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Lula’s Economic Challenge is Enormous – Brazil’s Democracy May Depend on Him Getting it Right

Cody Searl | Latin America Fellow

Image credit: Milos Hajder

More than a month has passed since supporters of right-wing former President Jair Bolsonaro stormed Brazil’s key government buildings–breaking windows, destroying priceless artwork, and demanding the military intervene to overturn the recent election. Brazil’s institutions have so far proven resilient. And yet, growing authoritarian sentiment poses a serious challenge to President Luiz Inácio Lula da Silva. Having finished his first eight-year presidential term in 2010 with an 83 per cent approval rating, and subsequently spending 19 months in jail on now annulled corruption charges, ‘Lula’ must now must find a way to restore faith in Brazil’s “cracked” democracy. The task is formidable.

Brazil’s Economic Challenge

Lula’s most critical challenge is getting Brazil’s economy back on track. Brazil’s high levels of debt, persistent inflation, and his predecessor’s poor economic management will make this a difficult feat. At the same time, cutting back on government spending would make it impossible to address the social problems fueling Brazil’s political tensions.

Brazilians have good reason to feel angry. Two decades ago, China’s explosive growth sent prices for Brazilian exports like beef, soybeans, and iron ore soaring. Then-President Lula used these windfall profits to push up wages by 50 per cent and introduce policies like his bolsa familia cash transfer program. As a result, the country’s poverty rate fell from 26 to 12 per cent as the middle class expanded by some 30 million people. Now, after a decade of economic stagnation and political turmoil, the average Brazilian is ten per cent poorer than they were ten years ago. In Lula’s recent inauguration speech, he vowed to pull Brazil out of this recent era of “devastation”. Voters will be expecting him to deliver, and fast.

Unfortunately for Lula, making good on this promise won’t come cheap. Buoyed by Bolsonaro’s big pre-election spending, public debt reached 74 per cent of GDP in 2022. High inflation has pushed up borrowing costs and eroded confidence in long-term macroeconomic stability. Should government spending continue to outpace its income, investors may decide Brazil is not a safe place to do business. Brazil will struggle to attract much-needed foreign investment, and money leaving Brazil could weaken the Brazilian currency, making imports more expensive.

The Government’s Strategy

In light of these competing political and fiscal pressures, an economic strategy has begun to crystallise. On January 12, Lula and his Finance Minister announced their plan to reduce the budget deficit to between 0.5 and 1 per cent of GDP. However, instead of reducing spending, the government says it will increase the amount of money pouring into its coffers through fiscal reform and increased economic growth. Lula has already secured Congress approval to borrow above the constitutional government spending cap. This will allow an additional R$168 billion (US$33 billion) to be spent on his election promises to increase the minimum wage, revitalise Bolsa Familia, and increase education and infrastructure spending. The government is also hoping to push through big fiscal adjustment and tax reform which they say will help get employment and growth back on track.

Will it Succeed?

Lula’s strategy will require economic growth and a cooperative congress to succeed. Unfortunately, neither are particularly likely. For the Government’s numbers to add up, the Getulio Vargas Foundation estimates that Brazil’s economy will need to grow by 2.5 per cent in 2023. However, economists surveyed by Brazil’s central bank are forecasting growth of less than one per cent. Inflation is expected to hover around five per cent throughout 2023. This means that interest rates will not fall much below their current 14 per cent this year, and may climb even higher if government spending puts further pressure on inflation. Fears of slowing Chinese growth and a sluggish global economy mean that Brazil’s exports are unlikely to be Lula’s golden egg this time around.

And then there is Congress. Should economic growth not materialise, the Government will be forced to wind back social spending, or once again convince the majority-conservative Congress to allow it to borrow above (or replace altogether) the spending cap. All Lula’s big policies to boost economic growth–such as tax reform, employment programs, and increased State Development Bank loans–will require congressional backing. Lula is a skilled negotiator, and has so far managed to build a broad coalition of support in Congress despite his left-wing Worker’s Party only holding 12 per cent of seats. Such is the nature of Brazilian politics; if his competitors sense political weakness, this support will be increasingly hard to find, and reforms increasingly difficult to implement.

The Stakes

To unite his polarised country, Lula must restore hope in Brazil that the future will be better than today. A tough global economy, high levels of debt, and a fickle Congress; Lula’s odds are stacked against him. And yet, if Lula can provide support to Brazil’s poor in the short term while restoring confidence in Brazil’s economic trajectory, he will prove that democracy–while sometimes slow and cumbersome­–is far better than the alternatives espoused on the streets of Brasilia on January 8. Should he not deliver, faith in Brazil’s democracy will continue to fade and the allure of a strongman leader will only grow. It is then likely that Bolsonaro or a successor will be waiting in the wings, ready to pounce at the first sign of weakness.

Cody Searl is the Latin America Fellow for Young Australians in International Affairs.


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