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Brazil’s new president faces austerity and a fickle Congress

Europen January 1st Luiz Inácio Lula da Silva looks out from the slopes of the Planalto Palace, the office of the Brazilian president, to see supporters in red ocean. The crowd was similar to the one that greeted him at his first inauguration in 2003. Brazil’s fortunes have fluctuated since then. The same goes for Lula, a former union organizer and founder of the left-wing Workers Party (PT) are known. He left office in 2010 with an approval rating of 83%. From 2018, he served 19 months in prison on corruption charges, which were later dropped. In October 2022, he completed a remarkable political comeback when he defeated right-wing populist incumbent Jair Bolsonaro in a bitter presidential election.

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Now he must govern. In fact, he’s been acting for the past two months as if he’s already president. That’s partly because Bolsonaro has been sullen during the transition. He never explicitly admitted defeat in an election that was rigged against him without evidence; his party tried unsuccessfully to overturn the election results.In December, when most Brazilians were watching the World Cup, hundreds of Bolsonarista Protesters stood outside the army headquarters in the capital Brasilia, calling for a coup. Mr Bolsonaro decided that on the day of his inauguration he would rather be abroad, in Florida. The presidential belt, which is supposed to pass from one president to the next, was given to Lula by a group representing Brazilian society, including a ten-year-old boy and an indigenous chief.

Lula faces a daunting task amid the economic chaos that Mr Bolsonaro has bequeathed to his successor. Plenty of pre-election stimulus spending helped boost growth in 2022; according to the central bank, it would be 2.9%. But it is expected to drop to 1% by 2023. Inflation has fallen to 6% in November from a peak of 12% in April. However, the proportion of Brazilians who do not have enough to eat has risen from 6% in 2019 before Bolsonaro took office to 16%. His government promised liberal economic reforms but, aside from putting the state pension on firmer footing, did most of it.

Inflation helps reduce the government debt burden by increasing the size of national income. But high inflation has also pushed up the government’s borrowing costs, eroding confidence in long-term macroeconomic stability and leaving the new government with less leeway in dealing with its debt burden, which stands at 75 percent gross domestic productstill uncomfortably high (see chart).

The resulting fiscal austerity will complicate Lula’s ambitious policy plans and the speed at which he hopes to implement them. “It is not fair or right to ask the hungry to wait patiently,” Lula said through tears in his inaugural address. He wants to revise various social policies initiated by his previous administration. These include a conditional cash transfer program called Bolsa Família (Family Fund), a housing subsidy program, and a program to provide jobs and upgrade Brazil’s poor infrastructure.

Lula also plans to reduce illegal deforestation in the Amazon. Under Bolsonaro, the pace of tree-felling accelerated 60 percent as officials turned a blind eye to illegal logging, mining and land-grabbing. Lula’s first decrees in office included restructuring an environmental agency wrecked by his predecessor, reversing a plan to legalize wildcat mining in protected areas and relaunching the Amazon Fund through which Norway and Germany help pay for environmental policing and The cost of sustainable development projects. The new environment minister, Marina Silva, who served from 2003 to 2008, is expected to launch a coordinated enforcement effort to help Brazil curb deforestation in the 2000s. Adjusted for inflation, however, the ministry’s budget is about a quarter of what it was when Lula left office in 2010.

Lula has to scramble to fill a roughly 1.7% shortfall in the 2023 budget gross domestic product, caused by Mr Bolsonaro’s pre-election profligacy. If vacant, he would have to cut health, education and cash transfer spending to keep the country’s 22 million 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 a recession in 2014-16, during the tenure of Lula’s hand – The chosen successor, Dilma Rousseff. The cap limits any increase in government spending to the previous year’s rate of inflation.

give and take

Lula’s amendment was passed on December 21, on the eve of a recess in Congress. Having to amend the constitution in order to increase the budget is a symptom of Brazilian political dysfunction. The charter has been amended 140 times since it was drafted in 1988, often to allow the government to borrow more money rather than allow for reforms that might make spending more efficient.

Senator Marcelo Castro, who oversees the budget bill, said it was “not normal” for Lula to have to deal with all these issues before taking office. Still, Lula’s approach — haggling with the leaders of more than two dozen political parties and allocating cabinet posts to those who agree to back him — shows that he realizes that the first step to realizing his ambitious plan is to negotiate with Congress. Build a stable relationship.

It will not be easy, despite Lula’s reputation as a master negotiator.this PT Only 12% of seats in Congress.As is typical for Brazilian legislatures, a majority coalition must be established by toma lá, dá cá (“Give and Take”), the dirty process of striking deals with opportunistic centre-right parties and giving them positions of power.one PT Senators raised their hands angrily as each party demanded an “inflated” number of ministries in exchange for support for the government. Lula created 14 new ministries, including one for fisheries, bringing the total to 37.

Congress has also grown stronger since Lula’s ouster in 2010.Although Mr Bolsonaro initially avoided toma lá, dá cáThen he took it to the extreme, handing over tens of billions of reals in federal budget decisions to Arthur Rira, speaker of the House of Representatives, in exchange for protecting the president from impeachment. Mr Lira funnels the cash to his political allies in the states for vote-winning projects such as paving roads and buying tractors.

During the campaign, Lula denounced this “secret budget”, which the Supreme Court said was unconstitutional. It siphons money away from ministries and creates opportunities for graft. Once elected, however, Lula changed his tune, allowing the “secret budget” to be turned into two separate transfers controlled by congressmen. He also began negotiations with Mr. Lila. That surprised many, given the congressional leader’s loyalty to Mr Bolsonaro. But Lila, like Lula, is a pragmatist.He quickly recognized Lula’s victory; the other Bolsonarista Politicians followed suit.

Indeed, many politicians who once supported Mr Bolsonaro have now decided to support Lula. “Against the government when it’s going well is like opposing the country,” said Luciano Vivar, head of the Brazilian League, one of the parties that will give Lula a majority in Congress. Even some members of Bolsonaro’s Liberal Party may vote for the government. “The party has some influence over its members, but the government has much more power,” said one of the representatives, Sóstenes Cavalcante.

Even so, Sen. Simone Tebet, who ran for Lula in the runoff and is now Lula’s planning and budgeting minister, predicts that Congress’ goodwill will not extend to every issue. For example, lawmakers are eager to support Lula’s efforts to boost economic growth, but many will not support left-wing social causes. Conservatives are likely to try to overturn several decrees passed when Lula took office, including a ban on the purchase of certain types of guns and a temporary moratorium on the opening of new shooting clubs.

The broad coalition built by Lula will be unstable. The strength of Brazilian presidents in Congress depends on their popularity, which in turn depends on the economy.Neri Geller, vice chair of the Congressional Agriculture Caucus, predicts infrastructure projects like improved roads and ports and subsidized lines of credit BNDESCDB, Lula may be beloved by farmers, who tend to be bolsonist. But Brazil’s fiscal situation and global economic outlook are more difficult than during the commodity boom when Lula became president.

Lula’s finance minister, Fernando Haddad, has promised to replace the spending cap with a new fiscal rule that would allow the government to borrow more (along with new fiscal responsibility rules to calm market nerves). He also wants to implement tax reforms to boost growth, although governments have failed to do so for decades. Initial reforms will simplify the maze of tax laws, such as combining several taxes into one value-added tax. Mr Haddad has said the government may try to make taxes more progressive in the future, for example on inheritances.

imposing person

Growth above Brazil’s sluggish 0.5 percent annual average over the past decade is crucial to funding Lula’s planned social programmes.but many worry PTLeft-wing interventionist tendencies will kill it. Aline Contar de Souza of Ágora, a consultancy, said financial markets had been “much less forgiving” of Lula than they were of Mr Bolsonaro. Brazil’s currency fell after Mr Haddad’s nomination, but then rebounded. Shares in state oil giant Petrobras fell 6% the day after he took office as Lula decided to continue fuel subsidies initiated by Bolsonaro and to withdraw preliminary studies on privatizing eight state-owned companies.

Lula can initiate parts of his economic agenda through executive orders and decrees.He could roll out a jobs program and expand lending by BNDESwhich PT It is hoped that will stimulate consumption and boost growth. But major reforms require congressional support.

In Brazil, as elsewhere, a booming economy has boosted politicians’ support for the government. During a crisis, the opposite often happens, making difficult reforms all but impossible. “We bet a lot on Lula’s political skills,” said Humberto Costa, a PT senator. The new president must prove himself quickly.

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