© Reuters. FILE PHOTO: Brazil’s Economy Minister Fernando Haddad greets President Luiz Inacio Lula da Silva during a meeting to sign the government’s economic package at the Planalto Palace in Brasilia, Brazil January 12, 2023. REUTERS/Adriano Machado
BRASILIA (Reuters) – A debate has broken out among senior aides to Brazilian President Luiz Inacio Lula da Silva over fuel taxes, underlining the competing views within his circle over the future path of his nascent leftist administration.
Former far-right Jair Bolsonaro unveiled the fuel tax cut last year as he sought to ease inflation and win over voters ahead of the election which he eventually lost to Lula. Since Lula’s victory, debate has raged within his Workers Party (PT) over what to do with the costly and popular measure.
Lula’s Finance Minister Fernando Haddad has long opposed the waiver, arguing privately that it hurts public coffers and undermines Lula’s green agenda, according to two sources from the ministry who requested anonymity to speak candidly. Publicly, Haddad has said ultimately it would be up to Lula to decide.
“The decision (to extend the tax waiver only to February) was taken by the president, who, obviously, can revisit the matter,” he said after a January meeting with Febraban, the lobbying group representing Brazilian banks.
Others in Lula’s circle have convinced the president to extend the waiver on diesel and biodiesel until December of this year, and on gasoline and ethanol until February.
Tensions are now mounting over whether to extend further the gasoline and ethanol tax waiver.
In his fiscal plan, presented in January, Haddad included the reintroduction of taxes on gasoline and ethanol starting in March. That would generate 29 billion reais ($5.6 billion) in federal revenue and add fiscal backing to Lula’s social spending plans.
But this stance is seen as too market-friendly by some of the leftists in Lula’s camp, and on Friday that debate broke out into the open.
In a series of Twitter posts, Congresswoman Gleisi Hoffmann, president of Lula’s Workers Party (PT), said fuel taxes should only resume once state-run oil giant Petrobras defines a new pricing policy.
“This will be possible starting April when the Board of Directors is renewed with people committed to the reconstruction of the company and its role for the country,” she said.
Hoffmann added that a “fairer pricing policy” is needed for Petrobras, which currently pegs domestic fuel prices to international oil rates, which makes pump prices more expensive when the commodity and the U.S. dollar appreciate.
“We are not against taxing fuels, but doing so now penalizes consumers, generates more inflation, and violates campaign commitments,” she wrote.
The Finance Ministry and the Presidential Palace did not immediately respond to requests for comments.
Vice-President Geraldo Alckmin said on Friday the government had not yet made a decision on fuel taxes.
Central bank governor Roberto Campos Neto, who is under pressure from Lula and his allies to reduce interest rates, has said the re-taxation of fuels would add short-term inflationary pressure, but would improve Brazil’s fiscal situation, arguing it would have “a beneficial effect going forward.”
In Brazil, a debate has recently grown among members of the Lula da Silva administration regarding the implementation of fuel tax policy. This debate began when President Lula proposed an increase in the taxation of motor fuels in order to raise additional revenue for the government.
The proposed fuel tax increase is highly controversial as it could hit lower income families whose basic transportation needs to lead to significant increases in their already high fuel costs. Although the additional tax would generate revenues for the government, the proposed increase has created much debate among Lula’s team. Those opposing the proposal argue that the increase in fuel costs would result in a disproportionate burden on lower income households while not really benefiting the government in any meaningful way.
Those in favor of the proposal have argued that increasing the taxes on motor fuels is necessary in order to fund needed infrastructure projects and spur economic growth. Furthermore, supporters of the measure maintain that since fuel taxes are imposed at a flat rate and all citizens pay the same rate it is not necessarily an inequitable burden for the less advantaged. Supporters of the measure also note that Government revenue from fuel taxes could be used to fund social welfare programs and initiatives, thus providing much needed assistance for the poor.
The debate over the proposed fuel tax increase has grown increasingly intense in recent weeks. There are strong opinions on both sides of the issue, however it remains to be seen how the Lula da Silva Administration will ultimately proceed. What is certain is that the decision they make will have serious financial and social implications for the citizens of Brazil.