Trump critic Lula da Silva elected Brazil President for fourth time: 5 key economic challenges ahead | Explained

Brazil's economy has performed well recently, but leftist President Luiz Inacio Lula da Silva faces several economic challenges during his fourth term starting in January. Lula's significant public debt, which has risen over 10 percentage points to 82% of GDP, is driving up borrowing costs. This is due to years of increasing mandatory spending, leaving only a small portion of the federal budget available for adjustment.

Lula has provided inconsistent fiscal signals, sometimes dismissing debt concerns while claiming that strong economic growth will resolve the issue. His administration has pledged to adhere to current budget rules that cap spending growth and set primary balance targets, but the pressure to meet these targets will be greater with plans to raise the minimum wage faster than inflation and increase welfare benefits.

High inflation at 4.6%, above the central bank's tolerance range of 1.5% to 4.5%, and interest rates at 13.75% further complicate matters. Despite these challenges, Lula's campaign promises lower interest rates through fiscal discipline that would preserve social programs, but most economists believe rates will only decrease if Brazil reduces spending.

Additionally, approximately 84 million Brazilians and 9.3 million businesses are currently behind on debt payments, leading to public dissatisfaction. To address this, Lula plans to offer debt relief through discounted purchases of distressed household loans and tax debt forgiveness for some small business owners, but these measures are expected to provide only temporary relief.

The government is also considering ways to curb excessive credit usage, but no specific proposals have been made. Lula will likely face difficulties implementing his economic agenda in Congress, where the recently elected conservative legislature controls both chambers. Although Lula won the runoff against the right-wing Senator Flavio Bolsonaro, his Liberal Party and allies now dominate the legislature.

Despite this, Lula's aides have indicated that he will continue pushing for tax cuts, a move that faces resistance from lawmakers who resist measures that raise the effective tax burden. Furthermore, Lula has struggled to win Senate approval for nominees to key institutions, including the Supreme Court, central bank, securities regulator, and antitrust watchdog, a task that will likely be more challenging with the rightward shift in Congress.

In 2023, Lula secured congressional approval for a major overhaul of Brazil's consumption taxes, with a new value-added tax set to take effect in January. However, the effective rate remains undisclosed, with independent analysts estimating it at around 28%. The government has delayed submitting a bill to regulate a new tax on products considered harmful to health or the environment, such as cigarettes and alcohol, potentially delaying revenue from this tax and sparking criticism over tax policy handling.