Analysis
Lula reduces public spending but it’s not enough for the markets
Fiscal austerity measures have not satisfied financial markets in Brazil, despite low debt and strong growth. It’s causing tensions in the Workers’ Party.
Brazil is showing a strange paradox: despite the year ending with a GDP growth of 3.5 percent, inflation under control, the lowest unemployment rate since 2012 (at 6.1 percent), an increase in workers’ average income and investment growth, the financial capital is nonetheless managing to push the Lula government into a corner, with the help of the big media groups.
And this after the government has gone all in on “calming the markets,” as they say. With the aim of containing the increase in public spending in line with the “fiscal rule” in effect from 2023, the government had announced a package of cuts at the end of November totaling 70 billion reais (€11 billion) over two years. However, this failed to have the desired effect, even pushing the dollar to break through 6.20 reais for the first time. On Dec. 20, Congress approved the package in a watered-down version, leaving civil servants' high salaries untouched, for instance.
However, a part of the left has taken a stand against the cuts, not satisfied with the government’s proposal – not yet sent to Congress and whose approval is by no means a foregone conclusion – to raise the income tax exemption bracket to those earning up to 5,000 reais in exchange for a 10 percent rate for those earning more than 50,000 reais a month. They have particularly criticized the restrictions on access to social benefits and the introduction of a cap on the real increase in the minimum wage (above the rate inflation) based on the parameters of the fiscal rule, despite the increase in the minimum wage by 106 reais over 2024, which was announced by Lula on January 1 and is already in effect.
This fiscal austerity program has not been received positively even within Lula’s Workers' Party (PT), as shown by the vote against it by three deputies, including an influential PT figure, Rui Falcão, who explained his “no” vote as being motivated by the “reduction of rights” brought about by the cuts, pointing out that he felt no need to communicate his decision beforehand to either Lula or Finance Minister Fernando Haddad: “They didn’t consult me on the package. Why should I have let them know in advance?” This is one of the main criticisms being leveled at the government: the fact that it did not deem it necessary to listen to the opinion of the party, which is divided (among other issues) between those urging a turn to the left and those hoping for a shift to the center.
Nor was Haddad's announcement on Dec. 20 about adopting new spending cuts in 2025 to ensure the sustainability of the public accounts – a highly effective way to feed the ever-insatiable appetite of the “market” – been received well on the left. An important objection is the fact that Brazil's debt is now about 75 percent of GDP, one of the lowest among the world's major economies.
Economist Rosa Maria Marques also spoke out against the imperative of fiscal downsizing, which “doesn’t spare social policies either”: “A choice has been made,” that of adhering to the austerity approach, and “it makes no sense to keep saying that this is a result of unfavorable power imbalances” against the government, because “there are things that are not being proposed and there are limits that cannot be overcome.”
This is especially true given the fact that the weakness of the government only has the effect of making the right-wingers more aggressive. This is shown, among other things, by the constant talk about the president's advanced age and state of health: since his Dec. 10 surgery for an intracranial hemorrhage (following his fall on Oct. 19), the press has gone wild speculating about a possible “Biden effect” for the 2026 presidential election. Not to mention that the mere news of his brain surgery was already enough to improve the mood of the financial markets. But this is not surprising: according to a recent Quaest poll, conducted after the revelation of the Bolsonaro government's plan to kill Lula, 80 percent of financial traders would still vote for “the Legend,” as the former president is nicknamed, against the current president (although the former is ineligible to run for office).
There has been some good news for the government, however, in the form of the end of the nefarious tenure of Roberto Campos Neto at the helm of the Central Bank, whose monetary policy was distinguished by total alignment with the interests of financial capital to the detriment of the country's needs. Gabriel Galípolo, former executive secretary of the Ministry of Finance in the Lula government, took over the role on January 1.
Originally published at https://ilmanifesto.it/lula-riduce-la-spesa-pubblica-ma-ai-mercati-non-basta-mai-dollaro-alle-stelle on 2025-01-05