Trump Critic Lula da Silva Elected Brazilian President for Fourth Term: 5 Key Economic Challenges Ahead | Explained | Today’s news

Brazilian President Luiz Inácio Lula da Silva won re-election on Sunday (October 25th), defeating Senator Flavio Bolsonaro, an ally of US President Donald Trump, in a razor-thin race.

Following the historic victory, Lula, an 80-year-old leftist leader, became the first Brazilian president to be elected to office four times.

While Brazil’s economy has beaten expectations in recent years, Lula could face the challenge of rising debt and entrenched structural problems amid concerns about the cost of living.

Here are the top five economic challenges they face:

Growing debt

Brazil’s public debt has risen by more than 10 percentage points to more than 82 percent of GDP during Lula’s current term, raising borrowing costs.

The main reason is years of increasing mandatory spending that left less than 8% of the federal budget adjusted.

Lula has sent mixed fiscal signals, at times dismissing debt concerns as “nonsense” while arguing that strong economic growth would solve the problem.

His team has pledged to maintain the government’s current budget rules, which limit spending growth and set targets for the primary balance – revenue minus spending, excluding interest payments on the public debt – and signaled a tightening of them.

Achieving those goals will be harder given Lula’s promise to raise the minimum wage faster than inflation, which also raises pension costs, after he has already increased welfare benefits and promised new spending.

High interest rates and inflation

Even with interest rates at 13.75 percent, Brazil’s annual inflation rate of 4.6 percent remains above the central bank’s tolerance range of 1.5 percent to 4.5 percent.

The central bank cut its fifth rate in a row last month amid growing signs of an economic slowdown, but markets expect inflation to remain above the official 3% target until 2029.

Lula’s platform promises lower interest rates through fiscal discipline that spares social programs, but most economists say rates will only fall faster if Brazil cuts spending, and it’s unclear how it will balance the two.

Indebted households and companies

A record nearly 84 million Brazilians and 9.3 million businesses are behind on debt payments as high interest rates bite, according to Credit Bureau Serasa.

This has fueled public discontent despite strong indicators such as record low unemployment and wage growth outstripping inflation.

Lula is planning a new round of debt relief, this time through discounted purchases of distressed household loans from banks and tax debt forgiveness for some small business owners. Analysts say such measures offer only temporary relief.

The government has also discussed with the central bank ways to curb the heavy use of easy but expensive credit, such as credit cards and unsecured consumer loans, although it did not detail any proposals.

Insufficient political capital for reforms

Lula is likely to try to push his economic agenda through Congress after voters elected the most conservative legislature since Brazil’s return to democracy in the 1980s.

Although he defeated right-wing senator Flavio Bolsonaro in Sunday’s runoff, Bolsonaro’s Liberal Party and its allies are poised to take control of both chambers.

Lula’s aides have indicated he will continue to push for cuts to tax breaks, but lawmakers have repeatedly rejected measures that increase the effective tax burden.

During his current term, Lula has struggled to appoint nominees and get Senate approval for them in key institutions, including the Supreme Court, the central bank, the securities regulator and the antitrust watchdog, and that is likely to become more difficult as Congress shifts to the right.

Tax reform uncertainties

Lula won congressional approval for a sweeping overhaul of Brazil’s excise taxes in 2023, and a new value-added tax is set to take effect in January.

With less than three months to go, the government has still not released the effective rate, which independent analysts predict will be around 28%.

Fearing backlash during the campaign, the administration also delayed sending a bill to Congress to regulate a new tax on products deemed harmful to health or the environment, such as cigarettes and alcohol.

The delay could push back tax revenue and fueled criticism of the government’s handling of tax policy.

(With inputs from Reuters)