Brazil election: Five economic challenges facing Brazil’s re-elected President Lula

BRASILIA – Brazil’s economy has beaten expectations in recent years, but mounting debt and entrenched structural problems could complicate leftist President Luiz Inacio Lula da Silva’s fourth term, which begins in January.

Here are the five main economic challenges he faces.

Soaring debt

Brazil’s public debt has surged more than 10 percentage points during Lula’s current term to over 82% of gross domestic product, driving up borrowing costs.

The root cause is years of rising mandatory spending, leaving under 8% of the federal budget adjustable.

Lula has sent mixed fiscal signals, at times dismissing debt worries as “nonsense”, while arguing strong economic growth would resolve the problem.

His team has pledged to keep the government’s current budget rules, which cap spending growth and set primary balance targets – revenues minus expenditures, excluding interest payments on public debt – and hinted at tightening them.

Hitting those targets will be harder, given Lula’s promise to raise the minimum wage faster than inflation, which also lifts pension costs, after already raising welfare benefits and promising new spending.

High interest rates and sticky inflation

Even with interest rates at 13.75%, Brazil’s annual inflation of 4.6% remains above the central bank’s tolerance range of 1.5% to 4.5%.

The central bank delivered its fifth straight rate cut in September on growing signs of an economic slowdown, but markets expect inflation to remain above the official 3% target until as late as 2029.

Lula’s platform promises lower interest rates through fiscal discipline that spares social programmes, but most economists say rates will only fall faster if Brazil cuts spending, and it is unclear how he will square the two.

Debt-laden households and businesses

A record nearly 84 million Brazilians and 9.3 million businesses are behind on debt payments, according to credit bureau Serasa, as high interest rates bite.

That has fuelled public dissatisfaction despite strong indicators such as record-low unemployment and wage growth outpacing inflation.

Lula plans a new round of debt relief, this time through discounted purchases of distressed household loans from banks, plus tax debt forgiveness for some small business owners. Analysts say such measures offer only temporary relief.

The government has also discussed with the central bank ways to rein in heavy use of easy but expensive credit, such as credit cards and unsecured consumer loans, though it has not detailed any proposals.

Scarce political capital for reforms

Lula will likely struggle to push his economic agenda through Congress after voters elected the most conservative legislature since Brazil’s return to democracy in the 1980s.

Although he defeated right-wing Senator Flavio Bolsonaro in the run-off on Oct 25, Bolsonaro’s Liberal Party and its allies are set to control both chambers.

Lula’s aides have signalled he will keep pushing to curtail tax breaks, but lawmakers have repeatedly resisted measures that raise the effective tax burden.

During his current term, Lula has struggled to name nominees and win Senate approval for them at key institutions, including the Supreme Court, central bank, securities regulator and antitrust watchdog, and that is likely to be even more difficult ahead with the rightward shift of Congress.

Tax reform uncertainties

Lula won congressional approval in 2023 for a sweeping overhaul of Brazil’s consumption taxes, and a new value-added tax is set to take effect in January.

With under three months to go, the government has still not disclosed the effective rate, which independent analysts estimate will be around 28%.

Fearing a backlash during the campaign, the administration has also held off on sending Congress a Bill to regulate a new tax on products considered harmful to health or the environment, such as cigarettes and alcohol.

That delay could push back revenue from the tax and has fuelled criticism of the government’s handling of tax policy. REUTERS