Lula aims for elections with a “shot” at the fiscal target; risk is inflation and interest

President Luiz Inácio Lula da Silva (PT) surprised by giving a “graceful blow” to the fiscal target of zero deficit for 2024, established by his own government. His statement made to journalists on Friday morning (27) brought down the prices of the country’s financial assets and increased the value of the dollar. But it also further complicated economic policy by indicating a dangerous pragmatism. The result could be a worsening in inflation expectations, which would have an effect on the basic interest rate.

With signs of loss of popularity and growing dependence on the goodwill of the presidents of both Houses of Congress, Lula appears to be giving in to political advisors who prioritize the allocation of resources to strengthen government intervention in the electoral process, through social benefits and great works.

The Centrão and the more radical wing of the PT are pressuring Lula to adopt a less responsible approach in managing public money and more aggressive in using his presidential authority. By stating that he will “hardly” meet the 2024 fiscal target, Lula not only nullified the effort and reputation of his Finance Minister, Fernando Haddad, but also gave a clear signal that the Union Budget will need to adjust to accommodate more ” fiscal space”.

The need to contingency funds was already bothering allied ministers and parliamentarians. It is no coincidence that the president has already announced that he will hold inaugurations across the country next year. Afterwards, he reiterated that the “greed” of investors will not force him to make spending cuts.

The market already expected a fiscal deficit of 0.75% of the Gross Domestic Product (GDP) in 2024. However, the president’s words could increase the so-called “unanchoring of expectations”, a technical term used to explain the loss of predictability of indicators and trust in the authorities responsible for economic policy, which are fundamental for the market to operate.

Contrary to what Lula suggested, “greedy investors”, according to his view, value commitment to proposed goals more than the size of profits, charging more and with shorter terms when the economy’s compass does not stabilize .

Economists interviewed by the newspaper “O Estado de São Paulo” warn that the risk of inflation expectations becoming unanchored in the coming years has increased due to the uncertainty caused by the government’s difficulties in advancing its economic agenda in Congress, now aggravated by Lula’s statements.

They warn that the apparent stability in the country’s prices could change quickly, especially in the face of negative signs on the fiscal side and adverse international events, such as an increase in oil prices forced by the war in the Middle East.

For Marcos Mendes, Insper’s associate researcher for public policies, Lula’s statements reflect the lack of commitment to fiscal balance, ignoring the negative effects on interest rates, inflation and economic growth.

XP Investimentos suggests that the change in the fiscal target is likely due to pressure on the Union Budget. Felipe Salto, chief economist at Warren Rena, believes that Lula’s statements do not substantially change the fiscal framework, considering the triggers provided for in the law in case of failure to meet the target.

Political interest overshadows the search for economic stability

Another error by Lula and his allies pointed out by economists is the assumption that the inflation scenario, still in an improving phase, will be sustained in a guaranteed way, which could encourage more aggressive spending, counting on the Central Bank to avoid greater lack of control.

From a political point of view, Centrão maintains its influence, and the government is even more dependent on the president of the Chamber, Arthur Lira (PP-AL). According to analysts, without a clear project for the country, the Executive is at the mercy of parochial political interests and is limited to occupying positions and distributing public resources.

The fact is that Lula is in a hurry. Even with improvements in economic indicators, the president’s approval is declining, especially in the Northeast region and among the evangelical public. The promised reversal of the spending ceiling in favor of social justice, the recomposition of Bolsa Família and the increase in the minimum wage did not materialize.