Class A and B should earn more with Lula 3 – 07/23/2023 – Market

The chances of the Lula 3 government repeating the result of its first two terms, between 2003 and 2010, when Brazil experienced the boom of the so-called class C, are small.

On the contrary, this time it will be the richest segments, concentrated in the A and B classes, who should take more ownership, in terms of income, of the recovery of the economy —which could increase inequality in the country, the fight against which is one of the main flags of the new government.

The diagnosis is part of a study by Tendências consultancy, which projects for the coming years the total income of classes A and B rising more than double in relation to that of D/E. Class C would have an intermediate increase in income.

Brazil does not have official criteria to define social classes, but consultancies use their own parameters to define them. In Tendências, families with monthly household income of up to R$ 3,200 are in class D/E. In A and B, those with earnings greater than R$7,600. In C, between BRL 3,200 and BRL 7,600.

At the beginning of his term, not by chance, Lula reinforced social programs aimed at the D/E class, such as the increase in Bolsa Família and Auxílio Gás, the reduction in the INSS queue and the return of Minha Casa Minha Vida, among others.

It did so with resources from the Transition PEC, which released BRL 145 billion, outside the spending ceiling, in the 2023 Budget.

According to Tendências, these actions will produce a 6.4% increase this year in the income mass of the D/E class, well above the 2.2% of the C class.

According to Lucas Assis, macroeconomics analyst at Tendências, the effects of the measures for the poorest are strong in 2023, but will end up diluted in the coming years, with the economic recovery benefiting the richest.

“Social mobility from now on will take place at a reduced pace, a phenomenon typical of countries with high inequality”, says Assis. “While there is slow migration to the middle class, the upper classes will lead the recovery and income growth.”

Assis points out, however, that a drop in income is not expected in any of the classes in the coming years. But that the richest will benefit from higher returns on their investments (with high interest rates), rents and the profits of their companies, which should return to historic levels, higher than in recent years.

“In classes A and B there is also a concentration of civil servants, in which the dynamics of the economy little interferes, as they have stability”, says Assis.

In President Lula’s first two terms, Brazil benefited from a strong external impulse and grew 4.1% a year, on average, compared to 2.4% in the FHC years (1995-2002).

During the PT governments, the world economy had the highest synchronized growth since the Second World War; and China’s GDP increased between 10% and 12% a year, causing a boom in the prices of the commodities that Brazil exports.

None of that is present this time around; and Brazil is in a much worse situation with regard to public accounts. Lula inherited primary surpluses (to lower the public debt) from the FHC government and kept the accounts in the black during his mandate.

With Dilma Rousseff (PT), however, the country entered the red, where it stayed until last year, when the federal government recorded a small surplus, which will not be repeated in 2023.

Now, to reduce debt, Brazil would have to cut spending — or raise taxes, which seems to be the option, negatively impacting economic activity.

For Marcelo Neri, director of FGV Social, the Transition PEC alleviated the situation of the poorest this year, but it will not be repeated in 2024. “Next year will be one of great fiscal uncertainty”, he says.

Data from FGV Social show that, at the end of 2022, after the series of electoral measures by former president Jair Bolsonaro (PL), the per capita family income (counting all sources) of the poorest 40% reached BRL 374 —returning to the same level (adjusted for inflation) of the best point in the series, BRL 375, in 2014.

“There was recovery, but it is a lost decade in this comparison”, says Neri. For the economist, one of the problems now is that Lula has also been trying to create programs for the middle class, or C, such as discounts for the purchase of popular cars.

“If the priority were turned only to the poorest, it would be easier [do ponto de vista orçamentário] accommodate things,” says Neri.

Analysis of the 2022 election result suggests that the C class was crucial to Bolsonaro’s expressive vote, who ended up losing to Lula by just 2.1 million votes.

With few exceptions, states where the C class is relatively larger gave Bolsonaro more votes. On the other hand, where the D/E class predominates, Lula did better — which would explain the PT’s desire to now please the C class audience.