Economy

Impact of FGTS withdrawal on consumption should be greater than estimated by Brazilian government

The measure will release more than $10.8 million and can have an impact of 0.55 percentage point in the GPD of the country

reais brazilian currency
  • The Brazilian government has released the calendar for the withdrawal of the FGTS (the Portuguese acronym for “Guarantee Fund for Length of Service,” an obligatory social insurance fund);
  • This economic measure will release more than $10.8 billion (40 billion reais) in the economy of the country during this year and the next;
  • LCA consultancy says that the measure can generate a 0.55 boost in the economy of the country.

The Brazilian government has released the calendar for the withdrawal of the FGTS (the Portuguese acronym for “Guarantee Fund for Length of Service,” an obligatory social insurance fund which saves 8% of the worker’s earnings monthly to support them in case of specific eventualities, such as long-term sickness or the purchase of a new home) and PIS/Pasep (a bonus salary released every year for those who earn up to two minimum wages). This economic measure will release more than $10.8 billion (40 billion reais) in the economy of the country during this year and the next.

The withdrawal will take place between September of 2019 and March of 2020. Part of the funds should go to repay debts, and part to consumption. This second use is the one which tends to generate more jobs, increase income, and so on, according to specialists.

According to a simulation made by the economic consultancy LCA, which considered similar resource releases made in 2017 and 2018 by the Brazilian government, if about 60% of the released resources are intended for consumption, the impulse for the Brazilian government will be 0.35 percentage point in GDP – the same number expected by the Brazilian government. But the consultancy believes that the proportion of resources allocated to the acquisition of goods and services will be even higher, which would generate a 0.55 boost in the economy, according to information released by the Brazilian newspaper Valor Econômico.

The consultancy said that this greater impact can be explained by a number of factors. One of them is that the number of people (96 million) covered by the measure is three times higher than in a similar measure in 2017. Of this total, 54.7 million have less than  $129 (500 reais) to withdraw.

Moreover, the average withdrawal per person should be around $107 (415 reais), a low amount and therefore more likely to be spent than spared. Among other reasons for a greater use of the resources on consumption are lower default and income levels – 0.6 and 0.8 percentage points lower than in 2017 – and a higher Brazilian confidence index (5.8 points above than two years ago).

Understand FGTS Withdrawal Changes in Brazil

The FGTS is funded by contributions made by employers. The amount deposited in each FGTS account (one is created for each new employment contract) can only be withdrawn by workers in specific cases, like when they’re dismissed without cause or retire, among other scenarios. What the government of Jair Bolsonaro is doing is creating new cases where the withdrawal of this fund is allowed.

This simulation of the LCA consultancy does not take into account a second new feature introduced in the FGTS withdrawal by the Bolsonaro team: from 2020, the worker will have the option to withdraw part of the FGTS (from 5% to 50% from each account, depending on the amount available) every year.

If the employee chooses this form of withdrawal from the FGTS, he or she will lose the right to withdraw money from the fund in the event of dismissal and will have to wait a period of two years if he or she wishes to return to the old rules.

On the anniversary draw, according to LCA, the initiative could inject another $6.2 billion (24 billion reais) into the economy.