Lula Government – ​​Year I – economy

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The strategy adopted by the Lula government in the face of class confrontation, and the possible developments it announces

One year into Luiz Inácio Lula da Silva's third term, it is necessary to evaluate the strategy adopted in the face of the clash between classes, as well as imagine the developments it announces. After having won at the head of a heterogeneous gathering of democratic salvation, the president decided to sing the classic Lulist melody: to make, wholesale, concessions to the bourgeoisie and, at retail, look for loopholes through which he can benefit, to some extent, the popular segments. However, the issue has been developing at a very slow pace, making the expected movements for the 2024 and 2026 electoral periods doubtful.

When he assumed the Presidency two decades ago, the combination of a conservative pact and gradual reform sounded disconcerting and innovative. Instead of breaking with FHC's neoliberal legacy, rejected by the polls, he assumed it. However, little by little, he incorporated initiatives into the current scheme that raised the consumption standard of the deprived part of society.

The expansion of income transfers through the Bolsa Família program, the creation of payroll loans and real and regular increases in the minimum wage constituted the fundamental tripod of popular change. The result improved the lives of the impoverished majority without confronting the foundations of the neoliberal order.

In the long run, a plethora of contradictions characterized what we call “weak reformism.” To remember a few: the increase in workers' purchasing capacity was not accompanied by equivalent improvements in the public provision of health, primary and secondary education, transport and security. Greater access to university degrees was not equivalent to good jobs, generally linked, directly or indirectly, to the dynamism of industrial production. Brazil's celebrated choices as host of the World Cup and the Olympics threatened countless communities, affected by FIFA-standard infrastructure works.

In the electoral sphere, weak reformism, however, provoked a decisive realignment, with the poor adhering en masse to Lulism, while the middle classes grouped around the PSDB (Brazilian Social Democracy Party). Until 2014, the model was endorsed at the polls, guaranteeing four consecutive victories for the PT (Workers' Party) in the presidential contest. At its peak, a Rooseveltian dream of conflict-free change captured multiple hearts and minds.

From then on, for reasons that cannot be explained here, a set of dissatisfactions, both on upper and lower floors, became noticeable, and the institutions began to boil. A gigantic wave emerged from the Judiciary, which resumed aspects of June 2013, driven by the fight against the specter of corruption. The PSDB, hungry for power, rebelled against constitutional precepts, contributing to an illegitimate impediment. Business entities, united against Dilma Rousseff, called for an anti-popular economic orientation. The MDB led by Michel Temer and Eduardo Cunha placed the Chamber at the service of impeachment without a crime of responsibility, summarizing in "bridge to the abyss” the reactionary angle on the paths to follow.

In the crisis of Lulism, for almost a decade (2015-2022) we experienced the typical restoration of the delay that scholars of national history identified in 1964. Hopes for social justice were buried under the rubble of the gains obtained in the previous phase. Added to the regression at the societal level was the political setback, with the military once again aspiring to direct the State, a practice abandoned since the 1988 Constitution came into force.

A significant contingent of society, frustrated, began to question not only the representative on duty, but the rules of civilized coexistence themselves, amplifying anti-democratic impulses on the part of the ruling class. A mediocre far-right deputy was elevated to the Presidency, putting Brazil in line with the worst international trends. After such demolition, however, Lulismo was called back to manage the ruins that remained.

A paralyzing framework

Na reenter During the Lula season, Lula delegated to Fernando Haddad the role of making the concessions demanded by capital, reserving the role of looking for gaps through which the people's needs need to pass. Still in December 2022, after dodging austerity pressure, skillfully appointing Geraldo Alckmin to preside over the transition team, Lula managed to approve a R$145 billion break in the 2023 Budget, with the so-called Transition PEC. In this way, it avoided squeezing income transfers and Farmácia Popular.

In 1st. January, on the day of his inauguration, he published a Provisional Measure that expanded Auxílio Brasil and, in March, he launched Bolsa Família 2.0, with a minimum of R$600 reais per benefiting household, to which he added R$150 per child up to 7 years old. Lula compensated for the loyalty of the subproletarian base and shielded himself from the rapid drop in approval that has been weakening progressive beginnings of office in Latin America. Therefore, one should not underestimate the relevance of what part of the press, echoing the resistance of the elites, called the “PEC da Gastança”.

But the maneuver had counterparts. The physiological majority that commands the Legislature used the Transition PEC to increase the percentage allocated to mandatory amendments by parliamentarians from 1,2% to 2% of net current revenues, reinforcing the semi-presidential tendencies that have been growing at least since Eduardo Cunha headed the Chamber . This bias reduces Lula's room for maneuver, which now needs to preserve the budget not only from pressure from those who want austerity, but also from the advance of parliamentary physiognomy.

The key thing, however, is that the pressure from capitalists was met in the so-called fiscal framework launched at the end of March. A plan was then revealed that, in practice, put weak reformism into overdrive. Unlike the spending ceiling granted during the Michel Temer era, which froze expenses in real terms, the new rule allows expenditure growth, as long as tax revenues grow. It turns out that this increase was limited to 70% of revenue gains, respected, nota bene, a maximum of 2,5% annual expansion in public spending.

Thus, forcing expenses to grow more slowly than revenue, the proposed rule continued to embed a gradual reduction in the size of the State, like the infamous previous law. As economist Pedro Paulo Bastos rightly noted, the proposal is not even compatible, over time, with an effective increase in the minimum wage that follows GDP and with the maintenance of the constitutional floors for education and health. If the typical contradictions of Lulism implied problems in the long term, now the short term itself was threatened.

The concessions to Faria Lima went further. The Executive committed to a bold adjustment (cast in doubt by the president himself at the end of October), establishing a target of zero primary deficit in 2024 and surpluses of, respectively, 0,5% and 1,0% of GDP in the following biennium . Considering that the deficit in 2023 is expected to exceed 1% of GDP, zeroing it would represent a significant cut, greater than that made in the initial Lulista incarnation (2003), whose impact was one of the elements that ended up leading to the creation of PSol.

The official discourse makes an effort to mitigate the austere nature of the plan, arguing that the adjustment will not fall, as is customary, on spending, but on revenues, in particular by including the rich in taxation. In effect, positive measures were taken: the taxation of exclusive funds and offshore, the change in the rule on the vote of confidence in CARF (Administrative Council of Fiscal Resources), which gives greater power to the Executive in tax disputes with companies, the so-called MP for subsidies, which seeks to mitigate the erosion of the government's tax collection capacity, and the review of so-called tax expenditures, mostly subsidies and tax benefits granted to specific sectors.

This advanced side of the framework is extremely welcome, as it addresses the regressive nature of the Brazilian system, especially if it is accompanied by a reform of income and wealth taxation. Furthermore, reducing the deficit by increasing taxes on the rich tends to be less harmful to growth than cutting spending. However, in the best case scenario, this will only reduce austerity, without repealing it.

The underlying reason for the paralyzing nature of the framework is the limit of 2,5% increase in public spending. Even if it is possible to obtain revenues from unprecedented taxation, in order to open space to increase expenses, the barrier placed represents a brake that did not exist in previous Lulista experiences, regardless of the agreed goal.

The following numbers speak for themselves. Between 2003 and 2010, primary expenditure as a proportion of GDP increased from approximately 15% to 18%, creating the conditions to implement the Bolsa Família program and increase the minimum wage by 66% in real terms. According to a simulation carried out by the Macroeconomics of Inequalities Research Center (MADE) at the University of São Paulo, however, if the framework had been adopted in 2003, government spending would not have increased, but decreased to 11% of GDP. In short, Lulism, in this third exhibition, is projected in slow motion.

The contrast with the past is sharp. When observing the growth rate of Union expenditure, it is clear that during the Lula 1st and 2nd governments there was real growth of 7,2% per year. This is a pace almost three times faster than that allowed, in the best case scenario, by the framework. Even during FHC 2 and Dilma 1, spending grew twice as fast as predicted by the framework.

The debate opened by Lula on the primary result for next year, as we will see below, is important to prevent a collapse of state functions in 2024. But it does not change the fact that the possible loopholes opened by the taxation of the rich – in itself fair and progressive – appear to be below those existing in traditional Lulism. The maneuvering margins were so tight that they practically blocked the popular block's passage through the avenue.

Political reflections

It would be plausible to argue, however, that the growth of around 3% per year observed in 2023 goes against the idea of ​​Lulism slow motion. The problem is that we are not yet living under the restrictive effects of the framework. The current acceleration was due, in part, to the expenses that occurred in 2022 – the result of Jair Bolsonaro's use of the budget as an electoral instrument –, added to those made possible by the Transition PEC, as shown above, and, finally, to the agrarian bonanza brought by a record harvest in 2022-2023.

With the fiscal regime now proposed, this government impulse will be abandoned, which explains Lula's statement that the deficit “does not need to be zero”. Fulfilling the script self-attributed, the president displeases the market in an attempt to expand the available gaps. After Lula dixit, the stock market fell and the dollar rose. Capital demanded a commitment to austerity and, for now, the government gave in, keeping the target unchanged. The dispute continues, however, with the PT taking the lead in criticizing austerity, and it is possible that the target will be changed next year. If this happens, the magnitude of the adjustment will be reduced and the negative effect of restrictive fiscal policy on income will be reduced. However, will it be enough?

Compared to Chilean Gabriel Boric, who would have lost 22 percentage points of approval in the first year of government (Folha de S. Paul, 11/02/2023), and Colombian Gustavo Petro, whose approval would have dropped 23 percentage points in the same period (Radio France International, 07/08/2023), Lula had a drop of just 11 percentage points, between the favorable expectation of 49% at the beginning of his term and the approval of 38% on December 5th (Datafolha). That is, in the face of a nation that remains polarized, the PT member managed not to fall, although he is somewhat below the mark he reached both in December 2003 (42%) and, above all, in December 2007 (50%).

The relative stability in government approval so far will now, however, be confronted with the slowing economy. The expectation of financial institutions is that GDP growth in 2024 should be around 1,5% (Focus report of 8/12/2023). Such a forecast may be too pessimistic, as both the Institute of Applied Economic Research (IPEA) of the Ministry of Planning and the Organization for Economic Cooperation and Development (OECD) project a somewhat superior result. However, the common view is bearish for 2023.

Planalto knows that the feel good factor is a key factor in election years. In ten months, once local idiosyncrasies have been filtered, the general state of mind of the population will be gauged from the elected mayors and councilors. A defeat in highly visible schools will create a bad atmosphere for the start of the 2026 election. Hence the fight in recent weeks over the framework, not to mention that parliamentarians continue to press for their amendments and undermine the government's fundraising capacity, especially with the extension of exemptions.

If we focus on São Paulo, which usually decides the evaluation of the municipal win-lose, there is a chance of a fierce dispute. The good campaign of Guilherme Boulos (PSol) in 2020 and Lula's victory in 2022 on the city's perimeter give promising prospects for Lulism in São Paulo. On the other hand, the traditional conservatism existing in the local middle strata suggests a competitive candidacy in the right-wing camp. In this scenario, the economy can make the difference between the middle class, which usually decides the election.

In another dimension, it is worth taking into account that the uncertainties of global dynamics are enormous. Severe geopolitical tensions, uncontrolled finances and extreme weather events tend to create turbulence that reverberates in the periphery. It is true that, since the end of 2022, inflation rates observed in the USA, the Eurozone and the United Kingdom have fallen and interest rates should follow suit, reinforcing the effect of the ongoing fall in Brazilian interest rates. With luck, some possibility will be created to recover liquidity on the planet and stimulate growth south of the Equator.

There are also those who are placing their bets in the event of Chinese aid, resulting from the growing geopolitical bipolarity. It could happen, but it is unlikely that any external push will come in the magnitude necessary to move a continental economy like Brazil's. Hence, the slow pace of third-generation Lulism could compromise both 2024 and the start of 2026, paving the way for the rearticulation of the conservative camp.

Not to say that we don't talk about the flowers, if Lula 1 and 2 stimulated dreams of painless changes, the current Lulism in slow motion took the overcoming of historical ills out of the picture. Some observers argue that, in the current situation, the priority should be to save democracy, leaving the rest for later. The problem is that it will not be viable to stabilize democracy in the country without structural transformations and the slow version of the original strategy does not even provide the old reverie with them. This is, however, a subject for another text.

*André Singer He is a professor at the Department of Political Science at USP. Author, among other books, of Lulism in crisis (Literature Company). []

*Fernando Rugitsky is professor of economics at the University of the West of England, Bristol, and co-director of Bristol Research in Economics.

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