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JP Morgan See Upside Risks To Primary Deficit Forecast

BRAZIL
  • With attention centred on fiscal developments in Brazil, JP Morgan note today that the risks to their 0.9% of GDP primary deficit target are tilted to the upside, as they expect revenues to improve, helped by the government’s proposal to change how payroll tax breaks are distributed as well as other measures approved last year. Nonetheless, they still expect discussion around a less ambitious fiscal target, and therefore policy noise, to pick up as we move closer to March.
  • The Senate is currently debating the government proposal to reduce the number of companies that will access payroll tax breaks while also focusing on lowering taxes for the first minimum wage, which JP Morgan say will reduce about a third of its costs to BRL6bn. The government also proposed a roll back of the Covid-era PERSE program, which was introduced to protect the services sector during the pandemic, and to limit the use of credit to reduce tax payments. These proposals have generated heavy criticism from lawmakers, leading some members of the administration to suggest that they may be dropped. However, the Finance Ministry team has argued that they are critical to maintaining this year’s budget balance.
  • For now, the BCB it seems is happy to continue with 50bp policy rate cuts, given the decline of inflation. But fiscal developments could play a more prominent role in the coming months and headline risks may grow.
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