Lula 3’s economic policy is neither Palocci nor Dilma – 01/04/2023 – Celso Rocha de Barros

The new fiscal framework showed that Lula-3 is neither Lula-1 nor Dilma-1. It is a government that recognizes the need to balance the accounts, but will try to do so gradually. It could go right, it could go wrong, but there’s nothing crazy being proposed.

The good news is that, according to the calculations of economist Felipe Salto, former president of the Independent Fiscal Institution, the new rule will have an important effect on the evolution of the debt/GDP ratio in the coming years.

In an interview for the Brazil Journal website, Salto stated that, in his previous projections, the debt/GDP ratio had an increasing trend, reaching 95.3% in 2032. If the new rule is applied, the projection shows that number already stabilizing in 2026-7.

That is, the new rule, if applied correctly, should prevent the Brazilian public debt from getting out of control. Under normal conditions, this will cause interest rates to fall.

The bad news is that, in order to meet the announced goal of zeroing the deficit in 2024, measures will be needed to increase revenue. While these measures are not announced, doubts remain about the viability of these targets.

In short, the chances of the debt not exploding in the medium term have improved, but the chances of the government achieving the goals it has set for itself in the short term will remain difficult to calculate until the full package of measures is released.

And the short-term goals are important benchmarks: the government invested political capital by announcing them, it will lose if it does not reach them. If the PT intends to be government more often in the future, it must not waste credibility, as it did in the first Dilma government.

After all, the Lula government’s proposal is a good sign for a longer horizon: the left-wing Brazilian government is willing to keep the trajectory of the debt/GDP ratio under control by imposing limits on its own ability to spend future revenue gains.

This is a modest but important step towards the ideal of strong parties that see themselves as long-term partners in democracy. The PT signals that it has some interest in the financial health of the State whose command it intends to dispute, sometimes winning, sometimes losing, for many years.

There is still a long way to go in that direction, but what Lula proposed on Thursday was a good start and should be seen in comparison with what recent right-wing governments have done.

The main difference between Lula’s fiscal framework and Temer’s spending cap is that Temer has not limited himself. The spending ceiling was approved for the next government, which, as it did not yet exist, had no complaints at the time the ceiling was created. As soon as the cap was applied to an existing government — the Bolsonaro government — the cap died, minister Chicago boy and all.

Unlike Temer, Lula is putting a limit on himself. It would be surprising if the limit applied by Lula to himself were not more flexible than the limit applied by Temer to other people.

Lula 3’s economic policy is gaining face, beyond the noise of recent months. It is neither the face of Antônio Palocci nor Dilma Rousseff. The economic team even resembles the PT/PSDB alliance dreamed of by Palocci. But the political circumstances are even worse than those facing Rousseff.

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