(Bloomberg) -- Brazil President Luiz Inacio Lula da Silva said he wants bigger income tax exemptions beyond his existing pledge for workers with salaries of up to 5,000 reais ($893), adding to investor worries about fiscal policy.
The government’s plans for income tax exemptions are just because the poor pay proportionally more taxes than the rich, Lula told a local radio station on Friday. Lula said he views salaries as being different from total income.
“What we want is to exempt those people with salaries up to 5,000 reais and, in the future, exempt more,” Lula said, adding that “we have to take away from somebody. And this debate doesn’t have to be hidden. It has to be public. The people have to know who pays.”
Brazil’s real tumbled the most among emerging market currencies while interest rate futures rose as Lula’s comments revived investor fears of looser spending and worsening public accounts. Last month, the central bank kicked off a cycle of borrowing cost hikes to tame inflation, and traders see the benchmark Selic surpassing 13% next year from the current level of 10.75%.
“Lula’s comments around extending tax exemptions are not sitting well,” said Brendan McKenna, an emerging-market economist and strategist at Wells Fargo. “Markets interpreting that as less fiscal responsibility.”
The real fell as much as 1.2% to 5.6529 per dollar in morning trading. Swap rates on the contract due in January 2029, an indicator of financial market sentiment toward monetary policy, rose more than 20 basis points.
Assets in Latin America’s largest economy have been hammered as financial markets grow more skeptical over the government’s commitment to fiscal balance. The real is this year’s worst-performing emerging market currency other than the Argentine peso and Turkish lira, while Brazilian stocks are also lagging peers.
Brazil’s income tax reform will be fiscally “neutral,” meaning that it can neither lead to a loss nor a gain in revenues, Finance Minister Fernando Haddad told reporters on Thursday. He said the government still has not finalized the plan and that it cannot worry about investor reactions to the proposal.
Many in markets disagree. The income tax overhaul will cost some 50 billion reais, making it impossible to fit into the 2025 budget, according to Solange Srour, head of Brazil macroeconomics at UBS Global Wealth Management.
“The market is increasingly apprehensive that we may enter a more populist agenda than we have had in the past,” she said. “Fiscal spending has already increased significantly at the beginning of this year, and perhaps it will not slow down as much as the market was expecting.”
In the same interview Friday, Lula said he wants to purchase a new presidential airplane as well as aircraft that his ministers can use for official travel. The government is also creating a currency hedge to give assurance to foreigners who want to invest in Brazil, he added.
--With assistance from Josue Leonel, Felipe Saturnino and Franco Dantas.
(Updates market move in 6th paragraph, adds context and economist comments throughout.)
©2024 Bloomberg L.P.
