Lula Raises Doubts About Fiscal Goal, Causing Currency Selloff

Martha Beck and Barbara Nascimento
·4-min read

(Bloomberg) -- President Luiz Inacio Lula da Silva cast doubt on the need to meet Brazil’s fiscal targets, saying in an interview with a local TV station that he is “not obligated to set a goal and stick to it” if he decides he “has more important things to do.”

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“It’s just a matter of vision,” Lula said in the Tuesday interview with Record TV. “This country has no problem if it is a zero deficit, if it is a 0.1% deficit, if it is a 0.2% deficit. There is no problem for the country. What is important is that this country is growing, that the economy is growing, that employment is growing, that wages are growing.”

The leftist leader said he would have to be convinced of the need to freeze spending under Brazil’s fiscal rules this year. At the same time, he also said his government would do what it takes to comply with its budget goals, which call for eliminating the primary fiscal deficit — excluding interest payments — this year and in 2025.

Local assets started selling off as Lula’s comments were cited in a report published by Capital Advice, a Brasilia-based political analysis firm, more than an hour before Record released them to the public. The reporter who carried out the TV interview is a partner at the firm, according to her LinkedIn profile and data from Brazil’s internal revenue service.

Record TV said it wasn’t aware of the link between its reporter and Capital Advice.

“The broadcaster makes it clear that it condemns any leak of information, particularly of partial excerpts of interviews made by our teams,” it said in an emailed note to Bloomberg News. “Appropriate measures will be taken with an investigation of the facts.”

Capital Advice didn’t immediately respond to an email and calls seeking comment.

Finance Minister Fernando Haddad said Lula’s comments were taken out of context and stressed that the president had reaffirmed the government’s commitment with the fiscal target.

“Everything is going according to plan. The 2025 budget will be very comfortable, certainly the best of the past 10 years,” he told reporters, adding that he has yet to discuss with Lula a potential freeze to this year’s budget.

Lula’s government has faced mounting investor scrutiny over the country’s fiscal outlook, fears it briefly calmed by announcing it would cut 25.9 billion reais ($4.8 billion) in spending next year. Those reductions, however, will all derive from an audit of social programs where irregularities are suspected, according to two government officials with knowledge of the matter. No additional savings are planned so far, the people said, requesting anonymity to discuss the strategy.

The spending review was announced by Haddad in early July after weeks of market turmoil largely fueled by Lula, who had repeatedly raised questions about the need to cut expenditures. The leftist president has long opposed measures he sees as hindering his ability to improve living standards for Brazilians, particularly the poor.

“It is low-hanging fruit. It is obvious that there is easy money in this review because there are benefits being paid irregularly,” said Gabriel Barros, chief economist at ARX Investimentos. “It’s positive because at least the government realized the obvious.”

Yet there are no signs Lula plans additional cuts. He has vowed to keep in place rules that all but ensure a large social spending expansion over the years — including above-inflation increases to the minimum wage that is used as a base for the adjustment of social benefits.

Institutional Relations Minister Alexandre Padilha — a top Lula adviser — has signaled the government only wants short-term cuts in outlays to comply with fiscal rules through 2026 and not ambitious reforms related to income and spending, according to a person with direct knowledge of his thinking.

Spokespeople for Lula and Padilha didn’t immediately reply to a request for comment.

“Structural measures would be necessary,” said Carlos Kawall, founding partner at Oriz Partners and a former Treasury secretary. “There is dynamic growth in mandatory expenditures, and you need to decide whether it is sustainable or not.”

The scope of Haddad’s spending revision is becoming clearer ahead of a closely-watched report on 2024 public spending and income, which is expected to be published on July 22. Investors estimate that, together with the report, the administration will need to announce the freezing of some expenditures to meet its goal of reducing the primary fiscal deficit, which excludes interest payments.

Haddad has left open the possibility that the spending audit could be brought forward if needed to comply with 2024 fiscal rules. He also said there is potential of a larger impact of around 50 billion reais from the social program review.

Whether the recent market gains will be sustainable or not will depend on how the government implements the findings of its social program review.

“The government has to deliver the cut properly, and then the market will price it in assets,” said Barros, from ARX Investimentos. “What is priced so far is the intention.”

--With assistance from Simone Iglesias, Josue Leonel and Daniel Carvalho.

(Updates with details of Lula’s interview leaking, comment from Record TV.)

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