economic challenge threatens to be greater in 2023

Accelerated inflation and low growth: these are two of the main challenges that the next president of Brazil will face from 2023 onwards. Economists heard by the UOL claim that the two candidates leading the contest —former president Luiz Inácio Lula da Silva (PT) and president Jair Bolsonaro (PL)—have already faced difficulties in the economy, but may face an even more complicated economic scenario next year than at the beginning of their first terms.

Lula was president between 2003 and 2006 (first term) and between 2007 and 2010 (second term). Bolsonaro took office in 2019. The two candidates have a common characteristic: both have already sat in the president’s chair and, therefore, faced problems in the economic area inherited from previous administrations. But how big is the challenge for 2023?

The data below helps with the comparison. They reflect the status of some of the main economic indicators on the first day of each presidential term. The numbers about the start of the next government, in 2023, are current projections by MCM Consultores Associados.

In the case of the exchange rate, the values ​​were updated by the inflation of Brazil and the United States to reflect how much US$ 1 in the past would be worth in April 2022 values. With this, it is possible to compare the values ​​of other years with the projection for the end this year (R$ 5). The calculations were made by Professor Alexandre Cabral, from the Saint Paul Business School, in São Paulo.

The indicator of the relationship between gross debt and GDP (Gross Domestic Product) underwent methodological changes over time, but it still serves as a parameter to show what the scenario was like in 2003, when Lula took office.

Lula’s challenges

The data show that inflation at the beginning of Lula’s first government, at 12.53%, was higher than that projected for the beginning of the next government, at 7.4%. Even so, economists claim that current inflation is a problem — as it was in 2003. In the case of GDP (Gross Domestic Product), an eventual new Lula government would start with growth below (2%) what was seen in early 2003 (3.1%).

The economist Alexander Schwartsmanformer director of the Central Bank and partner at the consultancy Schwartsman & Associados, argues that Lula’s challenge, if elected, will be greater than in 2003.

“It will be much bigger, because in 2003 the [ex-presidente] Fernando Henrique Cardoso had already adjusted the public accounts, raising taxes”, says the economist, who was director of the BC during the Lula government. “From the fiscal point of view [de despesas] the house was in order, just don’t move. Lula even improved a little.”

Schwartsman draws attention to the need for the next government to stabilize the ratio between gross debt and GDP, considered the main indicator of a country’s ability to meet its commitments.

“Roughly speaking, we are going to end 2022 with a debt close to 80% of GDP, with 5% real interest [descontada a inflação]. If the country manages to grow 2% a year, the government will have to make a surplus close to 2.5% to stabilize the debt”, he calculates.

The primary surplus occurs when government revenues are greater than expenditures.

In practice, the government itself would need, in the view of Schwartsmancut more expenses to guarantee a surplus close to 2.5%, which would prevent the debt from advancing beyond 80% of GDP.

“There is a path to follow. It is a complicated path, among other things, because the Budget today is much more rigid than when Lula took office for the first time”, he says. According to him, the government now has even less room to cut expenses.

high inflation

For C6 Bank chief economist Felipe Salles, the data indicate that Lula’s challenges, should he be elected for a new term in 2023, will be similar to those faced 20 years earlier, in 2003.

Both in 2003 and now, we see problems of high inflation. In 2003, inflation was in double digits and is currently also in double digits. Interest rates were high in 2003 and [também estão] now, precisely to bring inflation down. And there were fiscal problems both in 2003 and now.
Felipe Salles, chief economist at C6 Bank

The economist recalls that the 2002/2003 inflation was the result of a crisis of confidence in the financial market in relation to Lula. Amid doubts about the future of the economy with the PT in the presidency, the dollar soared and contaminated inflation.

Thus, at the beginning of Lula’s first term, inflation was around 12% and the dollar was close to R$7 (in April 2022 value) – figures above those projected for the beginning of 2023.

“In Lula’s first term, when it became clear that the country would follow the so-called macroeconomic tripod [dólar flutuante, meta de inflação e meta para gastos]inflation decreased”, recalls Salles.

The situation is now different. Economists point out that current inflation, at 11.73% in the 12 months through May, is caused by a series of shocks — unexpected economic events, such as the covid-19 pandemic, the water crisis, the soaring fuel prices and the war between Russia and Ukraine.

“We don’t know what the world will be like in 2023. In principle, I tend to say that Lula’s challenges, if elected, are similar. But only if the world continues the way it is now. If shocks continue, the challenge increases.” , says Salles.

Bolsonaro’s challenges

The current occupant of the Planalto Palace, Bolsonaro will also face some greater challenges than those seen at the beginning of his government, if he is reelected.

“Inflation was undoubtedly lower at the beginning of Bolsonaro’s term. And interest rates were at a sustainable level”, cites Salles. “On the other hand, at the beginning of the Bolsonaro government, Brazil had higher expenditures — even higher than now. There was also a high gross debt, with a tendency to accelerate”, he adds.

Economist Mauro Schneider, from MCM Consultores, says that the spending debate “has progressed very little” under the Bolsonaro government. “The only thing that was done was the Pension Reform”, he says. “The issues of spending on public servants, subsidies to companies, mandatory expenses were not addressed.”

Schneider also assesses that the exterior is a concern for the next president. “The external scenario is worse than what Bolsonaro faced in 2019 and Lula faced in 2003”, he says. “Outside, we are seeing a process of monetary policy tightening [alta de juros], due to high inflation. And countries also have high levels of indebtedness.”

The MCM economist sees a more difficult scenario for the global economy now, with reflexes in Brazil. “Before, there were forces favorable to global growth, such as low interest rates and the supply of resources. The scenario now, for a second Bolsonaro administration, is different.”

What do voters want?

Away from technical discussions, voters of Lula and Bolsonaro expect the basics of the next president: that the economy improves.

Without a formal job for two years, Gislaine da Rosa, 46, hopes for a better life in the next president. A Social Work student in Ponta Grossa (PR), she hopes that the next government will manage to control inflation and stimulate growth, generating more jobs. Gislaine is Lula’s declared voter.

Gotta have hope, right? And I have hope that Lula will manage to control inflation and, over time, start investing in the economy, creating jobs.
Gislaine da Rosa, student, voter of Lula

Critical of Lula, trade representative Willian Silva, 34, will vote for Bolsonaro if the dispute is really between the two. A resident of Franca (SP), he is also concerned about inflation, but argues that this is not an exclusive problem in Brazil. “The whole world has record inflation. Unfortunately, for us it is already commonplace.”

Silva’s expectation is that Bolsonaro, at the beginning of his second term, respects the spending ceiling — the rule that limits public spending to the previous year’s budget, corrected for inflation. Silva shows concern about controlling expenses and the use of public resources.

There is no justification for not respecting the spending ceiling. It would not be fair to threaten the future of the next generations by changing the spending ceiling. As in any budget, as in our house, you cannot spend more than you earn.
Willian Silva, commercial representative, Bolsonaro voter

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