🎲 Gambling push

Good morning! Today, we talk about a push to legalize casinos in Brazil. Another major defeat for the government. And a trial that could affect millions of Brazilian workers.

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• Fun fact: Did you know Brazilians celebrate Valentine’s Day today — instead of February 14, as countries in the Northern Hemisphere do? Find out why!

Casino bill closer to a vote

A controversial bill to legalize casinos in Brazil is again on the agenda in today’s sitting of the Senate’s Constitution and Justice Committee. The bill was approved in a hasty February 2022 House vote. Lawmakers on the left and right helped pass it, despite previous public opposition from the evangelical Christian caucus.

• A vote on the issue has been postponed multiple times for various reasons, but the bill’s opponents are running out of instruments to further delay a decision.

Context. Casinos and most forms of gambling have been banned in Brazil since 1946, although the country has recently moved to legalize sports betting platforms. The idea of legalizing casino resorts was revived during the former Jair Bolsonaro administration and advertised as a way to boost tourism in Brazil.

What they were saying. In 2019, then-President Bolsonaro repeatedly said he aimed to turn the coastal city of Angra dos Reis, in Rio de Janeiro state, into a “Brazilian Cancún.” Although Mr. Bolsonaro did not address the topic of gambling directly, Cancún is home to many casinos.

 Why it matters. As we showed in a recent podcast episode, the push to legalize casinos is closely related to calls for allowing the private use of “marine land” such as beaches (prime locations for casino resorts). Both bills passed on the House floor less than 48 hours apart in early 2022.

Backers. Senator Flávio Bolsonaro, the former president’s eldest son, was a major backer of the casino bill and served as rapporteur of the marine land proposal. He and Senator Irajá, the casino bill rapporteur in the Senate, traveled together in 2020 to Miami and Las Vegas to meet with gambling moguls.

A defeat for the Finance Ministry

The Senate turned down part of a presidential provisional decree that created mechanisms to compensate for tax revenue losses by changing the federal tax credits system. The move caters to corporate lobbies who contended that less tax credits would fuel inflation, as additional costs would be passed on to consumers.

Context. Brazil implemented in 2011 a program to grant payroll tax exemptions to dozens of sectors as a way to encourage hiring. After multiple extensions, the benefits were set to expire at the end of last year, but Congress kicked the can down the road again, with the tax breaks expected to be phased out by 2028.

• A study by the Institute of Applied Economic Research (Ipea) found that the 17 sectors still contemplated by the benefits were not in fact the main drivers of employment, and many had decreased their job totals since 2011.

• Lula’s provisional decree prevented companies from using credits related to federal social security contributions (PIS and Cofins) to avoid paying other taxes, such as income tax. It also prohibits the reimbursement of presumed tax credits. 

What they say. The government’s economic team claims that the credit system was created to avoid cumulative taxes, but after legal changes, it is actually being used to subsidize companies without due transparency and social control. 

Process. Provisional decrees are presidential executive orders that take effect immediately but need congressional approval within 120 days, or else they expire. The Senate president also has the power to reject any such decree if they consider the proposal does not observe all constitutional requirements, automatically making it null and void.

• When announcing his decision, Senate President Rodrigo Pacheco claimed the decree failed to respect the constitutional norm of including a 90-day grace period before new tax rules can take effect.

 Why it matters. According to the government, the provisional decree would have guaranteed the public purse around BRL 29 billion (about USD 6 billion). 

What now? Finance Minister Fernando Haddad says there is no plan B for compensating for the revenue loss. The government recently moved to litigate the issue at the Supreme Court — which gave the two sides 60 days to find some source of compensation for the payroll tax benefits.

State of play. Multiple public spending watchdogs have voiced their skepticism about the government’s ability to reach zero deficit. The latest was a group of budget analysts from the House — who this week worsened their fiscal outlook from a surplus of BRL 9.1 billion to a BRL 27.5 billion deficit.

• The House analysts say Brazil should collect BRL 10.4 billion less in taxes and spend BRL 26 billion more than anticipated by the budget law.

A massive Supreme Court trial for Brazilian workers

The Supreme Court will today resume a trial to decide which index should be used to calculate the remuneration of accounts linked to the FGTS mandatory severance fund for workers.

Context. Created in the 1960s, the FGTS fund aims to protect formal employees terminated without cause. Employers must make monthly deposits equivalent to 8 percent of a worker’s salary into an account that can only be accessed in specific situations, besides termination.

• The money can be used by workers to purchase real estate and by the government to finance infrastructure projects.

• Returns on FGTS funds are notoriously below inflation, resulting in a net loss for workers and subsidizing housing programs. In 2014, the center-left Solidarity party filed a lawsuit to replace the rate used to remunerate FGTS funds. 

• Chief Justice Luís Roberto Barroso is taking the case off the shelf as he claims Brazil’s recent positive economic results allow for a “serious and balanced discussion” on the issue.

State of play. Three of the 11 Supreme Court justices have voted on the case; all three defend that the FGTS should at least have the same rate of return as savings accounts (which stood at around 8 percent annually in 2023).

• While the justices argue that the changes should only apply to deposits made from 2025 onwards, they want to order public bank Caixa (which operates the FGTS) to pass all the gains made by the fund in 2023 and 2024 back to workers.

 Why it matters. The federal government argues that if that understanding prevails, it will have less money from the FGTS fund to invest in infrastructure and housing programs. 

Yes, but … According to the currently prevailing understanding of the case, only Congress or the government can discuss retroactively applying the rate change, which would exponentially increase losses to an estimated BRL 661 billion (USD 123.1 billion).

What they are saying. After trying to punt on the case, the Solicitor General’s Office proposed maintaining the current remuneration rates — but with the guarantee that they will at least meet inflation. It also wants to block any possibility of retroactive corrections.

Quick catch-up

President Lula is traveling to Europe. Tomorrow, he will attend the International Labor Conference in Geneva. On Friday, he goes to the G7 Summit in Rome — and has bilateral meetings with Indian Prime Minister Narendra Modi and Presidents Cyril Ramaphosa of South Africa, Emmanuel Macron of France, and Ursula von der Leyen of the European Commission. 

The Federal Police are carrying out a warrant to arrest the chairman of the center-left Solidarity party (which holds five of the House’s 513 seats). Eurípedes Júnior and other targets are accused of siphoning public funds to finance party activity.

After the BRICS foreign ministers meeting in Russia, Brazil’s Mauro Vieira reaffirmed the country’s demands to reform global governance systems. He added that Israel’s reaction to Hamas’s October 7 terrorist attacks “has gone past beyond what is acceptable under international law.”

The government on Tuesday canceled a June 6 auction to import 263,300 tons of rice for BRL 1.3 billion, after multiple signs of irregularities arose with the winning bidders.

The Central Bank is developing a system to make PIX, Brazil’s instant payments system, available for contactless transactions.

Google launched in São Paulo a service that allows users to remove personal data such as addresses, phone numbers, and email addresses from search results.

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