A tax reform and spending cuts promoted by Lula, key to the rise

The dollar opened higher and reached 6 reais for the first time in history this Thursday, with investors paying close attention to the details of the cost-cutting package and the Income Tax exemption for taxpayers earning up to 5,000 reais. The Ibovespa, the main stock index of the Brazilian stock market, B3, operates at a minimum.

This morning, the Ministers of Finance, Fernando Haddad, of Planning, Simone Tebet, and of the Civil House, Rui Costa, held a press conference with journalists to explain more details of the package announced the day before.

The Brazilian Minister of Finance, Fernando Haddad, clarified this Thursday that the income tax reform announced the day before, which provides for an expansion of the number of taxpayers exempt from paymentwill be compensated by raising the tax on the richest, so it will not reduce collection.

“It is a neutral reform. It does not increase or reduce revenue. It makes it fairer,” said the minister in a press conference in which he detailed a surprise announcement made the day before that caused turbulence in the market.

The Government announced on Wednesday that it will extend the income tax exemption to taxpayers who earn up to 5,000 reais (about 840 dollars or about 796 euros) per month, a campaign promise of the Brazilian president, Luiz Inácio Lula da Silva, which until now had not been put into practice due to its high fiscal cost.

Currently, those earning up to 2,259.20 reais (about $380) are exempt from paying income tax.

“The tax exemption with this reform will be 35,000 million reais (about 5,868 million dollars) a year and not the 70,000 million reais (about 11,373 million dollars) with which the market has been speculating and that caused the turbulence,” Haddad said.

That resignation, he added, will be compensated with measures to raise the value of taxes paid by the richestso it will not cause a reduction in collection.

“People who today earn more than 50,000 reais (about $8,383) per month and who do not pay income tax because part of their income is exempt because it comes from rent, interest or dividends will pay 10%”, he explained.

According to Haddad, all income will be added, including those that are exempt from income tax, and those who have income of more than 50,000 reais at the end of the month will pay the tax, which will tax high-income people who live off dividends and interest and are exempt.

The minister said that the other measure to compensate for the reduction in collection will be a correction to prevent people who earn more than 20,000 reais (about $3,353) per month and who do not pay income tax because they deduct high expenses in health start paying.

“These taxpayers will continue to deduct everything they spend on health, but they will not be exempt from income tax,” he explained.

The minister said that the income tax reform It was not improvised to be announced the day before but has been analyzed by the Treasury for more than a year and will have its deadlines.

He assured that the respective bill will be presented to Congress in the coming days so that it can be approved in the first half of 2025.

Haddad also clarified that the reform will come into force in January 2026 and not in 2025as the market speculates, so it will not threaten the Government’s efforts to reduce the country’s fiscal deficit to zero starting next year.

“With the reform of the consumption tax (the tax reform approved last year) and the income tax, starting in 2026 we will deliver a more modern, fair, progressive and updated country,” he stated.

The minister said he hoped that his clarifications would dispel the erroneous information that circulated on Wednesday and that caused turbulence in the market and sent the value of the dollar up to 5.91 reais, its highest historical level.