At the beginning of February, domestic and international flights at government-run airports in Brazil will be hit with a tax increase of 14.21% on average. The National Civil Aviation Agency’s administration company Infraero runs 60 airports (half of the country’s total), including ones in Rio de Janeiro and other major hubs, that covered 101.7 million passengers between January and November 2014. However, Infraero is deep in the red.
O Globo estimated that the new taxes would bring in $75 million to the cash-strapped government-run company, which posted a $187 million deficit in 2014. However, the tax hike is causing anger among Brazilians, since no improvements in infrastructure or services have been made, and it is well above inflation (which reached 6.5% last year). “It is unjustifiable and constitutes an abusive action,” said a lawyer for Brazil’s Consumer Defense Institute.
The tax increase may backfire in terms of revenue generation if cost-conscious consumers decide not to fly, especially during this time of sluggish economic growth in Brazil. Consumer confidence has dropped to its lowest point ever as Brazilians face a barrage of other simultaneous tax increases on February 1. Two taxes on gasoline and diesel fuel will rise then, as will one on personal loans, and further tax increases on fuel, imported goods, and cosmetics will take effect in May and June. Meanwhile, on January 21, Brazil’s central bank raised interest rates to 12.25%, a three-year high, which will further dampen consumer demand.
These measures, estimated to bring an addition $7.7 billion in government revenue, are designed to reverse Brazil’s yawning fiscal deficit. While spending cuts and tax increases are not politically popular, President Dilma Rousseff feels they are necessary to pave the way for future sustainable growth after years of deficit-financed stimulus spending. Preserving the country’s investment grade credit rating is another top priority. However, there is a major risk of overdoing it, as further drops in consumer activity would harm both GDP growth (already estimated at a weak 0.5% in 2015) and government revenue.
There may be a more palatable alternative to this major airfare tax hike. Brazil’s new Civil Aviation Minister, Eliseu Padilha, said on January 6 that another way to make regional aviation viable would be for foreign capital to participate in the concessions of federally-owned airports. However, such participation is illegal under the current Brazilian Aeronautical Code, although it could be revised. The government has previously made billions of dollars by selling long-term concessions to administer major airports, like Galeão in Rio de Janeiro and Confins in Belo Horizante in November 2013. Consortiums of Brazilian and foreign firms paid over 250% of the government’s minimum-required bids, and Infraero retains a 49% stake in them.
Discussions and studies are ongoing on this matter, and so far the Civil Aviation Secretary has not sent over any proposals to the Chief of Staff office. So any final decision is still quite far off. It is no guarantee of lower prices for consumers, however, since taxes at airports under private management were also increased in August 2014.