Brazil’s President Luiz Inácio Lula da Silva is beginning to advance on economic policy initiatives that had taken the back seat following the political upheaval of the 8 January storming of democratic institutions.
Within the space of a fortnight, Lula relaunched the low-income housing programme ‘Minha Casa, Minha Vida’ and announced the long-awaited income tax bracket adjustment, as well as a second minimum salary increase this year. In addition, the government reintroduced fuel taxes to help bolster public finances and seemingly put to rest a spat over interest rates with the central bank (BCB).
That is good news, as is the fact that Lula and his economic team still appear to be adhering to some type of inflation control and fiscal discipline, after massive spending increases that ballooned public debt. But getting there was an arduous process, riddled by disagreement and miscommunication within the government.
That may simply be the growing pains of a young government – but it may also reflect deeper divisions within the administration. Either way, it makes it harder to tackle the broader economic challenges that lie ahead, including the drafting and passage through parliament of new fiscal responsibility rules.
At the same time, there does not seem to be an overriding economic strategy to put the sleeping giant, as Brazil is sometimes called for its huge untapped potential, back on track. The main legislative initiatives so far seem to be approving a tax reform that has been lingering in congress for years and rewriting the spending cap Lula himself did away with.
While that is important, there is little talk of reforms that would make Brazil more competitive and help drive growth in coming years. Indeed, there is still a great deal of uncertainty as to whether Lula will undo part of the 2017 labour reform implemented under Michel Temer (2016-2019), which deregulated the market but left some professions unprotected.
To be fair, it’s still early days, the political challenges have been immense, and there is a lot of repair work to be done, whether rebuilding the environmental protection agency or social welfare programmes.
Also, Lula’s plan to kick-start economic growth by fueling consumer demand with low-cost credit and generous salary increases, particularly among poorer households, worked well during the early years of his first government (2003-2011), even though the model later ran out of steam and proved a serious drain on public coffers.
Minimum wage
A major step back to that old model came on 16 February, when Lula announced another increase of the minimum salary this year. The monthly minimum wage will be R$1,320 (US$254.9) as of 1 May, from currently R$1,302 and R$1,212 at the end of last year.
That is in line with Lula’s campaign pledge to return to wage increases above inflation, which he hopes will again fuel consumer goods demand like during his first two terms in office. Back then wage increases and subsidised credit fuelled consumer demand but also undermined monetary policy and ballooned the budget deficit, in part because the minimum wage is used to calculate pension benefits. There was also criticism at the time that the government was fuelling household debt by pushing families to buy ever more stoves, TVs, and other consumer goods.
Tax brackets
Another measure to fuel consumer demand that Lula had promised on the campaign trail and implemented in February was to adjust the income tax bracket. While in most countries these are a percentage of income, in Brazil they are a nominal rate that periodically needs to be adjusted in line with inflation. In practice that doesn’t always happen, meaning more people pay taxes on wages that do rise with inflation.
According to the latest adjustment, the amount of tax-free income will rise from R$1,904 to R$2,640 per month. In practice that means that an estimated 13.7m people won’t pay taxes, leaving more money they can spend elsewhere. However, it also means less tax revenue for the government. As a result, Finance Minister Fernando Haddad is trying to make up the shortfall with a proposal to tax online sports betting.
In a further attempt to restart consumer demand, Lula pledged to work with banks to find a way to pardon debts and clear the names of people who have been blacklisted by credit rating agencies. “We need to find a way out, free these Brazilians from the credit crunch so they can go back to being citizens and buy things,” Lula said during an event in Brasília on 28 February.
Housing
After a break of more than 12 years, Lula on 14 February was again handing house keys to the needy as part of his flagship Minha Casa, Minha Vida social welfare programme. A hug, a key, a picture and then again.
While it’s hard to imagine that the 2,745 houses that were handed over that day were built since Lula took office on 1 January, the more important message was that the programme will be expanded. By the end of 2026, 2m houses are to be built, roughly half of them for households of less than two minimum salaries. These beneficiaries will practically receive a house for free, paying only 5% of its value with monthly installments of less than R$50. Half of the R$30bn-R$40bn cost over four years will be paid for with taxpayer money from the treasury. The other half will come from the workers’ severance pay fund (FGTS).
The government wants to first resume construction of some 187,000 unfinished homes that had stalled. “We’re going to push ahead with all of them, so that this country starts growing again,” Lula said during the ceremony. In 2022, Lula’s predecessor, Jair Bolsonaro (2019-2023), spent only R$1.2bn on Casa Verde e Amarela, a downsized housing plan with lower subsidies.
Central bank
Lula is not the only leader in the world who is unhappy with monetary policy, but since early February he has probably been one of the most vocal critics of high interest rates anywhere. In fact, he and the chief of his Partido dos Trabalhadores (PT), Gleisi Hoffmann, bombarded the head of the central bank, Roberto Campos Neto, calling the rate policy “disgraceful” and even threatening to try to cut short his mandate that ends in late 2024.
The PT does not like Campos Neto, nor the independence of the central bank that was adopted under former president Bolsonaro. But the party’s push for lower interest rates somehow ignores that this would fuel inflation, even though Lula has repeatedly boasted of having controlled inflation in the past and how this benefited the poor. So it seems that the heckling of Campos Neto was addressed mostly at the PT’s own rank-and-file, in an attempt to find a scapegoat for lacklustre economic growth this year.
- Low growth, high rates
Brazil saw 2.9% GDP growth in 2022, official figures show – but a quarterly contraction in the last three months of the year has fanned concerns that the economy will see a significant slowdown, or even a contraction, in 2023. The World Bank, for example, projects 0.8% growth in Brazil this year. Meanwhile, the benchmark interest rate remains at a high 13.75% and the central bank’s monetary policy committee has so far given no indication that it intends to cut it.
The problem is that the mere talk about ending central bank autonomy raises borrowing costs and depreciates the real, which slows growth and fuels inflation. And combating inflation with a monetary authority reporting to the finance minister didn’t make the job any easier.
While Lula has since backed off and is unlikely to try and end central bank autonomy, the administration may continue to push for less aggressive inflation targets, which it argues would give it room to cut rates earlier. Currently the market expects an easing cycle to begin only in November. Critics say the idea may become a self-fulfilling prophecy because the higher the target is, the higher inflation expectations will go.
Fuel tax and Petrobras pricing
For months Lula and his advisors had skirted the issue of whether to reintroduce fuel taxes, which had been suspended by Bolsonaro as an attempt to win support ahead of last year’s election. The Lula administration needed the revenue and didn’t want to favour fossil fuel consumption, but at the same time it was wary of negative political fallout from rising costs, particularly among pro-Bolsonaro, middle-class motorists and lorry drivers.
Given that dilemma, in January it postponed a decision by two months. Now, it has decided in favour of a partial return of the levy. Gasoline will be taxed with R$0.47 per litre (previously it was R$0.792), and ethanol with $R0.02 per litre (previously R$0.242). Diesel, which has the largest potential political and inflationary impact, won’t be taxed at all.
To help offset the increase, the state oil company Petrobras then cut gasoline prices by R$0.13 per litre and diesel by R$0.09 per litre. According to the Centro Brasileiro de Infraestrutura (CBIE), gasoline prices were 4.73% above global market prices on the eve of the announcement. To make up for the shortfall and still raise the R$28.9bn in expected revenue, the government will raise a 9.2% crude oil exports tax for four months – a move oil companies are not too happy about.
- Unhappy oil giants
Fossil fuel companies have not taken kindly to the government’s new export tax on oil. Five oil giants including Shell, which together accounted for around a fifth of Brazil’s oil production in January, are suing the government to be exempt from the temporary export tax. But their petition was rejected by a Rio de Janeiro court on 9 March.
All this indicates that Finance Minister Haddad seems to have got his way, at least partially. But just like the inflation targeting issue involving the central bank, there was a lot of noise in the runup to the decision on fuel taxes, and Haddad took plenty of friendly fire from PT president Hoffmann and the president of the national development bank (Bndes), Aloízio Mercadante.
The fuel price issue may have been solved temporarily but it will resurface. First because the presidential decree expires after four months if it is not validated by congress, and, second, because Hoffmann, Lula, and many others want to change the pricing policy of Petrobras. They consider the oil company to mostly benefit wealthy investors rather than the people, even though most of the dividends go to the biggest shareholder, the state.
In his first press conference as Lula-appointed head of Petrobras, Jean Paul Prates left no doubt that the company would abandon its current pricing policy, which is based on the global market price and the exchange rate. But he couldn’t really say what it would be replaced with, other than that it would be more in tune with the broader needs of the country and not only the company.
“The Brazilian market is different,” Prates said. “Petrobras will charge competitive prices for the national market, for its market, as it sees fit, to guarantee its market share in every place it is present.” The press conference took place a day after Petrobras announced a record profit of R$188bn in 2022. It had a higher profit margin than any of the big oil majors.
