By Marcela Ayres
BRASILIA (Reuters) -Both chambers of Brazil’s Congress on Wednesday overturned a decree from President Luiz Inacio Lula da Silva raising the financial transactions tax (IOF) on certain credit, foreign-exchange and private pension plan operations.
The move marks a setback for Lula’s government, which had opted for the tax hike as a way to boost revenue and limit the size of spending freezes needed to comply with fiscal rules.
It also underscores the government’s failed strategy to negotiate with Congress, which quickly rejected the tax measure. Much of Lula’s economic agenda has snagged in Congress this year – including proposed spending cuts – as his approval ratings slump ahead of next year’s presidential election.
The tax hike was first announced by decree in late May and was projected to raise 61.5 billion reais ($11.07 billion) through 2026 by raising taxes on a range of transactions, including corporate loans and foreign-currency card payments.
The announcement triggered immediate backlash, prompting the government to walk back the tax increase on certain overseas investments within hours, amid criticism that it was effectively introducing capital controls.
Earlier this month the government submitted a revised, watered-down decree with lower rates that still affected corporate borrowing, foreign exchange and pension funds.
The administration’s efforts to backtrack on its initial proposals were ultimately in vain, as Wednesday’s vote re-established the previous tax precedent. Now Lula’s government could take the issue to the Supreme Court to overturn Congress’ decision or turn to alternatives to shore up public finances.
The administration has boosted spending on social programs while seeking to shore up public finances by targeting what it views as unfair tax breaks largely benefiting the rich.
But Congress, where Lula lacks a solid coalition, has insisted it will not approve new spending without cost-control measures. Lawmakers have also weakened or blocked the few proposals to cut spending that the government has submitted.
($1 = 5.5577 reais)
(Reporting by Marcela Ayres; Editing by Natalia Siniawski, Kylie Madry and Michael Perry)
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