Year of difficult decisions for Lula – 01/17/2024 – Vinicius Torres Freire

What will set the tone for the government in 2024?

In 2023, Luiz Inácio Lula da Silva dedicated himself to rebuilding foreign policy, left in ruins by the darkness of 2019-22. He promoted a large increase in spending, almost all of it dedicated to increasing the income of the poor. In an improvised way and in fits and starts, he established relations with a Congress dominated by the right in an unprecedented way.

The president endorsed Fernando Haddad’s economic policy almost in its entirety, despite the incomprehensible and counterproductive attacks on the federal government’s inflation and deficit control policies.

This year, Lula will travel more, in words and planes, with the aim of taking care of his party and allies in the municipal elections. There will be no relevant increase in spending for the poorest.

Congress will also be more restive because of the municipal election and, more circumstantially, because Lula and Haddad wanted to overturn by decree a repeated decision by parliamentarians (which extended the reduction in taxes on company payrolls).

Furthermore, the environment will be more tense due to the election of the House and Senate command, which is in 2025, but heats up at the end of the year. It usually causes problems. Dilma Rousseff says so.

As for the economy, Lula will also have to make crucial decisions for the final half of his term.

The growth in spending on education and health was once again linked to an increase in government revenue. As spending growth in general is subject to a more restricted limit, increases in the health and education budget will flatten other spending, undermining the “fiscal framework”.

It is a social, political and parliamentary problem. Furthermore, the government must send an income tax reform project to Congress.

Starting in February, the discussion on revising the fiscal target heats up. In theory, the government’s goal is to balance revenue and expenditure, apart from interest expenses: a zero primary deficit.

It should be noted in passing that the interest bill, which is not paid, but is rolled over through new debt, is around 5.6% of GDP, around R$560 billion.

The goal will not be met. If the zero deficit target is maintained, it will be necessary to make cuts to the Budget and, in 2025 and 2026, there would be additional limitations on the increase in federal spending.

If the target is revised, it is likely that the government will not have to submit to such restrictions, provided for by the “fiscal framework”. The “framework” will thus be demoralized from the start, public debt will grow faster and interest rates will be higher than they could have been, other things being equal.

Interest rates are a determinant of the investment decisions of companies and families. The real one-year rate is still a horrendous 6% per year (higher than December 2021).

Longer-term interest rates have been stuck for a month and a little below the level of August, when the Central Bank began cutting the Selic rate. These are, roughly speaking, the rates that creditors charge on loans to the government, the general floor of the wholesale money market.

Interest rates also depend on interest rates in the United States. The world had become more excited about inflation and interest rates at the end of last year, but this 2024 started with slight clouds.

Investment in more production fell off the charts in 2023. With high interest rates and economic doubts, it is uncertain that it will grow well in 2024. The greater increase in GDP this year depends on the return of business enthusiasm to invest.

A greater reduction in interest rates, however, which does not depend solely on the Central Bank, should have a more significant effect in 2025. Definitions on fiscal targets and social spending will be crucial for the fall in interest rates and the resumption of faster growth in 2025. And for the fate of Lula 3.

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