How the reduction in the IPI affects industrial production and inflation

When announcing at the end of February a reduction of up to 25% in the rate of tax on industrial products (IPI), the Minister of Economy, Paulo Guedes, said that this reduction should have an impact on short-term inflation, although he noted that this would not be the case, the main objective of the measure. The market, however, did not greet the announcement with the same enthusiasm and sees limited effects in the exemption.

“This has a short-term impact on the IPCA [Índice de Preços ao Consumidor Amplo], but it is an industrial policy measure and not an inflationary policy measure. It even takes some of the pressure off industrial prices, it will drive the IPCA down, but what will determine whether there will be inflation is Central Bank action,” Guedes said.

The linear reduction is 25% for all sectors, with the exception of tobacco and derivatives, and cars transporting up to ten people, for which the reduction will be 18.5%. As the sector already has a different regime, in practice the exemption will also reach 25%. According to the Minister, the measure benefits more than 300,000 companies. “This is an important step in the reindustrialization of the country,” he said.

The drop in the IPI was the first of the measures announced by the federal government to stimulate the economy this year. This Thursday (18), President Jair Bolsonaro launched a package that includes the release of withdrawals of up to R$1,000 from the FGTS, the advance payment of the 13th salary and credit programs.

In recent days, the Ministry of Economy has begun to study a further reduction in the IPI, but there is still no decision on the matter. In parallel, on Thursday (17), Bolsonaro publicly asked the ministry for an exemption from the IPI levied on motorcycles purchased by motorcycle taxi drivers and people with disabilities.

Industry celebrates IPI reduction

Industry representatives celebrated the reduction of up to 25% already promoted in the IPI, in line with Guedes’ speech. The president of the National Confederation of Industry (CNI), Robson Braga de Andrade, said the measure should reduce the prices of industrialized products, “with benefits for consumers and in controlling inflation”, noting that industrial products represent 23.3% of the IPCA.

Andrade also defended that the cut should boost economic activity in the country. “The manufacturing industry has the potential to generate even greater growth. Every BRL 1.00 more produced in industry translates to BRL 2.67 more in GDP. And over the past ten years, the industry has shrunk, on average, by 1.6% per year. It lost place in the Brazilian GDP and in the world production. It lost ground in Brazilian exports and in global exports of manufactured goods,” he explained in a statement.

Luiz Carlos Moraes, president of the National Association of Automobile Manufacturers (Anfavea), also welcomed the measure. “Any proposal that alleviates the heavy tax burden of the manufacturing industry in Brazil is always welcome. The reduction in the Brazilian cost, although still timid, is beneficial not only for the industrial sector, but also for job creation, for consumers and for society as a whole,” he said during the ‘a press conference.

The effect on inflation may be limited

But even before the cut took effect, Central Bank (BC) President Roberto Campos Neto said the tax cut “structurally” does not help reduce inflation, noting that this conclusion takes into account not only the historical record in Brazil, but in other countries that have adopted similar measures, such as Colombia.

“You cut a tax or do something that gives up revenue to get a lower product price at that time, structurally, you’re not helping inflation. You can have a short-term downside, but, in terms of inflation expectations, that will be priced in and that element tends to prevail structurally, speaking in the medium to long term,” he said after being asked about the subject while attending an event.

Infinity Asset’s Chief Economist, Jason Vieira, isn’t too optimistic about the IPI cut. He says there is a recent cost escalation the industry is facing and the lower regulatory tax rate should be absorbed by the production chain. “Unfortunately, the industry usually doesn’t have a lot of speed to make that transfer. [da redução para o consumidor]”, he says. “We have already seen this happen in 2010 and 2011, when the government carried out a monstrous tax exemption and not only did not stimulate economic activity, but also ended up not helping the economy. ‘inflation.”

According to the Brazilian Institute of Geography and Statistics (IBGE), the IPCA accumulates a maximum of 10.54% in the 12 months to February.

In the financial market, inflation expectations for 2022 have jumped in recent days, rising from 5.65% to 6.45% in just one week, according to the latest edition of the BC Focus bulletin. This new advance is explained by the surge in raw materials such as oil, following the war in Ukraine, and the consequent rise in fuel prices in Brazil. The forecast has been rising for nine weeks and indicates inflation well above the objective pursued by the monetary authority (3.5%, with a tolerance of up to 5%).

XP Investimentos calculated that the linear reduction of 25% in the IPI, excluding tobacco, and 18.5% in automotive, would have a potential impact of 0.49 percentage points on the IPCA, if it were fully passed on to product prices. industrialized.

Automakers like Kia, Ford and Toyota released new price lists after the IPI cut. The reduction in value on most models was around 2%, reaching 4.6% in the case of the Ford Mustang Mach 1, which went from R$545,000 to R$519,790.

Etore Sanchez, chief economist at Ativa Investimentos, believes the cut could have the opposite effect in the long run. “It should be noted that the policy is not fiscally sustainable. The justification that the collection was positive and allows the reduction of tax is something ephemeral, and when the collection would return to normal, taxes would rise again, ordering the future inflationary peak,” he says.

“Tax reduction, to be sustainable, requires reduction and/or greater state efficiency. Given that none of the above has progressed, it is likely that tax offsets will be made in the future, albeit not in the relieved sectors.

States and municipalities, which are losing revenue, have criticized the reduction of the IPI

Entities representing states and municipalities have spoken out against the federal government’s decision to lower the IPI. Indeed, federal tax collection is shared with regional governments, which complain about the loss of resources.

The National Committee of State and Federal District Finance Secretaries (Comsefaz) said the cut would worsen the fiscal situation of subnational entities, undermining the provision of essential services, such as education, health and security.

The National Confederation of Municipalities (CNM) also expressed “deep dissatisfaction” with the measure. “Unfortunately, the old habit of doing charity with someone else’s hat is repeating itself,” CNM president Paulo Ziulkoski said in a note released to the press.

“The IPI constitutes the basket of taxes shared with the municipalities and constitutes an important part of the FPM. This means that any IPI tax exemption measure adopted by the federal government has a direct impact on transfers to municipalities, which may imply a budgetary imbalance,” he said.

The National Federation of State and District Tax Authorities (Fenafisco) said that “it considers fallacious the federal government’s argument that this tax benefit tends to benefit the end consumer and stimulate economic activity”. The entity calculates that the linear reduction of the IPI should withdraw R$4.5 billion from the State Participation Fund (FPE) and an additional R$5.3 billion from the Municipal Participation Fund (FPM).

“Minister Paulo Guedes’ promise that this measure is the first ‘of a movement to reindustrialize Brazil’, more than delusional, is an outrage on the intelligence of Brazilian society,” denounces the organization in a press release.

For Vieira, of Infinity Asset, the measure, despite “good intentions”, should have a limited effect even in terms of stimulating economic activity. “I think other measures more in the direction of seeking tax reform, even if this year is experiencing its difficulties, would be more important,” he assesses.

In a technical note, economists from the Independent Fiscal Institution (IFI), linked to the Federal Senate, calculate that the tax exemption with the measure by the end of the year should reach R$4.6 billion for states and R$4.3 billion for municipalities. , in addition to R$500 million for regional funds. In the Union, losses are expected to amount to R$6.5 billion.

“We must also consider the negative effects, from the point of view of economic activity, due to the evolution of relative prices generated by the exemption for industry only, and not for the service sector, for example. Furthermore, the reduction in the IPI may not be fully passed on to the prices of the final goods. Finally, there are effects to be mapped on other taxes”, warn the authors Vilma Pinto, Felipe Salto and Daniel Couri.

“The IPI, due to its extra-fiscal nature, constitutes an exception to the rule of the law of fiscal responsibility, which requires the offsetting of the fiscal effects arising from revenue exemptions. However, it should be mentioned that the estimated impacts are relevant and, in the absence of compensatory measures, could affect the public deficit and debt. In other words, they would harm the positive effect possibly produced by the stimulus resulting from the IPI measure on economic activity,” they said.

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