In early October, Jair Bolsonaro’s poll-defying performance in the first round of Brazil’s presidential election revived his stuttering campaign.

eventually it was Luis Inácio Lula da Silva (or Lula) who was victorious in the nerve-racking second round. The count was close, with Lula taking the win by just 1.8 percentage points.

Tensions have been running high ever since and will remain high until January 1, when Lula is inaugurated.

In highly divisive and violent electionsLula’s pledge to protect democracy and reduce poverty buoyed left-wing voters. He was also able to lure moderates by choosing 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 alienated large segments of the country’s population.

Stunned by the result, Bolsonaro’s Liberal Party (PL) recently petitioned Brazil’s electoral court to reject ballots from 280,000 voting machines. The request has been rejected due to insignificant evidence and attention is now focused on the numerous tasks facing the new president.

“I think the Brazilian economy will face a major challenge in 2023,” worries Ernesto Bicaleto, a nurse in São Paulo’s Brooklin Novo neighborhood.

Compared to Lula’s first two terms in office, from 2003-2010, the current economic outlook is bleak. Inflation hovers around 6 percent, despite the central bank’s decision to raise interest rates to 13.75 percent in August, extending the 18-month tightening cycle.

High borrowing costs appear to be restraining investment and consumption, just as concerns about an impending global recession are beginning to undermine commodity markets. The price of Brazil’s main exports (soybeans, oil and iron ore) are all expected to fall next year.

In contrast, Lula’s previous presidency coincided with a long rise in global commodity prices. Brazil’s economy grew tremendously along with other resource-rich countries in the region. High budget surpluses made large-scale investments in infrastructure possible. Welfare programs (such as the Bolsa Familia money transfer scheme) were also expanded and unemployment fell.

Thanks to favorable growth dynamics, Brazil’s gross debt to gross domestic product (GDP) ratio fell from 77 to 62 percent during Lula’s tenure.

However, after the global financial crisis, economic activity and fiscal discipline softened. This was particularly the case during the presidency of Dilma Rousseff, Lula’s successor.

Precarious economic position

Towards the end of his presidency, Bolsonaro’s decision to collect cash benefits and cut taxes on gasoline and electricity (to combat the cost-of-living crisis) only added to Brazil’s debt burden.

Brazilian economy - the costs count
The new government will face high borrowing costs and a global economic slowdown affecting commodity prices, a major source of income for Brazil [File: Vanderlei Almeida/AFP]

Today, the country’s debt-to-GDP ratio is close to 90 percent. A high debt burden entails a high interest burden, which limits government spending on things like education and health care.

Admittedly, inflation has eased in recent months. However, Brazil’s economic position remains precarious. The president-elect will have to walk a fine line between pursuing growth reforms and cutting government spending.

Lula’s Workers’ Party (PT) has already hinted that it will maintain the recently approved increase in social security.

“But this won’t last forever,” warns Nelson Barbosa, Brazil’s finance minister from 2015-2016.

“Assuming growth picks up by the end of next year, the support measures will have to be reversed. That said, the focus will be on boosting growth and then reducing debt.”

Given Lula’s emphasis on government investment, PT economists have objected to Brazil’s current fiscal rules. In particular, the government’s spending ceiling, which limits budget increases to inflation, has drawn fierce criticism.

“This fiscal protocol is not suitable for this purpose. It should be replaced by a new rule that allows spending to grow in real terms and is based on a long-term fiscal government debt scenario,” 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 taxes into a single national value-added tax. E

Elsewhere, PT is thought to be considering a more progressive tax regime that would expand exemptions for low-income individuals.

Outside of government finances, PT previously pledged to repeal Brazil’s 2017 labor reform law that weakened workers’ bargaining power. However, the party has moderated its stance in recent months.

According to Marcos Casarin, chief economist for Latin America at Oxford Economics, “Lula can try to fit the bill by reintroducing mandatory funding for unions. He can also try to raise the minimum wage, but that will cost him political money.”

During the election campaign, other topics of discussion included higher wages for “gig” workers. For Brazil’s huge informal economy, estimated at 40 percent of the country’s employed labor force, COVID-19 exacerbated social vulnerabilities.

To help these workers, Mr. Marcos pointed out that “a tax indexed to app company revenues could be explored”, but stressed that, “while these measures would provide a tax lift, they are not a priority for the Congress”.

Treacherous terrain

Supporters of Brazil's former president and presidential candidate Luiz Inacio Lula da Silva
Pro-Bolsonaro parliament forces are expected to try to thwart Lula’s agenda [File: Amanda Perobelli/Reuters]

In the first round of elections on October 2, the far right tightened its grip on the country’s national congress. Voters reappointed all members of the Chamber of Deputies and one-third of the Senate.

In the first, Bolsonaro’s PL won 99 seats, the largest one-party bloc. In the latter case, PL and its right-wing allies secured 19 of the 27 seats up for grabs.

Pro-Bolsonaro parliament forces are expected to try to thwart PT’s agenda for years to come.

“The terrain is very treacherous for any political leader… implementing economic reforms will be an uphill battle,” noted Alfredo Saad-Filho, a professor of international development at King’s College London.

In turn, Lula’s politics may be forced to shift more towards the center.

“Lula is perhaps the most talented politician of his generation and if anyone can heal the country’s rifts, it’s him. But given the political landscape, he will have to make major concessions over the next four years,” said Saad-Filho.

“I’m not optimistic about progressive reform.”

Financial markets are so far bullish on Lula’s return. On December 14, Brazil’s new finance minister, Fernando Haddad, calmed market jitters by downplaying the prospect of excessive government 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 moderate approach to economic policy.

As a result, Lula will not be able to ride a growth spurt from the 2000s. He is also under increasing pressure to decarbonise Brazil’s growth model and reassert greater government control over Petrobras, the state-backed energy company. .

In short, he faces enormous challenges.

But according to Mr. Biclaeto, the nurse from Sao Paulo, Lula’s most lasting legacy will not be economic. Rather, it will be “the victory of democracy”.



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