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Is Lula Making Smart Moves for Brazil’s Economy?

Photo of Calculator President elect-Lula’s team on Thursday submitted a draft constitutional amendment to Congress that would exempt all of Bolsa-Família/Auxílio-Brasil cash transfer programs from the spending ceiling on a permanent basis. // File Photo: Marcello Casal Jr. via Agencia Brasil

Brazilian President-elect Luiz Inácio Lula da Silva’s transition team on Nov. 8 added a group of economists as Lula looks toward his inauguration on New Year’s Day. The economists include André Lara Resende and Pérsio Arida, who helped to construct the Real Plan in the 1990s, which brought down hyperinflation and implemented a new currency. The team of economists also includes Nelson Barbosa, who was finance minister under then-President Dilma Rousseff, and Guilherme Mello, who is seen as the chief economic advisor to Lula’s Workers’ Party. What clues do the naming of the economic advisors reveal about what economic policies the incoming government might pursue? Is Lula surrounding himself with the best people for the circumstances the country faces? What are the biggest economic challenges and priorities Lula will face when he takes office?

Paulo Vieira da Cunha, partner at Verbank Consulting in New York: “The budget for 2023 is the most immediate challenge. It is unworkable, and three issues stand out. First, the projected inflation is far above current expectations for the year ahead. Thus, revenues are overestimated. Second, the budget fails to deal with the abrupt and politically motivated reduction in the ICMS tax on fuels, electricity and telecommunications decreed by the Bolsonaro administration during the campaign. The effect was a loss in State-level revenues and once actioned the Supreme Court ordered compensation. Since it was not forthcoming, States cut payments on the debt service owed to the Treasury, threatening the future trajectory of the net federal debt, already negatively impacted by the rise in interest cost. The Treasury could retaliate by reducing other transfers to the states, but this would create a serious political crisis. Another solution must be found. Third, the budget does not contemplate either the promised 200 reais per month ($36.89) increase to 600 reais per month in the program of conditional income transfers to the poorest households or the promised increase in the national minimum wage. These were promises shared by both candidates and there is a consensus in Congress to make them effective, the question is how. Even if the other issues are disregarded and kicked down the line, the continuation of the payments at 600 reais per month demands an enlargement in expenditure that breaches the expenditure ceiling for 2023 and, given the strictures, a constitutional waiver is needed. A political agreement with the sitting legislature is possible in the coming weeks. The Bolsonaro wing of the Congress favors a deal that contemplates strictly the two items and only for 2023. The incoming administration has already spoken to the current legislative leadership, which it tacitly supports, about making the larger payment permanent, or at least valid for the duration of its tenure, thus committing the future legislature. In any event, the real difficulty will come next year when the new administration and the new legislature must agree on a new fiscal rule to change or replace the expenditure ceiling, deal most urgently with the tax issues, and attempt to mold public policy to reflect the goals of the new president. If President Lula wants to start well, he should strive to implement in 2023 the tax reform already under discussion in Congress.”

Tara Hariharan, managing director of global macro research at NWI Management: “Financial markets initially favored a Jair Bolsonaro win in Brazil’s presidential race on the expectation that Lula and his leftist Partido Trabalhadores (PT) party would be more fiscally profligate. Upon Lula’s win, investors sought to give him the benefit of the doubt that his economic policies would depart from former President (and PT colleague) Dilma Rousseff’s unauthorized expansion of the budget deficit to spend on social welfare. While Brazil’s central bank (BCB) has upheld its independence from the government thanks to a BCB governor who has credibly and prudently hiked interest rates in response to high inflation, monetary policy cannot offset fiscal extravagance, and high interest rates exacerbate the effects of an elevated debt burden. Furthermore, a center-right congressional majority keen to fund its own priorities may not constrain government spending despite partisan divisions. All these factors underscore why Lula’s choice of finance minister and economic team is so crucial. Individuals with past BCB experience and track records of defending Brazil’s budget spending cap would be considered market-friendly. Yet, recent reports have suggested candidates with limited economics expertise who support increased spending. Also worrisome is news that Lula seeks a constitutional amendment to exclude social spending programs like Bolsa Familia from the spending cap. Brazil’s macroeconomic outlook is extremely positive given a potential surge in commodity export demand from a reopening China in 2023. However, investor goodwill and a rebound in the Brazilian real will ultimately hinge on whether or not Lula names an experienced economic team that credibly restrains fiscal spending.”

Allison Fedirka, director of analysis at Geopolitical Futures: “Lula’s economic transition team reflects the government-elect’s need to balance electoral expectations and the constraints it faces. More government spending is expected because of Lula’s political orientation and the need for greater government support for addressing rising poverty levels. The key difference between this upcoming term and Lula’s previous terms is that he does not have the economic bonanza this time around and that will limit the fiscal policies his government can enact. Brazil finds itself in need of long-awaited structural reforms to the economy in addition to the global economic downturn. The latter poses primarily exogenous challenges for the incoming government—lower Chinese demand, commodity prices, trade complications, etc.—over which it will have little control and can only react to. Where the government will be able to have more impact is on the domestic front, confronting challenges like privatization drives, government spending reforms, welfare packages and growing defaults. Here a mixed economic team may help the Lula administration more effectively navigate the economic landscape, facilitate the executive’s policies and negotiate with the legislature when executing various economic strategies and programs. Much of the government spending, for example, requires congressional sign-off in the form of proposed constitutional amendment. The final version of the proposed transition spending package, which is currently under negotiation and aims to regulate minimum-wage and cash-transfer programs in the early year(s) of the newly elected president, will serve as a signpost for how this domestic dynamic plays out.” 

Ione Amorim, economist at the Brazilian Institute of Consumer Protection (IDEC): “Brazil has gone through a process of dismantling institutions over the last years. All social, environmental and climate pillars have seen serious setbacks, such as in the fight against hunger, health, education, deforestation in the Amazon and a large financial hole in public accounts. With still a very divided Congress, the next government will require a broad base of support from leaders with diverse political positions. The challenges for Brazil’s next president include hunger and the over-indebtedness of families. Although the cash transfer program maintains its current value, which was raised during this year’s electoral campaigns, high inflation and rising prices for food and essential services have eroded the purchasing power of households, bringing increased risk of food security. The second challenge is the indebtedness of families, with the use of credit as an alternative to guarantee the purchase of food and medicines. As interest rates rise, default rates go up, and part of the family income goes to the banking sector in the form of interest. To unlock the economy, the government will need social programs to fight hunger, increase food production from family farming and recreate regulatory measures to contain the rise in prices. The next administration should adopt a recovery program for families in debt, through the strengthening of the Over-indebtedness Law, defining policies and criteria for compromising income for the payment of bank debts.”

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