Opinion – Samuel Pessôa: Path to Haddad

Lula began his government negotiating with the National Congress a spending increase of approximately R$ 150 billion. His finance minister’s main attribution will be to build the conditions so that this beginning of a government with a bad footing does not jeopardize Lula’s mandate.

There are ways. Fiscal policy has two direct impacts on the economy. The first is the impact of public sector spending and revenue on the balance between supply and demand for goods and services. Policy can be expansionary or contractionary.

Additionally, the long-term design of the economic policy and confidence (or not) in the leadership’s ability to manage the distributive conflict in society may indicate (or not) that the public debt will be paid without the need to increase inflation. This is the second impact of fiscal policy on the economy.

It is important that fiscal policy is countercyclical. If there are signs that the economy is at full load with low unemployment, wages rising beyond labor productivity and pressured inflation, fiscal policy needs to be contractionary. This is the case for 2023.

The Union’s primary spending in 2022 was 18.2% of GDP. This number considers the recent revisions in the GDP series and that the Union’s agreement with the municipality of São Paulo, because of Campo de Marte, does not represent primary spending.

Primary spending in 2023, according to the annual Budget Bill (PLOA 2023), is, according to our estimates, 17.5% of GDP. With the authorization of BRL 150 billion, it will go to 19% of GDP, 0.8 percentage points higher than the 2022 spending.

For the fiscal policy to be contractionary, it will be necessary for Haddad not to implement all the fiscal space opened by the PEC and, additionally, for there to be an increase in taxes. The reinstatement of PIS/Cofins and IPI, which were opportunistically reduced by Bolsonaro in an election year, will raise revenue by some R$80 billion.

This will be the minister’s first task: to ensure that Lula’s main campaign promise is fulfilled, as well as resources for areas of the State that were underfunded in the Bolsonaro government, and, simultaneously, to promote a contractionary fiscal policy in 2023.

The minister’s second task will be to work with the National Congress on a fiscal rule that will replace the expenditure ceiling and that will signal a reduction in the public debt as a proportion of the economy in the not too long horizon.

The necessary ingredient will be the ability of President Lula’s leadership to negotiate with society and the National Congress measures that raise taxes and reduce spending and subsidies, in order to signal the solvency of the National Treasury.

If the minister is successful in his second task, the perception of risk will drop, and the exchange will seek values ​​in the range of R$ 4 to R$ 4.5 per dollar. The sharp drop in inflation brought about by these market movements will allow the Central Bank to quickly cut interest rates.

I have been in this space for ten years. The main agenda was the social contract of redemocratization and, from Dilma’s second term, our fiscal crisis, that is, our distributive conflict.

If Lula manages to produce a trajectory of fiscal policy that guarantees the solvency of the National Treasury, the great victor will be Brazilian democracy. In general, fiscal crises produce institutional crises and political ruptures and, many times, democratic recession. May Lula’s leadership write a new page in our history.