The combination of bill that establishes a ceiling of 17% on ICMS collection us fuels with the PEC on federal and state tax exemption for these products alone would generate a drop of more than 2 percentage points in the inflation in 2022, according to estimates by economists consulted by the CNN Brasil Business .
However, this does not mean that this will be the scenario, in practice, explain the experts. Even if both projects are approved without changes, the fiscal risk they represent, in particular the Proposed Constitutional Amendment (PEC ), should make the dollar cherish.
In addition, gasoline and diesel remain lagged, which should require further readjustments by the Petrobras . Together, these two elements would reduce the potential for prices to fall.
Going beyond 2022, economists point out that temporary exemptions from taxes would end up having the opposite effect, inflationary, in 2023, making the economic picture more complicated.
Degree of reduction
Flávio Serrano, head of macroeconomic analysis at Greenbay Investimentos, estimates that PLP 18, which sets a 17% ceiling on the collection of ICMS for fuel, energy, telecommunications and transportation, would have the greatest deflationary effect, as most states charge rates above the proposed ceiling.
His current expectation, based on the project approved by the Chamber, is that the reduction will be 1.5 percentage points in inflation at the end of 2022, estimated today by the market at 8.9%.
Depending on design changes and where the charges will fall, the drop could be 1.8 percentage points.
“It is a significant drop, and the impact is permanent, it takes this year and, as there is no expectation of reversal, it does not impact 2023. There would only be a certain inertia, from lower inflation this year helping the next”, he says.
There is also the so-called PEC on Fuels, which would involve exemption from ICMS on diesel and gas and PIS/Cofins and Cide, federal taxes, in Gasoline .
Regarding the project, Serrano estimates a deflationary effect of 0.25 percentage point for diesel and gas and 0.75% pp for gasoline. As a result, total deflation ranges from 2.5 percentage points to 2.8.
It is a similar estimate to that of the chief economist at Ativa Investimentos, Étore Sanchez. He projects a maximum impact of 2.5 pp on inflation with zero taxes alone, but when accounting for an 80% pass-through of this drop to consumers, the decline would be 2.15 pp
As for the ICMS ceiling project, individually it would represent a drop of 0.9 pp, with 0.75 pp passed on to the consumer.
In both cases, the indirect impact on the reduction of fuel prices was not considered, which tends to be high considering the country’s dependence on road transport.
Another projection, from Banco Bradesco , estimates that this year’s inflation would be at 6.8%, and no longer at 9%, with the projects. In 2023, it would rise to 5.1%, compared to 4.1% initially forecast.
However, Mauro Rochlin, professor at FGV Rio, points out that these projects would have primary effects, but they would not be the only elements that would influence inflation. “It’s no use just looking at the mosaic stone, you have to see it all”. And when considering other elements, the benefits with projects tend to get smaller.
negative consequences
Sanchez says that the current estimates themselves may change depending on the changes that the projects undergo while they are processed in the Congress which could reduce or increase the potential for inflationary relief.
However, the main problem, in Rochlin’s view, is that fuel prices do not depend only on taxes, and the greater weight is usually the international price of the Petroleum and how appreciated the dollar is against the real.
“Prices at this moment are not in line with international prices, and if Petrobras continues with parity, it should have already made a new adjustment, and could compensate for these cuts”, he evaluates.
The economist at Ativa says it is unlikely that the readjustments this year will offset the entire drop in prices for gasoline and diesel, but that it is possible that a part will be reversed.
Serrano, on the other hand, estimates that a new 15% increase in gasoline, to compensate for the international lag, would represent 0.6 percentage point more in inflation. “An adjustment would already lead to the loss of one of these effects, probably that of the PEC. But it is uncertain. Prices could go down.”
Another issue arose after the announcement of the PEC that would create a compensation fund for the states and allow ICMS exemption. The federal government’s current estimate is that the project would represent an impact of R$25 billion, while the federal tax exemption would lead to a loss of revenue of R$15 billion, in an already tight budgetary scenario.
According to Serrano, the market “added a risk premium” by predicting a worsening of the fiscal situation with the project, and even threats to the spending ceiling. As a result, the dollar began to rise, and has already reached R$ 4.90.
“The rise in the dollar could mitigate part of the deflationary effects, it is the risk of worsening the fiscal and the exchange rate depreciation”, he says.
Even with this scenario, and the expectation of a election which will generate volatility and depreciation of the exchange rate, the economist still expects “a well-behaved exchange rate, due to high interest rates and a good balance of payments”.
Rochlin, from FGV, assesses that “the tax reduction measure itself represents an important impact on government accounts, hinders a good performance, and this has an impact on the exchange rate, as we are seeing, and on the interest rate, because with higher inflation we have a higher rate”.
The market does not see this with good eyes because it has an impact on the accounts, and what the market interprets is a worse performance, which increases what we call investors’ risk aversion, and translates into a more expensive dollar, which pushes prices to up and generates more inflation
Mauro Rochlin, professor at FGV Rio
Étore Sanchez considers it too early to measure the effect of projects on the dollar, and the consequence for inflation.
“If this upward movement is confirmed, since only part of the fiscal risk was considered because they were not approved, it could have an inflationary effect. Even so, it is a polluted calculation, because it assumes that the other factors will remain constant, which is very rare”, he says.
Effect in 2023
Another negative consequence of the new PEC proposed by the government is that it should have an inflationary effect in 2023.
Serrano states that the effects of PLP 18, which establishes the ceiling for ICMS, would be positive, due to lower inflationary inertia, but those of the PEC would not. “These zero taxes would come back next year, so it’s a situation where you win now but lose later.”
Ativa projects that the inflationary effect of the PEC would represent between 2.2 percentage points and 2.6 percentage points more in 2023 inflation, that is, practically the same value of the reduction this year.
The picture would involve a worsening of the fiscal problem, higher interest rates and a Gross Domestic Product (GDP ) smaller, which results in a “negative net balance of this project for society”, according to Sanchez.
Rochlin believes that the resumption of taxes the following year would generate an inflationary effect, especially if the dollar and oil prices remain high until the end of this year.
“Going back to collecting taxes, it reflects on prices and impacts next year’s inflation, without considering a worse scenario of more expensive oil and the dollar rising, common in election period”, he points out.
He states that the PLP can have an isolated deflationary effect because it is definitive, especially in the other sectors it encompasses. The PEC, however, should be more harmful, in a framework that he summarizes as “alleviating this year’s inflation by worsening that of 2023”.
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Source: CNN Brasil
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