Brazil’s Congress is coming back from vacation this week, with several important issues on its docket — and a faction of lawmakers banging the drums of war against the Lula administration and the Supreme Court.
From institutional feuds to setting the fine print of the tax reform approved by the House and Senate last year, to measures that will impact federal revenue, the 2024 congressional year has plenty of pitfalls in store for President Luiz Inácio Lula da Silva and his administration.
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In this episode:
- Cedê Silva is the Brasília correspondent at The Brazilian Report.
Background reading on Lula and Congress:
- The major issue in Congress last year was approving a landmark tax reform. In episode 275, we took apart the new rules, and explained that the goal for 2024 would be to approve a series of laws and regulations to give the reform teeth.
- Although the tax reform was a major victory for the Lula government, the approval of bills and provisional decrees proposed by the administration was lower in 2023 than at the start of previous presidential terms, suggesting that Lula may be losing influence over Congress.
- Congressional and government leaders are engaged in highly public negotiations over extending payroll tax breaks for 17 economic sectors. The administration wants to cut these benefits to raise more money for its brave deficit goals — targets that the Federal Accounts Court believe may be unrealistically optimistic.
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Transcript of this episode (by Cockatoo)
Euan Marshall: Brazil’s Congress is coming back from vacation this week, with several important issues on its docket, and a faction of lawmakers banging the drums of war against the government and the Supreme Court. From institutional feuds, to setting the fine print of the tax reform approved by the House and Senate last year, to measures that will impact federal revenue, the 2024 Congressional year has plenty of pitfalls in store for President Luiz Inácio Lula da Silva and his administration.
My name is Euan Marshall, Deputy Editor of The Brazilian Report, and this is Explaining Brazil.
This week I’m glad to welcome back Cedê Silva, our Brazilian correspondent. Cedê, thanks for dropping by.
Cedê Silva: Ah, Euan, thank you for having me. Now, before we delve into the 2024 Congressional year, can you just kind of bring us up to speed on how last year went, both in terms of what Congress actually approved, but also how its relationship was with other branches of government.
So the major bottom line of 2023 in Congress, of course, is the approval of the landmark tax reform, which will greatly change the way consumption taxes work in Brazil.
It simplifies Brazil’s tax code, makes it hopefully more progressive, and also eliminates a lot of power from the part of state governments to charge different tax brackets on different products, which not only reduces avenues for corruption, but it’s also a good decision in terms of companies deciding which products have artificially a lower tax bracket due to a political decision.
In terms of the relationship between Congress and other branches of government, what we did have was some leaders in the far right opposition, many of them allies to Bolsonaro.
They have been trying so far unsuccessfully to curtail the powers of the Supreme Court and there’s a lot of talk about what they call quote-unquote judicial activism and the other thing we had was the Congressional Select Committee on the January 8 riots in which the pro-government lawmakers successfully approved the report which correctly and also in an incomplete assessment they went after the far-right leadership, especially Jair Bolsonaro himself, who was responsible for the January 8th riots.
Euan Marshall: And usually the months of December and January are quite uneventful in terms of congressional news in Brazil because lawmakers are on holiday and very little work actually gets done in Brasilia but this year was different, right? Because there was a lot of back and forth between the Senate and the Finance Ministry. They were sending messages to each other through the press about this matter of payroll tax breaks to certain sectors of the economy. Could you explain for us what’s going on there?
Cedê Silva: So as we showed in our newsletter, the discussion on the payroll tax exemptions is not being done in Congress because Congress is still on recess and they’re going to go back to work on Monday, February 5, but the issue is still on the table. And what we saw happening was some of President Lula’s assistants and also Senate President Rodrigo Pacheco, they were airing their demands and basically negotiating via the press, so to speak, because the issue is not yet resolved and because Congress is in recess, they cannot issue a final decision on this.
So this payroll tax exemptions, they were enacted several years ago during the Dilma Rousseff administration, and this allows some economic sectors, a few select economic sectors to pay less taxes over their payroll of employees. The Lula administration wanted to end these exemptions and in fact, President Lula vetoed a bill that extended these exemptions, but Congress has overridden Lula’s veto.
So in response, Lula issued a provisional decree that limits the effects of this exemption and some lawmakers who are closely aligned with select economic sectors such as tourism and communication, for example, they are discussing this issue and we will see what is going to happen in the first few weeks because the lawmakers they have an opportunity to strike down Lula’s decree or they can reach a different solution, which is what Finance Minister Fernando Haddadi has been hinting at.
Euan Marshall: So, how do you see that panning out then, Cedê?
Cedê Silva: Well, there are always in Brazilian politics, there’s always a lot of surprises and there are a lot of different options on the table, because many of these lawmakers are very flexible in terms of not getting exactly what they want, but getting something else instead, which might be different earmarks or different budget for different project or different bill and so on and so forth.
Euan Marshall: So there’s a lot of negotiating room so I wouldn’t be so bold as to speculate in the final result today we will achieve. From the government’s point of view, I mean they’ve promised a zero deficit, how crucial is it that they managed to scrap these tax exemptions?
Cedê Silva: Yes, it is absolutely crucial because the Lula administration has been working to get absolutely every cent of extra revenue they can get. The government calculates that this payroll tax exemption is going to cost over nine billion reais this year and to get the zero deficit they will need absolutely every extra hell they can get. The government just posted that in 2023 they had a very large deficit of over 200 billion reais. So in order to get to that zero deficit, those 9 billion would really come in handy.
And not only that, but they are also working for other additional sources of revenue. And the finance minister, Fernando Haddad, and the government, they’re going to throw everything and the kitchen sink in order to raise revenues.
Euan Marshall: Another point of contention was President Lula’s decision to veto part of the 2024 budget that would have seen a huge increase in the amount of money that Congress members are entitled to through budget earmarks, right? What’s the status there?
Cedê Silva: Yeah, so Institutional Minister Alexandre Padilha said in an interview that those 5 billion reais in earmarks were needed in the budget and the government needed to take from somewhere, so they did that with the earmarks. But him and Planning Minister Simoni Tebic both said that those earmarks and that budget is still under discussion. And Planning Minister Simoni Tebic even said that the government could reveal the veto veto to those five billion in earmarks after Carnival in mid-February. So depending on the expectation of revenues and depending on how negotiations and a lot of other things happen, the government could review that also because it’s important for the government to keep a coalition and to keep at least some lawmakers satisfied in order to get approval for other legislation that the government wants to enact in Congress.
Euan Marshall: And speaking of legislation, Cedê, what’s on Congress’s docket earlier this year?
Cedê Silva: The federal government is mostly interested in the regulation of the tax reform. So the tax reform that was approved in 2023 was actually a constitutional amendment, a very large constitutional amendment.
But this amendment needs regulation, needs a common legislation which requires a lower threshold than a constitutional amendment to pass and they are going to need this legislation in order to give teeth to the tax reform on how several rules are going to work for different products and sectors and etc. So this is one of the main issues for the government is the regulation of tax reform.
The government will also look into one thing that they were interested in last year, which is in approving the so-called fake news bill with regulations basically for social media companies. media companies, but of course that is a very spicy issue, especially because the pro-Bolsonaro far-right legislation is so closely aligned with the big tech, with Facebook and Google, who publicly do not want any new regulations at all.
Euan Marshall: Would you say that the government and Congress are singing from the same hymn sheet in terms of their agenda and priorities?
Cedê Silva: Well, on some economic issues that certainly can be said because the tax reform was approved with a very large majority and you will find people in the right that will have complements to finance minister Fernando Haddad and to the economic agenda of the Lula administration. But they definitely do not seem the same on some other issues, such as happen, for example, with earmarks, and especially on matters of what people wrongfully call, in my understanding, the so-called agenda of habits, which we’re talking about gums and gay rights and gay wedding and drugs and so on and so forth, the far-right opposition has very different priorities from the government and also in terms of limiting the powers of the Supreme Court.
Euan Marshall: And Cedê, one of the main events on the calendar this year are the municipal elections in October. How do they affect work in Congress? I mean, especially in terms of these measures that we’ve talked about from the government that seek to increase federal revenue.
Cedê Silva: Yeah, so it’s much more about political will, in my understanding, than actually about the city elections hindering the work of Congress. Finance Minister Fernando Haddad said in an interview earlier this year, 2024, that he was not expecting to get approval of another tax reform in income tax this year because of the elections, but the fact is that Congress has approved a major legislation in years with city elections before.
For example, in 2012, which was also a year of city elections, Congress got the approval of the so-called Forest Code, which is a very important environmental and agricultural legislation in Brazil. in 2008, there was this talk in early 2008 about how taxes were going to be a major point in the city elections later that year, and that really didn’t happen.
At that time, Gilberto Kassab was the mayor of São Paulo, and in 2007, the opposition to Lula, who was president at the time, they got to block the renewal of a tax, which we had in Brazil, called the CPMF, which was a tax on financial transactions. We also called it the check tax because you need to pay this tax over checks when people used to use bank checks.
And the opposition in early 2008, owing to their success in blocking the CPMF tax. They were saying that 2008 was going to be heavily dominated by the issue of taxes on the city elections, which didn’t happen at all. And in fact, Mayor Kassab, who was campaigning successfully for re-election that year, his re-election was much more about local topics in the city of São Paulo, such as his legislation in billboards and the subway, the metro system works, city hall works and so on and so forth.
So Brazilians are much more concerned during city elections mostly about city themes. And so Congress can both enact major legislation in the municipal year like they did in 2012 with the forest code and also not necessarily what is being discussed in Congress will get to be discussed in the city elections themselves.
But there are a lot of leaders, even, mostly on the right but some also on the left, who want to nationalize the city elections because this is their way of not discussing specific city topics and it’s much easier to just portray every political battle as a struggle between communism and progressivism and so on and so forth.
But back to your question about what’s going to be the strategies for the different political groups, something that is being cooking in the last few months is a coalition between three major parties in the big center, the Progressive Party, the Republicans, and União Brasil. And possibly they could form a federation, which is a new political arrangement in Brazil, which basically the parties function as a single party for a limited four years. And this would give them a lot of leverage and a lot of money in city elections, but they would also work as a coalition in Congress.
So, if this mega coalition is formed, it would be the biggest political development in terms of the relationship between Congress in Brasilia and the elections for city hall nationwide.
Euan Marshall: And speaking of elections, next year we’re going to have the House and Senate both electing new leaders because House Speaker Arturo Lira and Senate President Rodrigo Pacheco, they’ve already been in their positions for two terms and they’re going to have to step down. And because these are such important jobs maybe a lot of what will be done this year might also be conditioned by these different groups trying to gain control of the House and Senate next year, do you think?
Cedê Silva: Yes, we’re seeing that most notably in the Senate because Senate President Rodrigo Pacheco, he used it to be a very mild-mannered man. He really doesn’t pick battles, especially during the Bolsonaro administration. He refrained from siding with the opposition in order to get the select panels on the COVID pandemic, for example, approved.
And now Mr. Pacheco completely changed his tone, completely changed his behavior, and he is now siding with the pro-Bolsonaro opposition in terms of having a discussion, having debates about the bills, seeking to limit the powers of the Supreme Court and of individual Supreme Court justices. He is speaking this battle now because he needs votes of the senators themselves to get his ally, Davi Alcolumbre, who is also a former Senate president, reelected next year, or reinstated, or better, reinstated next year in February 2025 as the new Senate president.
And, of course, Artur Lira, who was elected by a very large supermajority of House members, members wants to pick his successor and so he needs to cater to a large wide agenda of lawmakers in different parties in order to get his appointed successor elected next year as the new Speaker of the House.
And this also goes a lot with another important development will be whether or not which would give this new coalition, if it is to be formed, a lot of votes and a lot of power in the so-called big center.
Euan Marshall: Cedê, to finish off and maybe bring this full circle, last year the success or failure of the congressional year depended on, as you mentioned, the consumption tax reform. If it passed it was going to be a good year, if it didn’t it wasn’t going to be a good year. Do we have a similar issue that will serve as you know a sort of litmus test for 2024?
Cedê Silva: Well I think it depends on who you ask. Every litmus test has a designer. Someone designs the litmus test in order to know whether or not there is a different chemical or different thing in that test. Same goes for a pregnancy test.
It’s designed to indicate whether or not a person is pregnant, but it is designed with that intention and there are specific chemicals in order for that to happen. So I think the litmus test, it depends on who you’re asking. For the point of view of the Lula government, Congress passed a litmus test in approving.
But if you ask Bolsonaro, there’s a video of Bolsonaro asking lawmakers not to get the tax reform approved. So, in Bolsonaro’s view, Congress failed the Litmus test because they approved the tax reform, even with the votes of some allies of Bolsonaro.
The same thing could be said about the panel on the January 8 riots. For the government, it was a successful panel and for the opposition, Congress failed the litmus test because the panel did not approve the conspiracy theories of the far right about the January 8 riots and so on and so forth.
But if we keep in the same point of view of the federal government, then we can say that the litmus test will be whether or not Congress can approve, most notably in the first semester, the regulations for the tax reform, since the tax reform was already approved and now it needs new teeth. And so the finance minister, at least, is going to focus on that part of the legislation in order to continue the work necessary for the tax reform to work as intended.
Euan Marshall: Cedê, thanks a lot. I’m sure you’re going to be keeping an eye out for everything that’s happening in Congress and be sure to let us know here.
Cedê Silva: Thank you very much. We will be keeping a close eye also when Congress goes back from recess next Monday, February 5.
Euan Marshall: Cede Silva is the Brazilian Report’s correspondent in Brasilia, the Brazilian federal capital, and you can read his articles on Brazilian politics on Brazilian.Report.
If you like Explaining Brazil, please give us a 5-star rating wherever you get your podcasts. If you’re listening on YouTube don’t forget to like the video and subscribe to our channel. Or better yet, subscribe to The Brazilian Report, the journalistic engine behind this podcast. We have a subscription based business model and your memberships fuel our journalism and keep us going and growing.
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Transcribed with Cockatoo
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