By Marcela Ayres
BRASILIA (Reuters) -Brazil’s Finance Minister Fernando Haddad on Thursday sought to calm the market following a meltdown over the announcement of a reform that would increase income tax exemptions, emphasizing that the measures would be fiscally neutral and take effect only in 2026 after Congress approval.
After weeks of delays, Brazil on Wednesday announced a package to contain mandatory spending, accompanied by an unexpected income tax reform aimed at easing the burden on the middle-class to mitigate potential negative public backlash.
Markets reacted negatively to the strategy, with the Brazilian real weakening over 1% on Thursday and sliding past 6.00 per U.S. dollar, setting a record low while interest rate futures extended their upward surge.
Haddad told a press conference that the move to increase the exemption threshold for those earning up to 5,000 reais a month had an estimated 35 billion real ($5.89 billion) fiscal impact, but that would be fully neutralized by compensatory measures.
The government said that around half of the compensation would come from setting a higher effective tax rate for the wealthiest.
Those earning more than 600,000 reais per year would see their effective income tax rate increase, reaching 10% for individuals earning over 1 million reais annually, according to the proposal.
The current effective tax rate is 4.2% for the top 1% of earners and 1.75% for the top 0.01%, government figures showed.
To cover the remaining fiscal hit, the government would put an end to the income tax exemption for retirees with severe illnesses or who suffered accidents and earn above 20,000 reais per month, among other measures.
When questioned about introducing the measure now despite its expected implementation only in 2026, Haddad said the decision was to “finalize all measures this year” to make “our project clear”.
He had previously said that the bigger tax exemption, which carries out a campaign promise by President Luiz Inacio Lula da Silva, would only be addressed next year.
Even before the official announcement on Wednesday, media reports of an increase in the income tax exemption from the current 2,824 reais per month had already soured market sentiment.
“The fiscal tightening measures failed to live up to expectations and reinforce the idea that political commitment to stabilizing the public finances is lacking,” Capital Economics’ deputy chief emerging markets economist Jason Tuvey said.
Haddad said the U.S. dollar had been strengthening globally, and that inflation in Brazil is expected to end the year within or very close to the official target range of 1.5% to 4.5%.
“The market needs to read again what the government is doing. They’ve been wrong in terms of growth and deficit (projections),” Haddad said. “Our work is not done. I don’t believe in silver bullets. I’m happy with this year’s results.”
The government outlined that the mandatory spending control package announced on Wednesday is projected to generate a fiscal impact of 327 billion reais between 2025 and 2030.
The measures, which have yet to be formalized and voted by Congress, also include tighter restrictions on the BPC social benefit, aimed at assisting the elderly and disabled, and enhanced oversight of the Bolsa Familia welfare program.
($1 = 5.9377 reais)
