A profligate president
To halt Brazil’s decline, Lula needs to cut runaway public spending
Investors have started to worry
When in 2022 Luiz Inácio Lula da Silva narrowly defeated Jair Bolsonaro in Brazil’s presidential election, democrats everywhere were relieved.
Mr Bolsonaro, a hard-right populist, had spread intolerance and guns, and encouraged the despoliation of the Amazon rainforest.
His threat to democracy was summed up by his failed attempt to persuade the armed forces to overturn his election defeat.
Whatever his faults, Lula is a democrat.
And he has moved quickly to curb deforestation, which is in both Brazil’s and the world’s interest.
But in other respects Lula’s third stint as president has disappointed.
In the first, from 2003 to 2007, he stabilised the economy with orthodox policies and pushed through economic reforms and social programmes that boosted growth, cut poverty and secured him re-election.
Aided by a commodity boom, his second term saw a public-spending splurge.
Some of the money went on corruptly padded contracts.
The boom ended, but the splurge continued under his chosen successor, Dilma Rousseff, who added wasteful and ineffective industrial policies.
That eventually tipped Brazil into its deepest recession since 1930, while activist judges sent scores of politicians, including Lula himself, to jail for corruption.
Times are now tougher, but his third term is shaping up to be more like the spendthrift second than the first.
As Talleyrand reputedly said of the Bourbons, Lula appears to have learnt nothing and forgotten nothing.
His graft conviction was overturned, but prison seems to have made him mistrustful.
Although he owed his victory to the support of liberal centrists, he has found little space for them in his government.
The Brazil he inherited had lost its way.
Annual economic growth in the ten years to 2022 averaged just 0.5%, though it has picked up a little since the pandemic.
The problem is that Lula is spending as if the country were far richer than it is.
Outlays so far this year have risen by a whopping 13% above inflation compared with the same period last year, and the overall fiscal deficit is 9% of gdp.
Spending by government, at all levels, is heading for almost 50% of gdp and public debt for 85%.
Faced with an expansionary fiscal policy, to curb inflation the central bank has resorted to the monetary policy of a boa constrictor.
This combination is familiar in Brazil, where consistently expensive credit holds back growth.
This is not all Lula’s fault.
Brazil’s voracious Congress grabbed more budgetary power under Mr Bolsonaro, who also offered pre-election giveaways which have been hard to scrap.
Lula’s allies have less weight in Congress than in the past, obliging him to buy the support of others.
Much of the spending involves freebies for special interests.
But Lula could stop some of it, by sticking strictly to the fiscal framework his government drew up to replace a rigid spending cap which broke down under Mr Bolsonaro.
Instead he has sniped at the central bank, confusing the symptom of high interest rates with their underlying cause: fiscal incontinence.
Cut budgets, not trees
Investors have noticed.
Brazil’s currency, the real, lost 17% of its value against the dollar over the 12 months to mid-June, the worst performance of any major currency.
That seems to have jogged Lula.
This month he gave more wholehearted support to Fernando Haddad, his finance minister, whose strenuous efforts to restrain spending have faced political resistance.
He should look to the future, promote younger successors and battle for the state reform that Brazil needs, to make fiscal space for genuinely progressive policies.
Instead, he seems bent on repeating the past formula of taxing and spending his way to yet another term.
There is little immediate risk of a currency crisis.
Rather, the problem is that Lula is following a path of managed decline.
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