In early October, Jair Bolsonaro’s campaign performance in the first round of Brazil’s presidential election revived his stuttering campaign.
Ultimately, however, it was Luis Inácio Lula da Silva (or Lula) who triumphed in the thrilling runoff. The record was tight, with Lula taking the win by just 1.8 percentage points.
Tensions have been high ever since and will remain so until Jan. 1 when Lula is inaugurated.
In a highly controversial and violent election, Lula’s pledge to protect democracy and reduce poverty has shaken left-wing voters. He was also able to lure the moderates by picking a centrist running mate, Geraldo Alckmin.
Meanwhile, Bolsonaro’s mishandling of the COVID-19 pandemic and baseless attacks on the legitimacy of Brazil’s electoral system have alienated large sections of the country’s population.
Angered by the result, Bolsonaro’s Liberal Party (PL) recently petitioned Brazil’s electoral court to reject ballots from 280,000 voting machines. The motion was denied due to insufficient evidence, and attention now turns to the many tasks ahead of the new President.
“I think the Brazilian economy will face a big challenge in 2023,” says Ernesto Bicaleto, a nurse working in the Brooklin Novo neighborhood of São Paulo.
Compared to Lula’s first two terms in office from 2003 to 2010, the current economic outlook is bleak. Inflation is hovering at 6 percent despite the central bank’s decision to raise interest rates to 13.75 percent in August, extending an 18-month tightening cycle.
High borrowing costs are likely to limit investment and consumption, while fears of an imminent global recession began to weaken commodity markets. Prices for Brazil’s main exports (soybeans, oil and iron ore) are likely to fall slightly next year.
In contrast, Lula’s previous presidency coincided with a long rally in global commodity prices. Along with other resource-rich countries in the region, Brazil’s economy skyrocketed. High budget surpluses facilitated extensive infrastructure investments. Social programs (such as the Bolsa Familia money transfer system) have also been expanded and unemployment has fallen.
Thanks to favorable growth momentum, Brazil’s gross debt to gross domestic product (GDP) ratio fell from 77 percent to 62 percent during Lula’s tenure.
After the global financial crisis, however, the economy and fiscal discipline slackened. This was especially true during the presidency of Dilma Rousseff – Lula’s successor.
Precarious economic base
Towards the end of his presidency, Bolsonaro’s decision to increase cash payments and cap taxes on gasoline and electricity (to combat the cost-of-living crisis) only added to Brazil’s debt burden.
The new government is grappling with high borrowing costs and a global economic slowdown that is hurting commodity prices, a key source of income for Brazil [File: Vanderlei Almeida/AFP]
Today, the country’s debt ratio is almost 90 percent of GDP. High debt burdens are accompanied by increased interest burdens, which constrains public spending on things like education and healthcare.
However, inflation has moderated in recent months. However, Brazil’s economic basis remains precarious. The President-elect will have to walk a fine line between pursuing pro-growth reforms and cutting public spending.
Lula’s Labor Party (PT) has already indicated that it will keep the recently approved increase in social assistance.
“But it won’t stay that way forever,” warns Nelson Barbosa, Brazil’s finance minister from 2015-16.
“Assuming growth recovers towards the end of next year, support measures will need to be scaled back. However, the focus will be on boosting growth and then deleveraging.”
Given Lula’s emphasis on public investment, PT economists have objected to Brazil’s current fiscal rules. In particular, the government’s spending cap, which limits budget increases to inflation, has been heavily criticized.
“This fiscal protocol is not fit for purpose. It should be replaced by a new rule that allows for real growth in spending and is based on a long-term fiscal scenario for public debt,” Barbosa said.
PT has also highlighted the need to simplify Brazil’s labyrinthine tax system. Some analysts expect Lula to keep parts of Bolsonaro’s policy proposals, such as unifying regional sales tariffs into a national VAT. E
Elsewhere, it is believed that PT is considering a more progressive tax system that would expand tax exemptions for low-income individuals.
Public finances aside, PT previously pledged to repeal Brazil’s 2017 labor reform law that weakened workers’ bargaining power. In recent months, however, the party has softened its stance.
According to Marcos Casarin, chief economist for Latin America at Oxford Economics, “Lula could try to amend the law by reintroducing mandatory funding for unions. He can also try to raise the minimum wage, but that would cost him politically.”
During the campaign, another topic of conversation was increasing wages for gig workers. For Brazil’s vast informal economy, which accounts for an estimated 40 percent of the country’s workforce, COVID-19 increased social vulnerability.
To help these workers, Mr. Marcos indicated that “a tax indexed to app company revenue could be explored,” but stressed that “while these measures would raise taxes, they are not a priority for Congress.” .
Treacherous terrain
Parliamentary forces supporting Bolsonaro are widely expected to try to stall Lula’s agenda [File: Amanda Perobelli/Reuters]
In the first-round elections on October 2, the far right strengthened its grip on the country’s National Congress. The voters re-elected all members of the Chamber of Deputies and a third of the Senate.
In the former, Bolsonaro’s PL won the largest single-party bloc with 99 seats. In the latter, PL and its right-wing allies secured 19 of the 27 seats up for grabs.
The parliamentary forces supporting Bolsonaro are now widely expected to seek to stall the PT agenda in the years to come.
“The terrain is very treacherous for any political leader…passing economic reforms will be an uphill battle,” noted Alfredo Saad-Filho, professor of international development at King’s College London.
Lula’s politics, in turn, may be forced to become more central.
“Lula is arguably the most talented politician of his generation, and if anyone can heal the country’s cracks, it’s him. But given the political landscape, he will have to make big concessions over the next four years,” Saad-Filho added.
“I’m not optimistic about progressive reforms.”
Financial markets have been optimistic about Lula’s return so far. On December 14, Brazil’s new finance minister, Fernando Haddad, calmed market jitters by downplaying the prospect of excessive public spending.
At the same time, Lula was forced to build a broad political church against Bolsonaro.
This, together with fierce parliamentary opposition, is likely to be reflected in a dovish approach to economic policy.
The result is that Lula won’t be able to ride the coattails of a 2000s-era growth spurt. He also faces mounting pressure to decarbonize Brazil’s growth model and regain greater state control over Petrobras, the state-backed energy company.
In short, he faces enormous challenges.
But according to Mr. Biclaeto, the Sao Paulo-based nurse, Lula’s most enduring legacy will not be economic. Rather, it will be “the victory of democracy”.
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