The main feature of Lula’s economic policy was what did not happen, says XP’s chief economist – 07/17/2023 – Panel

In an assessment of the first half of the economic policy of the Luiz Inácio Lula da Silva (PT) government, Caio Megale, chief economist at XP, says that the most important thing in the period was what did not happen.

According to him, the essential work of the federal management’s economic team was “to undo the perception of a shift in economic policy or the reversal of advances achieved in the last five or six years”, such as labor and social security reforms, the privatization of Eletrobras and the autonomy of the Central Bank.

“What is positive is that the risks did not materialize, things did not happen as feared, and economic management was balanced. The main thing was the things that did not happen”, says Megale, who was secretary of the Ministry of Economy between 2019 and 2020.

“People looked at the president and had little idea of ​​what could come concrete in the execution of the economic policy. Will the previous reforms be undone or not? Will the government force to remove the president from the Central Bank? Will it increase the inflation target or not? Will there be a tax reference or will the expense be released? We’ve been seeing over time that the answer was no, which is positive”, he completes.

As a more recent example, Megale cites the inflation target, which Lula even said should rise to 4.5%.

“That worried us, because inflation is a bug that you throw at the top and then you don’t get it anymore. And the CMN [Conselho Monetário Nacional] ended up confirming the search for low inflation at 3%. This is the positive aspect”, says the economist, noting that the Executive’s votes in the council, Finance and Planning, were for 3%.

Megale also highlights the government’s participation in approving the Tax Reform through a “focused effort”.

“I brought a guy with a 10 on the subject, Bernard Appy [secretário extraordinário da Reforma Tributária do Ministério da Fazenda], said ‘that’s the reform’ and went with it. At other times, we saw very diffuse discussions”, evaluates the economist, who was João Doria’s Finance Secretary in the São Paulo City Hall, and, therefore, succeeded Fernando Haddad, current Minister of Finance, in the capital.

Among his concerns, he lists the possibility that the government will not be able to increase revenue to achieve a balance between expenditure and revenue (which has been growing).

“Although there is a fiscal framework, the search for balance is expansionist. There will be more expenses, they continue to grow, and the balance comes through revenues. Will the government be able to collect everything it has signaled? What is the impact on companies if it manages to increase revenue by BRL 200 billion? Will it have a very heavy impact on economic activity? If it does not come, the hole in public accounts will continue to press the debt forward. And it is very difficult for an emerging country to be balanced with the growing debt”, he says.

If balance does not arrive, says Megale, it is still not clear whether the various economic agents (BC with new members, Petrobras) will be free to take unpopular measures.

“What will be the BC’s degrees of freedom, especially after the complete change of committee members? Will they be able to raise interest rates? Same thing with Petrobras. If it needs to raise gasoline, will it rise or will it absorb the loss in the balance sheet?”, he asks the Economist.

“The winds are favorable and everything is going in the same direction. If there is a dynamic clearly in the opposite direction, there will be noise, and will the tough measure be implemented or not? The government has re-charged gasoline, it was a tough measure. On the other hand, , it did not reach those who should pay the bill, which are the people who use it, Petrobras is assuming part of that. There is still one in the clove, one in the horseshoe, in some themes”, concludes Megale.

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