Brazil’s new president faces a fiscal crisis and a fickle Congress

On January 1st Luiz Inácio Lula da Silva will get the keys to the Brazilian president’s residence—exactly 20 years after he was first inaugurated in 2003. Brazil’s fortunes have risen and fallen since then. So have those of Lula, as the former union organizer and founder of the left-wing Workers’ Party (PT) is known. He left office in 2010 with an 83% approval rating. From 2018 he spent 18 months in jail on corruption charges that were later annulled. In October 2022 he completed a remarkable political comeback by beating Jair Bolsonaro, the right-wing populist incumbent, in a bitterly fought presidential election.

Now he must govern. Indeed, he has spent the past two months acting as if he is already president. That is partly because Mr. Bolsonaro has spent the transition sulking. He never explicitly conceded defeat in an election he suggested, without evidence, would be rigged against him; and his party tried unsuccessfully to have the result overturned. In December, while most Brazilians were watching the World Cup, hundreds of bolsonarista protesters stood outside the army headquarters in Brasília, the capital, calling for a coup.

Lula has a daunting task ahead, thanks to the economic rut into which Mr. Bolsonaro has driven Brazil. Growth, which the central bank estimates to have been 2.9% in 2022 thanks to copious pre-election stimulus spending, is expected to fall to 1% in 2023. Inflation has fallen from a peak of 12% in April to 6% in November. However, the number of Brazilians who do not get enough to eat has risen from 6%, just before Mr. Bolsonaro took office in 2019, to 16%. His government promised liberal economic reforms but, apart from trying to put public pensions on a sounder footing, failed to enact most of them. Brazil’s debt remained stubbornly high on his watch, at 75% gdp.

The resulting fiscal crisis will complicate Lula’s ambitious political plans. He wants to reduce poverty by revamping various social programs started under his previous administration. These include a conditional cash-transfer scheme known as Bolsa Família (Family Fund), a subsidized housing program called Minha Casa, Minha Vida (My House, My Life), and public-works projects to provide jobs and upgrade Brazil’s crumbling infrastructure.

Lula also plans to reduce illegal deforestation in the Amazon. The pace of tree-clearing rose 60% under Mr Bolsonaro, as officials turned a blind eye to illegal logging, mining and land-grabbing. The new environment minister will be Marina Silva, who did the job between 2003 and 2008 and is expected to launch the kind of coordinated enforcement effort that helped Brazil curb deforestation in the 2000s. However, the ministry’s budget is roughly a quarter of what it was when Lula left office in 2010, when adjusted for inflation. Lula plans to appeal to rich countries for cash to increase it, and to fund sustainable development in the rainforest.

First, however, he had to scramble to fill a hole in the budget for 2023 of the order of 1.7% of GDP, caused by Mr. Bolsonaro’s pre-election profligacy. Left unfilled, it would have forced Lula to slash spending on health, education and Bolsa Família, which keeps 22m of the country’s poorest families afloat. The president-elect spent much of the transition period rallying support in Congress for a constitutional amendment to exclude roughly that amount from a federal spending cap passed in the wake of a fiscal crisis and recession in 2014-16. The cap limits any increase in government spending to the previous year’s inflation rate.

Lula’s amendment passed on December 21st, the eve of the congressional recess. Having to change the constitution to make a budget add up is a symptom of Brazil’s political dysfunction. The charter has been changed 140 times since it was drafted in 1988, more often to allow the government to borrow more, rather than to allow reforms that might make spending more efficient.

That Lula had to deal with all of this before taking office is “not normal”, said Marcelo Castro, the senator overseeing the budget bill. Lula’s methods, however—haggling with the leaders of more than 20 parties and doling out cabinet jobs to those who agree to back him—show that he understands that the first step toward achieving his ambitious plans is to establish a stable relationship with Congress.

This has not been easy, despite Lula’s reputation as a skilled negotiator. The PT will have just 12% of seats in Congress. As is typical in Brazil’s legislature, a majority coalition must be built via toma lá, dá cá (“give and take”), the grubby process of making deals with opportunistic center-right parties and giving them positions of power. One PT the senator throws up his hands in exasperation at the “exaggerated” number of ministries each party demanded in order to back the government. Lula plans to create 14 new ministries, including a fishing ministry, bringing the total to 37.

Congress has also become more powerful since Lula stepped down in 2010. Although Mr. Bolsonaro initially eschewed toma lá, dá cá, he later took the practice to an extreme, giving decision-making power over tens of billions of reais of the federal budget to Arthur Lira, the president of the lower house, in exchange for shielding the president from impeachment. Mr. Lira funneled the cash to his political allies in the states for vote-winning projects like paving roads and buying tractors. Lula spent the campaign decrying this “secret budget”, which the Supreme Court says is unconstitutional. It sucks funds away from ministries and creates opportunities for graft.

Once elected, however, Lula changed his tune, launching talks with Mr. Lira, which surprised many given the congressional leader’s loyalty to Mr. Bolsonaro. But Mr. Lira, like Lula, is a pragmatist. He was the first authority to recognize Lula’s victory; other bolsonarista politicians followed suit.

Indeed many politicians who once supported Mr. Bolsonaro have now decided to back Lula. “Being opposition to the government when it’s going well is like being opposition to the country,” says Luciano Bivar, the president of União Brasil, one of the parties that will give Lula a majority in Congress. Even some members of Mr. Bolsonaro’s Liberal Party may vote with the government. “The party has some influence over its members, but the government is much more powerful,” says Sóstenes Cavalcante, one of its deputies.

However, Simone Tebet, a senator who campaigned for Lula in the run-off and who will be his planning and budget minister, predicts that congressional goodwill will not extend to every issue. Lawmakers are eager to back Lula’s efforts to boost growth, for example, but many will not champion leftist social causes.

And the broad coalition Lula wants to build will be unstable. Brazilian presidents’ strength in Congress depends on their popularity, which in turn depends on the economy. Neri Geller, the vice-president of the agricultural caucus in Congress, predicts that infrastructure projects such as improved roads and ports and subsidized credit lines from BNDESthe state development bank, may endear Lula to farmers, who tend to be bolsonaristas. But Brazil’s fiscal situation and the global economic outlook are more difficult than when Lula was the last president, during a commodity boom.

Fernando Haddad, Lula’s finance minister, has promised to deliver a new fiscal rule to replace the spending cap, which will allow the government to borrow more (while establishing new rules for fiscal responsibility in an attempt to calm market jitters). He also wants to implement a tax reform to boost growth, even though this has eluded governments for decades. An initial reform would simplify a byzantine tax code, for example by combining several levies into a single value-added tax. However, Mr. Haddad has said that the government might later try to make taxes more progressive, for example by taxing inheritance.

Faster growth than Brazil’s lackluster 0.5% average of the past decade is crucial to fund the social programs Lula is planning. But many fear that PT‘s left-wing interventionist streak will stifle it. The financial markets will be “far less forgiving” with Lula than they were with Mr. Bolsonaro, says Aline Contar de Souza of Ágora, a consultancy. The real fell after Mr. Haddad was nominated, although it later rebounded.

Lula can kickstart parts of his economic agenda via executive orders and decrees. He could launch housing and employment programs, for example, and expand lending by BNDESwhich the PT hopes will spur consumption and boost growth. But big reforms will require buy-in from Congress. In Brazil, as elsewhere, a buoyant economy boosts politicians’ support for the government. During crises, the opposite tends to happen, making painful reforms all but impossible. “We’re betting a lot on Lula’s political skill,” says Humberto Costa, a PT senator The new president will have to prove himself quickly.

Leave a Comment