Brazilian President Luiz Inacio Lula da Silva will begin a fourth term in January with little budget flexibility and a more conservative Congress, complicating efforts to balance spending, inflation and debt.
Reuters put public debt above 82% of gross domestic product, a rise of more than 10 percentage points over Lula’s current term that has raised borrowing costs. Years of growing mandatory outlays have left less than 8% of the federal budget open to adjustment, the report said.
The government says it will retain a fiscal framework that limits spending growth and sets targets for revenue less non-interest outlays. Reuters reported that officials have also suggested the rules could be made stricter. Lula’s pledge to raise minimum wages faster than inflation would lift pension costs, while expanded welfare benefits and other spending plans add to the budget burden, the outlet reported.
After Lula defeated Sen. Flavio Bolsonaro in the Oct. 25 runoff, Bolsonaro’s Liberal Party and allied parties are expected to take control of both congressional chambers, Reuters reported. Voters elected a legislature the outlet described as Brazil’s most conservative since democratic rule resumed in the 1980s. Lula’s aides signaled he would keep seeking cuts to tax breaks, but lawmakers have repeatedly opposed measures that raise the effective tax burden. Reuters also said Lula struggled to secure Senate approval for nominees to major institutions during his current term, a challenge that may grow under the new Congress.
Reuters reported that Brazil’s interest rate is 13.75% and annual inflation is 4.6%, above the central bank’s tolerance band of 1.5% to 4.5%. In September, the central bank lowered borrowing costs for a fifth successive meeting as signs of weaker growth mounted. Market expectations cited by Reuters see inflation staying above the official 3% target as late as 2029.
Serasa’s figures showed nearly 84 million people and 9.3 million businesses behind on payments, records for both groups, Reuters reported. The outlet linked public dissatisfaction to high rates, even with unemployment at a record low and wages growing faster than inflation.
Lula plans another debt-relief round involving discounted government purchases of distressed household loans from banks and tax-debt forgiveness for some small-business owners. Reuters said officials have discussed with the central bank how to reduce reliance on credit cards and unsecured consumer borrowing, but have not detailed a plan.
A new value-added tax created by a 2023 consumption-tax overhaul is due to take effect in January. Reuters reported that the government has not disclosed the rate; independent analysts estimate it at about 28%. The administration has also delayed a bill to set rules for a separate tax on cigarettes, alcohol and other products considered harmful to health or the environment. Reuters said the delay could push back revenue from the tax.
