Brazil’s Lula faces spending rows as supporters oppose tougher fiscal measures

BRASILIA, (Reuters) – Less than a week after Brazilian President Luiz Inacio Lula da Silva’s re-election, members of his government and Workers Party (PT) are drawing red lines around potential tougher spending measures, underscoring the challenge ‌of slowing Brazil’s rising debt amid resistance from his political base.

“That issue (fiscal adjustment) was not discussed, is not being discussed, and certainly is not being discussed within our caucus,” Institutional Relations Minister Jose Guimaraes told reporters two days after Lula’s election victory.

“The pledge of spending cuts lost the election,” Presidential Secretary-General Guilherme Boulos wrote on social ⁠media on Thursday, arguing that any adjustment should rely solely on reducing Congress budget earmarks and tax breaks.

The same day, the PT’s executive committee issued a statement saying controls on spending should not come at the expense of the poor.

The comments have fueled concerns among investors hoping for signs that Lula’s next administration will tackle national debt that has climbed more than 11 percentage points during his presidency to hit 82.9% of gross domestic product, as fiscal uncertainty drives up government borrowing costs.

“The reason for the market reaction is the government’s lack of urgency ‌in ⁠showing how it intends to address rising debt,” said Jeferson Bittencourt, former Treasury secretary and head of macroeconomics at ASA.

The debate highlights the difficulties facing Lula as he tries to present a credible fiscal plan without alienating constituencies that helped secure his surprising victory.

Attention has also turned to who will ⁠lead Brazil’s finance ministry against such backdrop and whether that person will have the political capital to overcome internal resistance to rein in spending.

Tightening Brazil’s fiscal framework remains under consideration, a government source said, though ⁠adding that such a move would require Lula’s approval.

For now, the government’s economic team has proposed a more modest change, targeting the midpoint of the government’s primary balance goal, a ⁠surplus of 0.5% of gross domestic product next year, rather than the lower end of the fiscal framework’s tolerance band of 0.25 percentage point of GDP on either side.