Risky strategy in Brazil for Lula implies compromise ahead of taking up office on January 1st

Luiz Inácio Lula da Silva faces his first test less than two months before he takes office as Brazil’s president, pushing for a constitutional amendment that would allow him to fund his multi-billion dollar campaign promises.

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While on the stump, the left-wing veteran pledged to increase the minimum wage, create a new cash stipend for poor families with children under the age of six, and maintain the flagship social welfare payment at R$600 (€109.70) from January. Under current budget rules, the payment should fall to R$405.

However, Mr Lula da Silva has little room to manoeuvre with much of next year’s budget already earmarked by congress and incumbent Jair Bolsonaro’s administration. He is further constrained by Brazil’s constitutionally mandated spending cap, known as the teto, which limits budget increases to inflation.

It appears that politicians are once again seizing the opportunity to increase expenses without accountability

—  Rafaela Vitoria, chief economist at Banco Inter

After meeting with congressional leaders this week, Mr Lula – who narrowly defeated the right-wing Mr Bolsonaro in elections last month – has opted to pursue a constitutional amendment that would put R$175 billion of funds for his social welfare plans outside the cap, thereby circumventing its limitations.

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It is a risky strategy that will inevitably involve political compromises, even before the 77-year old takes office on January 1st. It also appears to be causing unease among some investors. The Brazilian real has fallen about 5 per cent against the US dollar over the past week, while the stock index is down 7 per cent and the cost of government borrowing has risen.

Many economists remain concerned about Mr Lula’s commitment to fiscal responsibility, particularly as he has yet to signal the economic direction of his administration with the appointment of a finance minister.

“The amendment is being negotiated without the appointment of a finance minister and numbers being quoted are quite high,” said Rafaela Vitoria, chief economist at Banco Inter. “It appears that politicians are once again seizing the opportunity to increase expenses without accountability.”

Known as PECs, amendments to the constitution must be passed by three-fifths of politicians in two consecutive votes in each house of congress – a lengthy process that Mr Lula’s team would need completed by the middle of December in order to maintain the R$600 payment in January.

Politically, the move would hand leverage to congressional leaders.

Arthur Lira, speaker of the House, and Rodrigo Pacheco, president of the Senate, are both seeking re-election in February and will use the PEC as a bargaining chip to generate support for their candidacies.

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Mr Lira, a one-time close ally of Mr Bolsonaro, quickly embraced Mr Lula following his electoral victory on October 30th in an about-face that underlined the political malleability of Brasília.

Under the proposed amendment, R$105 billion worth of current social welfare expenditure, including the monthly R$400 Auxílio Brasil cash payment, would be placed outside the spending cap.

An additional R$70 billion would be allocated to maintain Auxílio Brasil at its current R$600 level and create a new R$150 handout to poor families with children under six. Voting on the amendment is expected to begin later this month.

Mr Lula’s allies say they want to keep the social welfare programme permanently outside the teto, although this possibility has raised concerns about fiscal slippage and would likely complicate the amendment’s passage through congress.

Before choosing the PEC, Mr Lula had considered issuing an executive order as soon as he takes office that would allow him to maintain elevated social welfare payments.

This, however, would occur too late for the month’s payroll, meaning recipients would receive reduced payments during his first few weeks in office. – Copyright The Financial Times Limited 2022