President-elect Luiz Inácio Lula da Silva once again criticized spending cap, the rule that limits growth in public spending

11/18/2022

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Luiz Inácio Lula da Silva — Foto: Peter Dejong/AP

On his second day of public appearances at COP27, the UN climate conference, President-elect Luiz Inácio Lula da Silva once again criticized the spending cap, the rule that limits growth in public spending, in an event organized by civil society.

One day after sending to Congress the blueprint of a proposal to amend the Constitution (PEC) to allow higher spending in social programs, he said that all the spending cap does, in its current form, is “take money away from health, from education, from culture.” “You try to dismantle everything that is part of social and you don’t take a centavo from the financial system,” he said. “If I say that, will the stock market fall, will the dollar rise [against the real]? So be it. The dollar doesn’t rise and the stock market doesn’t fall because of the serious people, but because of the speculators who speculate every single day.” Mr. Lula was commenting on the market reaction after his first visit to the Centro Cultural Banco do Brasil (CCBB), in Brasília, where the presidential transition team works, on the 10th.

On the occasion, he said that the social policy should be put ahead of issues of interest to the market – which caused the benchmark stock index Ibovespa to fall 2.58% that day. “What is the spending cap? If it was to discuss that we are not going to pay the amount of interest to the financial system that we pay every year, but keep the benefits, that would be fine,” said Mr. Lula, who arrived accompanied by the former mayor of São Paulo, Fernando Haddad, the future first lady, Rosângela da Silva, and the former foreign minister Antônio Patriota, who currently leads Brazil’s diplomatic mission in Egypt.

The markets Thursday again went south, not only because of the president-elect’s remarks, but also because of the blueprint of the so-called Transition PEC intended by Mr. Lula’s team, which definitely excludes from the spending cap the social program Brazil Aid. The blueprint excludes almost R$200 billion from the constitutional limit for public spending in 2023. In the interest market, the interbank rate (DI) for January 2024 reached 14.155%. The foreign exchange rate rose 0.37% and the Ibovespa fell 0.89%.

The president-elect’s new remarks also triggered reactions from economists linked to the Brazilian Social Democracy Party (PSDB). Former Central Bank President Armínio Fraga, former Brazilian Development Bank President Edmar Bacha, and former Finance Minister Pedro Malan signed a letter published in the newspaper Folha de S.Paulo supporting the spending cap. All three had declared their support for Mr. Lula in the runoff vote.

Hours later, Mr. Lula canceled a highly-anticipated press conference to end his two-day stay at the conference. According to the president-elect’s aides, the change of plan occurred after his other agendas were delayed. Besides a meeting with indigenous leaders in the early afternoon, Mr. Lula had meetings with UN Secretary-General António Guterres, Norwegian Climate Minister Espen Barth Eide, and German Foreign Minister Annalena Baerbock.

The meeting with Norway unlocked the immediate restructuring of the Amazon Fund. The idea is to set up teams that will do what is necessary so that the Amazon Fund can be launched in the first days of the Lula administration. The Amazon Fund is the most structured global compensation mechanism for efforts to contain deforestation and support projects in the Amazon region.

Brazilian and foreign journalists lined up outside the conference room. When the cancellation was confirmed, several of them were sitting on the floor.

Mr. Lula now heads to Portugal, where he is to meet with President Marcelo Rebelo de Sousa and Prime Minister António Costa. Mr. Lula will stay overnight in Lisbon and is scheduled to meet with supporters on Saturday.

The negative reactions to Mr. Lula’s remarks caused Vice President-elect Geraldo Alckmin to call journalists to talk in Brasília. He called the market’s reaction to the Transition PEC and Mr. Lula’s remarks “momentary.” He also said that a new fiscal framework will be discussed throughout his term in office, but that the priority is to ensure the payment of R$600 a month through social program Bolsa Família, plus R$150 per child up to six years old, as cited in the PEC – which implies R$175 billion in extra costs excluded from the spending cap.

Mr. Alckmin said he sees no reason for so much “stress.” “This will be clarified and overcome. President Lula has already been president of the Republic for eight years, two terms. He had absolute fiscal responsibility,” he said. “It is good to make it clear that the Lula administration is committed to fiscal responsibility. This cannot be an argument not to attend to social issues.” When talking about the new fiscal framework to be implemented in place of the spending cap, Mr. Alckmin said that the priority now is to approve the proposal to amend the Constitution.

“We have 30 days to approve a PEC, one thing at a time. Right now, [we will work on] urgent things, which is PEC and LOA [annual budget law]. The election ended 15 days ago,” he said. “A new fiscal framework will be discussed. But one thing at a time. We have an emergency thing to solve.”

Mr. Alckmin also said that fiscal responsibility and social spending are not “incompatible.” “Things are not incompatible. The current administration spent R$800 billion excluded from the cap.” According to the vice-president-elect, the 2023 budget is “unworkable.” “You don’t have the money to pay Bolsa Família. How do you do with [housing program] Green Yellow House,My Home My LIfe? You have R$30 million in the budget [for that program].”

Mr. Alckmin said that growth, spending cuts and tax reform will be priorities in the Lula administration’s economic management in order to improve the country’s fiscal situation. “The government will act on the expenditure side, cutting expenses that can be cut. For example, contracts. There has to be a review of all contracts. We will go through it with a fine-tooth comb. There may be a huge margin,” said Mr. Alckmin.

Within this agenda, he said, is tax reform. Mr. Alckmin signaled that the government can take advantage of one of the two proposals that moving forward in Congress. “It is a very good situation, because there are two very similar PECs. Both seek to simplify by replacing taxes with VAT [value-added tax], which the whole world has in place,” he said.

Another way to stimulate economic growth is a greater presence of Brazil in foreign trade. He said it will be necessary to “insert Brazil in the world economy” through international agreements.

Mr. Alckmin also said Brazil can take advantage of the high liquidity of international funds to carry out infrastructure and logistics projects.

The leader of the Workers’ Party (PT) in the Chamber of Deputies, Reginaldo Lopes, was picked by the presidential transition team to explain the details of the PEC to financial market representatives on Thursday in São Paulo. He met in São Paulo with representatives of at least 10 investment funds to justify the proposal.

By Ana Rosa Alves, Daniela Chiaretti, Fabio Murakawa, Andrea Jubé — Sharm El Sheikh, Brasília

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