How the government program that can make cars cheaper in Brazil will work

The federal government announced this Thursday (25/5) that it will adopt measures to lower the price of automobiles in the country.

Geraldo Alckmin (PSB), Vice-President of the Republic and Minister of Development, Industry, Commerce and Services, said that for this there will be a reduction in federal taxes for cars of up to R$ 120,000.

The decision was communicated after a meeting at the Planalto Palace between President Luiz Inácio Lula da Silva (PT), the Minister of Finance, Fernando Haddad (PT), and representatives of the automobile industry.

On the same occasion, Alckmin also announced that the government will make available a credit line of R$ 4 billion in dollars to finance exports, through the National Bank for Economic and Social Development (BNDES).

The measure, according to him, serves as exchange protection and will cover not only the automotive sector, but the industry as a whole.

Lula had already publicly complained about vehicle prices in the country.

“The car factory is not selling well, but what poor person can buy a R$90,000 popular car?” asked Lula da Silva during the inaugural session of the Development, Economic and Social Council, in early May.

However, details of how the program will actually be announced in the next 15 days, after an analysis by the Treasury of the program.

BBC News Brasil spoke with analysts about what has been released so far and the possible impacts of these measures. Understand next.

The government announced that it will reduce the Tax on Industrialized Products (IPI), applied to the manufacture, import and sale of these goods, including cars, and the Social Integration Program (PIS) and Social Security Financing Contribution taxes ( Cofins), which are levied on companies’ revenues and used to finance public health and Social Security.

The reduction index has not yet been disclosed by the government, but the government has stated that the percentage of the discount will be based on three criteria: social, energy efficiency and industrial density.

This means that, in practice, cheaper, less polluting and more fuel-efficient cars, as well as those with more domestic parts in their composition, will have more discounts.

According to Alckmin, the more criteria met, the greater the price reduction. He also signaled the possibility of a greater discount for direct sales by the industry.

“This will happen for those who have a company CNPJ and decide to use it when buying the car. Brazilian legislation allows the automaker to have a lower tax rate selling to companies”, explains Paulo Cardamone, president of Bright Consulting, specialized in the automobile market.

Some doubts remain open, such as whether the industry will be forced to pass on tax reductions to the final consumer.

Or, for example, for how long these measures will be valid, since the government has stated that it is a transitory program that aims to reduce the idleness of the Brazilian automobile industry.

The government’s expectation is that the tax cut will make the price of cars fall between 1.5% and 10.79%.

Cardamone estimates that the tax break has the potential to make more than a quarter of the models currently on sale cheaper.

“To give you an idea of ​​the size of the change, today we have approximately 600 vehicle models being sold and about 160 of them, 25%, are within this discountable price range, and represent 47% of the volume of cars on the market “, says the analyst.

Cardamone claims that, considering the objective of making vehicles more accessible for those with lower incomes, the limit of R$ 120,000 is reasonable.

“The reduction to higher price ranges would favor only those with very high income.”

However, details of the formula that will be applied are not yet known to be able to specify how much the price of each model may drop.

After the announcement, the president of the National Association of Automotive Vehicle Manufacturers (Anfavea), Márcio Lima Leite, may take the price of the models more into account to stay below R$ 60 thousand.

However, the cheapest cars in Brazil today, Renault Kwid and Fiat Mobi, would be above that with the rates announced by the government.

If they received the maximum expected reduction of 10.79%, for example, they would go from the current R$68,990 to R$61,545.

Analysts point out that a tax reduction that makes cars cheaper has the potential to increase sales and, therefore, revive industrial production.

This, in turn, would increase the supply of jobs and the income of part of the population, stimulating consumption and increasing government revenue, benefiting the economy in general.

“If well designed, the accessible vehicle program could even bring about a balance in collection, because it would be replacing used vehicles that generate lower taxes, with a marginal positive impact on jobs, pleasing the government in political terms”, assesses Cardamone.

The sector’s turnover, which has fallen 43% in ten years, is also an important factor behind the measure.

“Brazil has already produced around 3.8 million vehicles in a year, and today that number is stagnant at a level of 2 million vehicles. It is an idleness of almost 50% of production, which is not normal in the automotive sector , which needs to occupy at least 70% of its production capacity”, says Cardamone.

“The government looks at this sector, which already had a large tax contribution, and is looking for a way to try to recover that.”

Cardamone points out that an important point to be considered is the duration of the benefit.

“The measure cannot be eternal because it is an important fiscal waiver. It is not known whether it will last six months, a year… Particularly, I think that in an interval between July and December, for example, it works.”

The analyst estimates that the program would have the potential to increase sales by approximately 120,000 to 130,000 cars in six months – growth 6% above current forecasts for the sector.

On the other hand, points out the analyst, the fiscal waiver in this same period should revolve around R$ 4 billion.

“If the measure lasts a year, that would already be R$ 8 billion less for a government that is not going through an easy economic moment.”

Antonio Jorge Martins, academic coordinator of courses in the automotive area at Fundação Getúlio Vargas (FGV), points out that he does not see these impacts happening “overnight” and adds that it may be necessary to go beyond the tax cut.

“Perhaps not only the reduction in prices, but also the better conditions for obtaining financing, will result in a better scenario for increasing production in the sector.”

Lula touched on this point hours after the announcement, at an event at the Federation of Industries of the State of São Paulo (Fiesp), when he returned to criticize the current price of cars and the high interest rates that prevent consumers from seeking credit.

The president stated that most of the cars sold last year were sold in cash, according to him, “because there is no credit policy to finance. And the lower middle class is not buying more cars, because a popular car for R$ 90 thousand is no longer popular”.

Martins also points out that the tax that most impacts the price of vehicles today is the ICMS, charged by the States.

“I don’t know exactly what the federal government’s understanding is with the states in terms of also promoting the reduction of ICMS, but I even believe that the reduction of this tax would be more relevant than federal taxes.”

Although there is an expectation of a reduction in prices, the return of popular cars as Brazilians have known should not happen, according to experts interviewed by BBC News Brasil.

That’s because vehicles sold with this motto in past times, when the industry had production and sales numbers far superior to the current ones, have become outdated and no longer have a place in the market today.

“The popular car was previously characterized by a low level of safety and very limited options for comfort and technology. It is no longer possible to use that term – what we will have from now on are ‘entry cars'”, says Martins.

Cardamone explains that the increase in prices in recent years was due to a model modernization process.

“It is important for Brazil to be safe in terms of fewer accidents and be responsible for the environment. That is, to combine the ideal regulation with this consumer with greater purchasing power, who wants everything in the car, connectivity, infotainment, having the ‘ iPhone’ of cars, there’s nothing to do – the price goes up.”

There are also other, broader reasons that affected prices and the purchasing power of the population.

“At the same time, here in Brazil, we had an exchange rate devaluation and we also had inflation. This all made companies pass on these costs to their final consumers”, adds Martins.