Lula would scrap Brazil’s public spending cap, says draft manifesto – Financial Times

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Lula would scrap Brazil’s public spending cap, says draft manifesto  Financial Times

Luiz Inácio Lula da Silva would scrap Brazil’s constitutionally mandated spending cap, overhaul taxation and boost government spending “to put the poor and the workers back into the budget” if the veteran leftwinger returns to the presidency in October’s election, according to a draft manifesto circulated by his campaign.

The 90-point programme, which articulates many of the core objectives of Lula’s Workers’ party (PT), offers the first clear indication of the direction in which Lula would take Latin America’s largest economy if he beats incumbent president Jair Bolsonaro in the poll.

The draft manifesto, which was penned by Aloízio Mercadante, a close Lula ally and co-founder of the PT, still must be agreed by allied parties. It would then be put to a public consultation, a process that may take months.

Lula served two terms as president from 2003 to 2010, leaving office with an approval rating above 80 per cent. In government, the former trade union leader earned a reputation as a pragmatist who largely respected orthodox economic policy while funding poverty eradication programmes.

It is unclear, however, what kind of Lula the nation can now expect, particularly following his two-year stint in prison for corruption — a conviction that was quashed because of procedural problems with the trial.

In recent meetings with top business executives, emissaries for the former president emphasised that a third Lula administration would be fiscally responsible and respect the independence of Brazil’s central bank, according to people who attended the meetings.

The manifesto, however, focuses heavily on the need to increase spending on infrastructure, which makes up just 2 per cent of Brazil’s federal budget. To finance this, Workers’ party economists say the country should abandon the spending cap, which limits budget increases to inflation over a 20-year period.

“Let’s put the poor and the workers back into the budget. For this, it is necessary to revoke the spending ceiling and review the current Brazilian tax regime, which is dysfunctional and has totally lost its credibility,” the manifesto said.

Brazil is one of the world’s most unequal countries and international economists have criticised the country’s complex tax system, which relies heavily on consumption taxes and exempts dividends, for failing to redistribute wealth.

The draft manifesto also proposes revoking the labour reform passed in 2017 under the Michel Temer administration, which was widely hailed by businesses for creating more flexibility in the hiring process, although leftwing critics said it did not fulfil promises to create more jobs.

Viktor Szabó, investment director for emerging markets debt at Abrdn, described the manifesto as “more state, less private sector and potentially looser fiscal policy”.

“The PT’s instinct is to go for more public spending and investments. The only problem with public spending in Brazil is it’s not really efficient and, furthermore, we’ve learnt that it’s the prime source of corruption.”

“The problem is they also talk about revoking the constitutional spending cap and labour market reforms, which were quite significant achievements in Brazil,” he added.

Abandoning the spending cap is a particular bone of contention for Faria Lima, as Brazil’s Wall Street is known. For investors, the cap is a critical measure to prevent out-of-control spending in an emerging economy where gross debt reached almost 90 per cent of gross domestic product as recently as 2020.

“The spending ceiling is now the main fiscal anchor, which prevents Brazil from spending more than it can pay, giving investors confidence to continue investing and believing in the country’s future. Today, we have better fiscal health, but this is artificial as a result of inflation,” said Ariane Benedito, economist at CM Capital Markets.

“Brazil is dependent on foreign capital — a worsening of public accounts may cause outflows and make it even more difficult for Lula to reduce social inequality. There must be a balance between fiscal and social policy.”

Citigroup analysts said in a note that Lula’s declaration that he would be fiscally responsible “suggests he might try to increase taxes to at least partially offset the impact of increased spending over fiscal accounts”.

The manifesto also focuses on tackling inflation, running at more than 12 per cent, without offering clear policies on how this can be done.

According to a senior PT member, the document represented a “middle path” that reflected the historical values of the party while trying to be “something updated and modern, something that looks to the challenges of the 21st century”.

Beyond the business community, the manifesto has reportedly caused unease among important political allies, including the Brazilian Socialist party, whose members include Geraldo Alckmin, a centre-right politician who is Lula’s vice-presidential running mate. According to local media, the party was unhappy that its economic proposals had been excluded from the draft.

Additional reporting by Carolina Ingizza

Source: ft.com

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