Lula’s statements on fiscal responsibility worry the financial market

This Thursday (10th), President-elect Luiz Inácio Lula da Silva made statements that did not please the financial market. During a speech in Brasília, he suggested that there is an incompatibility between social assistance and fiscal responsibility. “Why don’t the same people who seriously discuss the spending cap not discuss the country’s social issue? Why aren’t the poor people on the macroeconomy discussion spreadsheet?”, said Lula this morning at the headquarters of the Banco do Brasil Cultural Center (CCBB) in Brasília, where the government transition headquarters are located.

Economists heard by CNN Brasil Business they said that Lula’s speech was negative and threw a lot of uncertainty into fiscal policy. For them, it is important to combine measures on the expense and income side, without going to extremes. Specialists said that it is necessary to establish a combination of adequate policies that aim for fiscal sustainability and, at the same time, meet social demands.

Pedro Paulo Silveira, director of Nova Futura, pointed out that, after the repercussion of the speech, the dollar exploded, interest rates too and the Ibovespa and state-owned companies melted. “It was a bad sign from the president-elect who gave hints that the government might consider fiscal policy a hindrance to his government, which is bad,” he opined.

In the view of Fábio Guarda, partner and manager of Galapagos Capital, the market did not approve Lula’s speech on Wednesday night (09), after the meeting he had with the ministers of the Federal Superior Court, as it impacts issues that interest the market, such as fiscal stability.

The market has already dawned with a rebound of this speech, along with the results of the high IPCA, which impacted the opening of the Ibovespa on Thursday (10), bringing the index down, making the dollar appreciate against the real and the curve interest rates opening higher.

From the release of the US CPI, US inflation, which came below expectations and surprised analysts, bringing global relief from the dollar buying pressure.

“The American currency began to weaken against other currencies in the world, except in Brazil, because Lula’s speech, in which he talks about the rupture between fiscal and social responsibility, was not well accepted by the market”, he says.

Guarda explains that countries that chose to prioritize social stability over fiscal stability, today suffer from even greater social instability. “Countries such as Venezuela and Argentina, which ended up ignoring fiscal stability to prioritize social stability, today the population pays a much higher cost than if there was a control of the accounts. Lack of fiscal control makes inflation go up, unbalances the economy and hurts the most needy population”, he says.

Lack of integration of social programs

Gabriel de Barros, chief economist at Ryo Asset, stated that there is no incompatibility between fiscal and social responsibility. For him, social spending in Brazil is unfocused, does not have an integrated action, as there are several disjointed social programs that do not talk to each other.

“This mismatch causes the government to spend a lot of resources on income transfers and social programs, but with an effectiveness below what it should achieve, given the volume of resources allocated to this type of program”, he criticizes.

And it is from this argument that Barros guarantees that it is possible to make responsibilities compatible through a focus on social policies, promoting a fusion of these programs that are dispersed. “If there is an integrated look, it is possible to channel resources effectively to those who need it without making the inspector worse. That is, today there are programs that transfer money to those who do not need it. So it’s just organizing and paying only for those who need it, and that doesn’t netly increase public spending,” he points out.

Barros shows that, in the way that the economic discussions are going, the government will spend four times more in 2023 on social policies, without having solved the problem of the focus of an adequate design of social programs. “It is clear that the problem is not a lack of resources, but a lack of coherence in the programs. There is ample space to reduce the inefficiency of the public machine”.

Administrative reform is one of the paths cited by economists. Barros emphasizes that this reform is a relevant issue. “Structuring public sector positions and salaries is more than necessary. Today there are 60-day vacations, automatic promotions, in short, a network of privileges that clearly needs a redesign. It is possible to save more than R$ 200 billion with the administrative reform alone without taking current civil servants”, he highlights.

Finally, the economist also mentions the salary bonus, explaining that there is an overlap between the social programs. This program, which has already been evaluated by several articles applied, including the World Bank, has already shown that the allowance is an expensive policy, costing more than R$ 20 billion a year, and inefficient. “The salary bonus does not contribute to the reduction of inequality in Brazil, so if there is a restructuring of this program, the government would be able to save more than R$ 200 billion in 10 years”, he concludes.