Lula Aims to Offset Costly Tax Break, Keep Fiscal Goal in Reach

(Bloomberg) -- Brazil’s government said it will issue a provisional measure to offset the cost of a contentious payroll tax break as it seeks to keep the benefit from derailing efforts to hit its primary fiscal target this year.

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The measure will limit tax credit compensation for companies, the Finance Ministry announced Tuesday.

The payroll tax exemption for municipalities and 17 economic sectors has been a source of tension between Congress and President Luiz Inacio Lula da Silva’s administration, which sought to end it as part of Finance Minister Fernando Haddad’s efforts to eliminate the country’s primary fiscal deficit, which excludes interest payments, in 2024.

After pushback from lawmakers and companies, the government ultimately decided to gradually end the exemption, which will cost 26.3 billion reais ($5 billion) this year, according to Finance Ministry projections. The new provisional measure will have a fiscal impact of 29.2 billion reais to cover the cost, it said.

Haddad has faced skepticism from markets and investors over his ability to hit the zero-deficit goal, especially as Lula has sought to increase spending to boost Latin America’s largest economy.

It’s essential to hit the fiscal target, especially given global economic volatility driven by the Federal Reserve’s caution toward US interest rates, the ministry’s executive secretary, Dario Durigan, said during a Tuesday press conference in Brasilia.

--With assistance from Bruna Lessa.

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