Lula leaves clues about plans for Brazil’s economy if re-elected

Ahead of a presidential election he is favoured to win for a third time, Luiz Inácio Lula da Silva has argued that a way to fix Brazil’s problems is to “put the poor in the budget” and “tax the rich”. 

The man known as Lula made it clear in comments to reporters this month that his priority was battling inequality rather than sticking to a rule limiting public expenditure.

Beyond the slogans, clues are emerging about what the veteran leftist might have in store for Latin America’s largest economy, which under far-right incumbent Jair Bolsonaro is in the grip of double-digit inflation and facing possible stagnation in 2022.

Although the 76-year-old former trade unionist is still to formally declare a candidacy for the October election, he and senior figures in his Workers’ party, or PT, have floated plans to increase public investment, stop privatisations, strengthen labour laws and raise incomes. All of this is underpinned by a greater role for government.

“Our party’s focus is the popular economy. This means that the Brazilian state will have to fulfil a strong agenda in inducing economic development,” said Gleisi Hoffmann, president of the PT. “This is done with jobs, social programmes and the presence of the state.”

Critics warn such an approach is doomed to repeat past mistakes. Fourteen years of PT rule to 2016 ended with Brazil’s deepest recession on record, a massive corruption scandal and the impeachment of Lula’s handpicked successor, Dilma Rousseff.

Yet since his return to the political stage after graft convictions for which he served jail time were overturned on a technicality last year, Lula’s rhetoric has appealed to many of those who have suffered the most during the Covid-19 pandemic.

The leftwinger would gain 44 per cent of first-round votes versus 24 per cent for Bolsonaro, according to an opinion poll published this week by Ipespe/XP. However, a 43 per cent rejection rate for the prospective challenger showed public support is far from uniform.

For the nation’s influential business class, the question is which Lula will take charge if re-elected. Will it be the pragmatist who largely embraced economic orthodoxy when he first took office in 2003, while alleviating poverty with welfare schemes? Or the second-term leader who ushered in an era of expanded state intervention and spending in response to the global financial crisis?

“The hope is that Lula will be fiscally responsible,” said one investment banker, “and not have economic policies that will inevitably lead to the same disaster that happened during the Dilma government.”

For now, the septuagenarian has been coy about specifics. Party insiders insist he will not appoint an economy spokesperson, seemingly to quell speculation about candidates for the portfolio.

Eyebrows were raised this month when Guido Mantega, a long-serving PT finance minister who eventually lost the confidence of investors, was chosen by Lula’s camp to author a newspaper article in a series by economic advisers to presidential hopefuls.

While stressing they did not speak for Lula, several participants from a group of about 80 economists who have been holding debates with the ex-president described a vision of economic recovery inspired by US president Joe Biden’s Covid stimulus package.

“We are not neoliberals, we do not agree with a minimal state, we do not accept a country with this level of inequality,” said Aloizio Mercadante, a former minister and head of the Perseu Abreu Foundation, a PT think-tank hosting the discussions.

Certain issues are totemic for the party, such as a 2017 labour reform it claims diminished workers’ rights without increasing employment.

Following initial suggestions of repeal, the talk among PT leadership now is of a “revision” negotiated between government, unions and business groups. Points raised so far include zero-hour contracts, access to employment courts, rules on union dues and rights for app workers.

Other ideas could prove unsettling to investors. With the PT opposed to the sale of major state-owned enterprises, Hoffman said the planned reduction of a controlling stake in power utility Eletrobras by the Bolsonaro administration could be “re-evaluated” should it go through.

“If it has an impact on development, it cannot remain [that way]. It is a strategic company. What is the logic of handing it over to private initiative?” she added.

As the central bank has aggressively raised interest rates, some economists close to the PT criticise a reliance on monetary policy to tackle inflation and argue there is a part to be played by state-controlled oil producer Petrobras.

Options mooted include adjustments to the company’s policy of pricing diesel and petrol in line with international markets. Another is a “stabilisation fund”, financed by taxes on crude exports, to help smooth out volatility in fuel prices.

“Inflation has multiple causes — it needs multiple solutions,” said Pedro Rossi, a professor at the State University of Campinas.

A potential vote-winner is Lula’s call to boost by 50 per cent payments under a cash-transfer scheme for the nation’s poorest, which Bolsonaro has already enhanced to R$400 ($73) a month.

But given Brazil’s high level of debt, a chief concern for investors is the management of the public accounts. At present, a constitutional provision restricts growth in the public budget to the rate of inflation.

Nelson Barbosa, a former economy minister under Rousseff who has participated in the talks with Lula, argued this should be changed to accommodate extra spending to fuel the recovery from the Covid crisis.

A new framework could involve differential treatment for investment and rules to prevent falls in per capita health and education expenditure.

“It would be a target that allows [spending] to grow, but not in an explosive way,” said Barbosa. “Some fiscal expansion will be necessary in 2023 . . . So that this is compatible with economic stability, it will need to come with the redesign of fiscal anchors.”

Investments could be initially paid for with borrowings, he added, then by an increase in government revenues through growth and tax reform.

The government is already pushing to introduce a tax on dividends, reduce the corporate rate and exempt low earners. But the PT wants an even more progressive system.

Some observers believe that Lula will end up taking moderate stances, not least due to the realities of building coalitions for electoral campaigns and governing in Brazil.

This perception was galvanised at his recent press conference, when Lula said he was open to the centre-right politician and former rival Geraldo Alckmin as running mate.

“The market today has greater hope that Lula can be a good president for the economy, more responsible and capable of implementing a good agenda, than Bolsonaro,” said the investment banker.