100 Days in Power: Lula’s Economic Policy

One of the expectations with Lula’s victory was that he would reverse the reactionary and retrograde measures implemented by Bolsonaro’s misgovernment. Several important measures were taken, such as the increase in the minimum wage, the family allowance, the intervention against gold mining and the environmental and social disaster in the Yanomami Indigenous Territory, among others, which offer a sense of relief.

But without a struggle to overcome the economic and political obstacles, such relief will be temporary and limited. This is very evident in the new economic policy proposed by the Lula government, the new “fiscal framework”, which maintains the logic of a spending cap and austerity to guarantee the payment of the public debt to the sharks of the financial system.

Since the elections there has been a campaign, bringing together the bourgeois media, the financial markets and the Central Bank, to ensure that the Lula government, more susceptible to popular pressure, does not evade “budgetary discipline” and let spending rise.

Although Lula maintains a more left-wing discourse, emphasising social inclusion, “putting the poor on the budget” and attacking Central Bank president Campos Neto for high interest rates and saying that the rich have to pay more taxes, there is so far little concrete progress. On the contrary, the idea of building governability with a congress dominated by the right — rather than going for a necessary confrontation with the powerful interests of the market — remains the logic.

New fiscal framework — a more flexible ceiling

The concrete text of the law will be presented in the coming days, but the main proposals have already been presented. The idea is to replace the EC 95 (constitutional amendment) spending cap, which prevents federal spending from rising beyond inflation.

The new proposal is more flexible, allowing a real increase in spending of a maximum of 2.5%, but limited to 70% of the increase in revenue from the previous year. For example, if tax collection increases by 2% this year, spending will be able to increase by 1.4% next year. If tax collection does not rise, or falls, spending can have a real adjustment of up to 0.6%.

The logic is to guarantee the payment of interest and amortisation of the public debt and placate the markets. Together with the spending limit, there will be a primary surplus target (which does not include spending on debt). The goal is gradual growth, from a primary deficit of 0.5% of GDP to a surplus of 1% in 2026, with a margin of error of 0.25%. If the surplus is higher, the surplus can be used for investments; if it is lower, spending in the following year can only grow by 0.5%.

The market was happy with the proposal, giving its approval with a surge in the stock market and a drop in the dollar. Far from being a repeal, it maintains the neoliberal logic and contains a number of pitfalls.

The previous spending cap has already proven to be totally flawed. While it served to implement deep cuts, as we saw in education, environmental protection or programmes against violence against women, the ceiling had to be ignored with pandemic spending. The Bolsonaro government also ignored the ceiling in the election year, in a shameless attempt to buy an electoral victory. The correct thing to do would be to repeal it, full stop.

The 2.5% limit is very low compared to the need for public investment to begin to remedy the debt and social and environmental deficit in the country. During the Lula governments from 2003–2010, spending grew by an average of 5.2%, which allowed several of the reforms implemented, along with a real increase in the minimum wage, and yet it was still insufficient. During the Dilma government the growth was 3.5% and even during the Cardoso government spending rose more than the proposed ceiling.

The expectation is that with the repeal of EC 95, the constitutional floors for spending on education (18% of net revenue) and health (15%) could come back into force. Spending on parliamentary amendments (2%, part of the budget that individual deputies can allocate to specific projects of their choice to boost their local support), and other constitutionally established measures, such as aid for nursing and FUNDEB, would also be outside the new ceiling. So if the tax collection grows 10% in a good year, these expenses also rise 10%, leaving little room for other spending, including the possibility of replacement for the civil service, not to mention hiring new employees. There is a large deficit of civil servants, leading to long queues at the INSS (National Institute for Social Security), for example. In 2022, the number of civil servants in the executive branch was 569,000, compared to 631,000 in 2018, and also lower than in 2010, when there were 580,000.

The government also proposes a floor for investments, which will be 70–75 billion, including the expenses of the resumption of Minha Casa Minha Vida (a federal housing program launched by Lula in 2009). The resumption of public investment is important, and even more will be needed, but it is another competitor for the narrow resources of spending within this limit.

The 0.6% limit for crisis years, together with the 50% limit if the surplus is not reached, imposes austerity just when public spending is most needed. Besides the years of the pandemic, where spending rose far beyond this, we have the example of the 2008 crisis, during Lula’s second mandate. Revenues fell in 2009, but public spending rose 16.3% in 2010, which was crucial to mitigate the effects of the crisis and to the recovery. Now there would be no such possibility.

Where is the taxation of the rich?

To reduce the deficit and achieve a surplus, Haddad proposes measures to increase tax collection by 100 to 150 billion reais. The idea is to broaden the tax base, making companies that currently don’t pay to start paying, or reducing exemptions. Haddad has mentioned betting and electronic commerce, for example. But this is still quite uncertain.

According to a technical note from the Budget Consultancies of the House and Senate on the 2023 Budget, tax waivers should reach R$456 billion this year — much of it implemented by PT governments. Not all such waivers are bad, the largest share is directed at Simples, which supports small businesses, or the income tax exemption, which should increase to cover a larger share of those with low incomes. However, a lot go to large companies, and these should be repealed.

Haddad’s emphasis on not implementing new taxes or raising rates seems to rule out the possibility of taxing large fortunes, high salaries and profits of large corporations, which should be the main way to bankroll social spending.

Privatisations

We should not expect any reversal of privatisations. Even before he took office, Vice President Alckmin gave the green light to privatisation of the metro in Belo Horizonte, which recently came to fruition. Although Lula calls the privatisation of Eletrobras “banditry”, Mines and Energy Minister Alexandre Silveira (PSD, a right — wing party) calls it “consolidated”. It is already very clear who is profiting from it. The company is going to increase the reserve for compensating executives eightfold, with directors earning increases from R$60,000 to R$360,000 per month!

But the PT way of privatising is not through the sale of state companies. Lula ordered the barring of privatisation projects of the Post Office, EBC (media company), Petrobras (in addition to what is already privatised of the giant oil company) and others, but there are no plans to reverse what has been privatised. The focus is on Public-Private Partnerships, where the government comes in with a large part of the investment and the private sector with its thirst for profit. Since the main economic goals are aimed at guaranteeing the payment of the debt, which has no limit, what remains is not enough for social programs. This creates the need to involve the private sector to solve social problems, which does not work. The interest for profit is cold and inhuman, but neither does it solve real problems.

We see this in the area of water and sanitation. Instead of revoking the new Sanitation Framework, implemented by the Bolsonaro government, the Lula government announced a decree to expand the participation of private interests, in order to attract more investments, taking away the previous participation of 25%. This means that the goals of universal sanitation by 2033 would not be possible with public money alone, which becomes a self-fulfilling prophecy with the proposal of spending limits and lack of taxation of the rich and large companies.

We know that private investments are not the way. A survey of international data by Public Services shows that, globally, the water and sanitation sector has had the most reversals of privatisations in recent years, due to failures in private services, in addition to generally making services more expensive.

Interest, banks and debt

The government has centred a lot of fire criticising the Central Bank’s high interest rates, the highest in the world. At the centre of the criticism is the president of the Central Bank, Campos Neto, nominated by Bolsonaro, who in fact has used interest rates to blackmail the control of spending. One of the objectives of the new fiscal framework is to show that spending is under control and that this is why interest rates can be reduced now, but market forecasts do not indicate a reduction in lower interest rates.

It is necessary to go further and against the logic of the market, which profits enormously with high interest rates. Firstly, it is necessary to revoke the Central Bank’s autonomy implemented in 2021. But that’s not enough. Interest rates were already astronomical before that. It is necessary to take control of the financial system out of private hands, with the nationalisation of the banks and large financial institutions under workers’ control and management. Otherwise the “market”, actually a handful of rich people and speculators, will continue to have the power to blackmail any government.

This is also linked to the issue of public debt, which is a system of transferring public money from us to the private sector. It is a debt that needs to be audited, where a large part of it had dubious origins, has already been paid several times, but continues to grow with interest on interest. The payment of the debt should be suspended during the audit, guaranteeing payment only to small creditors. In this way we can free up resources to finance the necessary social investments.

Governance until death?

There are other measures implemented since the usurper government of Michel Temer that should be reversed, such as the pension reform (which the government does not want to touch) or the labour reform (which will perhaps have some adjustments).

Besides the blackmail of the market, there is obviously the problem of the composition of congress. But the government’s line is to play the game of a corrupt system, where small advances are paid for with large concessions that will open the way for new defeats.

This was the result of the 13 years of PT government, which was in a more economically favourable period than we have ahead of us. By not breaking with the structures of power, when the crisis hit, the path was opened for the strengthening of the extreme right.

By building its government again through alliances with the right, it makes the government a hostage to the logic of the system. Not even the “secret budget” has been completely revoked. This is one of the most odious aspects of the previous congressional management which, after an agreement with the government, remains under the control of Arthur Lira, the president of the Chamber of Deputies. The “secret budget” allowed deputies to allocate part of the budget without oversight or control.

9.8 billion of the “rapporteur’s amendments” were reverted to the ministries’ budgets after the Supreme Court (STF) ruled that the “secret budget” was unconstitutional. The government, under strong pressure from Congress, now wants to transform this amount into a new form of amendment, with the only difference being that its destination should be transparent. It is a way for the government to buy support in votes (as the government can control when to release the money to the projects of the choice of deputies). This comes at the cost of strengthening the logic of horse-trading and tying the provision of fundamental services for the population to the influence of individual members of parliament. In doing so, it perpetuates a system of clientelism and corruption, even if it eliminates some of the corruption in the contracting by private companies.

Other goals, other ceilings, another logic that can inspire the struggle and change the correlation of forces

Many see the limits of the government and do not enthusiastically see the prospects for more profound changes. There are positive one-off measures and a sense of relief at getting rid of Bolsonaro, even more so after the attempted coup on 8 January. But the limits are very visible, and the argument most people hear is “the government is doing what it can”, “there is no way it can do more with this Congress”, etc. The problem is that if we let the negotiation and governability of the current system dictate the limits, we’ll be deepening the problem. It won’t be possible to make enough changes to eliminate the risk of the far right returning to power.

We have to begin by recognising that we are fighting a rotten system. Congress, the Centrão (a bloc of right-wing and conservative politicians and parties, a section of which now supports Lula’s government), Arthur Lira, the Supreme Court, are representatives of the system, not our friends. Lula builds his governability by defending the system and trying to make deals with a wing of the same parties that yesterday supported Bolsonaro. This leaves room for Bolsonaro and his supporters to pose as “anti-system”, which they are not.

We need to start from the main urgent social goals and reverse the rationale. We want jobs, housing, good and cheap food, water and sanitation, education, healthcare and to preserve the environment. We start there, our last priority is to pay interest to the rich. Our ceilings should be on wealth, super salaries, big corporate ownership and profits.

If the government put forward concrete proposals for measures that are unrealistic for the market and the political system, but urgently needed by the population, it would be able to mobilise support in the streets. Real change will come with a revival of struggles in direct confrontation with the powers-that-be.

But this is something that needs to be built. The government’s negotiations do not help, but demotivate and discourage. That is why it is important to maintain the independence of the social movements and the parties of the left from the government and the logic of negotiation, building our own campaigns and programme for real change, with a socialist alternative, based on and unifying all the struggles of the working class and oppressed.