The Brazilian government has announced a new round of temporary tax cuts worth about US$1bn to boost the struggling automotive sector and other industries in its latest attempt to restore a lost economic boom.
The real hit a three year low on Monday but finance minister Guido Mantega said the measures should help revive an economy that has been stagnant since mid-2011 while also providing protection from the debt crisis in the euro zone, according to Reuters.
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“If the crisis gets worse, if they don’t fix the problems in Greece, it will be certainly difficult for us to reach a 4.5% growth rate this year,” Mantega told reporters.
“But Brazil is in a position to react to the crisis and keep growing – I wouldn’t say at 4.5%, but to grow more than the 2.7% we had last year.”
The measures included a reduction until 31 August in the IPI industrial tax on some automobiles as well as the IOF tax on financial transactions for individual borrowers. The central bank also agreed to free up some BRL18bn (US$8.8bn) in bank deposit requirements to boost car financing.
In exchange, banks agreed to increase lending and sweeten terms for auto financing, including a higher number of loan installments, Mantega said.
“We want Brazil to remain among the largest players in the global auto industry,” Mantega said, noting that last year the country became the third largest auto market after China and the United States.
Mantega said the government would forgo about BRL2.1bn (US$1.02bn) in lost tax revenue as a result of the new measures. That represents a relatively small proportion of Brazil’s estimated $2.5 trillion gross domestic product.
Brazil was regarded until recently as one of the world’s most dynamic emerging market economies with annual growth rates above 5%. But the excitement has vanished over the past year as high taxes and the increased cost of labour and other inputs made the country’s industries increasingly uncompetitive.
In exchange for the tax breaks, automakers committed to lowering prices on compact cars and refrain from firing workers, Mantega said.
Brazil’s state development bank BNDES also agreed to lower interest rates on credit lines for machinery and industrial equipment.
