Tax Revenues Down Thanks to Poor Economic Performance

02/26/2015 - 08h42

With skepticism around the government's promises of fiscal adjustment increasing, the Rousseff administration is trying to prevent the loss of Petrobras' investment rating from negatively affecting assessments of public debt.

The downgrading of Petrobras' credit rating by the agency Moody's has raised fears that the government will be forced to bail the company out. Meanwhile, public finances remain in precarious conditions.

The first results of tax collection under new finance minister Joaquim Levy were published on Wednesday (25), and show that the poor economic performance - exacerbated by political uncertainty and social tensions, such as the truck drivers' strike - is making it hard for Levy to balance the books.

With industry and commerce shrinking, tax revenue fell 5.4% in January, with inflation already discounted, in comparison to the same month last year.

The data shows a fourth consecutive reduction, and illustrates the risk of a vicious cycle in which announcements of spending cuts and tax rises hamper economic activity, resulting in poor tax revenues.

The expectations of market analysts differ from the Ministry of Finance's stated goal of saving US$23 billion this year to wipe off public debt. The figure is an adjustment of nearly US$35 billion compared to the 2014 deficit.

According to research by the Central Bank, the average estimate of banks and consultancies is currently at US$19 billion - and falling.

As the climate of pessimism is affecting decisions to hire and invest, Levy's economic team hopes to restore confidence. The government's strategy is both to avoid further downgrading of Petrobras and prove the viability of the fiscal target.

The first task may encounter problems relating to the ongoing corruption investigations at the company, which has still not managed to publish externally audited financial statements for 2014,

In the second case, the dimension of the government's overall spending cuts remains unknown. A budget has yet to be approved. The loss of US$2.4 billion in January's tax revenues was split amongst the most important taxes.

At least the new economic team does not make unrealistic projections - the assessment is that tax revenues will only improve once the economy recovers.

Translated by TOM GATEHOUSE

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