfect. In Focus (BC’s weekly poll with forecasts of market analysts), growth is expected to be less than 1%. This means the following: services and retail are suffering much more than agriculture. We could arrive in the second half of the year with slightly negative GDP growth rates.

What will be the strength of the government in the context of a weak economy where tough measures need congressional approval?

There is a conflict in the field of economic policy between fiscal and monetary policy. This conflict goes into the political arena, the government against the central bank. What are the implications of this on the political level? It’s something we’ll have to see, but I think this political battle will continue and escalate and grow.

Don’t high interest rates make the credit situation worse?

There is no credit crisis in the country. This is a talk. There is no credit crunch in the world. There is no banking crisis in the world. The United States experienced a bank run. The management of banks is solved by guaranteeing deposits, and inflation is combated by interest rates. This is done in the United States and Europe. And in the case of Brazil, there wasn’t even a bank run. There was an unfortunate episode of a massive scam by Americana. This, basically, has caused an increase in bank margins with the skepticism of whether this scenario exists in other companies, which I believe does not exist. I don’t see greater credit pressures than from as restrictive monetary policy as we are seeing.

Given this international context, what should the Fed do next?

The Fed announced that it should do another 0.25 hike. The US economy is hot. It will either stop at this 0.25 level or promote another rally at 0.25. Now, we will watch the US economy, over time, slow down in growth.