President Lula (PT) stated on Wednesday (03/07) that fiscal responsibility is a government commitment and that the Executive does not throw money away. The president made these statements during the launch event of the Safra Plan for family farming, just hours after meeting with Finance Minister Fernando Haddad at Palácio da Alvorada. Lula’s comments on fiscal commitment follow recent criticisms of what he described as the speculative game of the dollar’s rise. He also mentioned that he would not implement cost-cutting measures, such as decoupling social benefits from the minimum wage.
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Meeting between Lula and Haddad
On Wednesday (03/07), President Lula (PT) met with economic ministers to discuss cost-cutting measures, despite his statements limiting viable options for achieving this goal. Lula’s various remarks, including vetoing certain measures and criticizing the Central Bank (BC), have caused the dollar to rise due to market uncertainty about Brazil’s fiscal trajectory. This concern stems from the potential for rising prices, which may force the BC to increase the basic interest rate, currently at 10.50% per year, to contain inflation.
Cutting Expenses
After focusing on fiscal adjustment through increased revenues, Finance Minister Fernando Haddad has begun to advocate for spending cuts. However, this approach was questioned after Lula stated last week that he first needs to determine whether spending cuts are necessary. Lula’s comments have constrained Haddad’s ability to manage expectations and counter the dollar’s rise. This sentiment is echoed by those close to the minister. So far, Haddad has not made any concrete announcements, and his efforts to emphasize his commitment to fiscal adjustment have been overshadowed by Lula’s criticisms.
Devaluation of the Real
In 2024, the dollar has appreciated 16.75% against the Brazilian currency. This performance has made the real one of the most depreciated currencies of the year: among 118 currencies, the real ranked 5th in terms of losses until mid-June, according to a survey by Austin Rating.
Dollar Increase
Experts attribute the recent dollar surge primarily to President Lula’s repeated statements, which have unsettled financial market agents. Lula has criticized the Central Bank of Brazil (BC) and its president, Roberto Campos Neto, claiming there is an interest-driven game against reality. His remarks have strongly criticized the BC’s actions, contributing to market instability.
Safra Plan
President Lula announced on Wednesday (03/07) the new Safra Plan for Family Agriculture 2024/2025. In total, there is R$85.7 billion to boost family farming, with R$76 billion in rural credit. There will also be the launch of the plan for corporate agriculture. The Safra Plan announced this Wednesday had a 10% growth compared to the previous plan.
Analysis:
The recent statements and actions of President Lula underscore a complex balancing act between fiscal responsibility and economic stability in Brazil. By emphasizing fiscal responsibility and dismissing allegations of fiscal profligacy, Lula seeks to project a government committed to sound economic management. However, his reluctance to implement cost-cutting measures, especially those affecting social benefits, signals a prioritization of social welfare programs over stringent fiscal adjustments. This stance, while politically popular, has contributed to market uncertainties, as evidenced by the rising dollar and concerns over inflation. Lula’s criticism of the Central Bank and its leadership further exacerbates these uncertainties, potentially undermining the credibility of Brazil’s monetary policy and complicating efforts to stabilize the economy.
Finance Minister Fernando Haddad finds himself in a challenging position, advocating for spending cuts amidst mixed signals from the President. Haddad’s push for fiscal adjustment through expenditure control contrasts with Lula’s public reservations, limiting the minister’s ability to reassure financial markets. The significant depreciation of the real in 2024 reflects these tensions, with the currency becoming one of the most devalued globally. This depreciation not only impacts inflation but also signals broader concerns about Brazil’s fiscal trajectory.