LULA WAS a goner—or at least that is what everyone had assumed. Instead, Luiz Inázio Lula da Silva, Brazil’s incumbent president, pulled off a win for the history books. The left-wing leader hung onto his job by a margin of nearly four points in a presidential run-off on October 25th, even though he had trailed his rival, Flávio Bolsonaro, in the first round. Never in Brazilian history has anyone come from behind in this way to clinch the presidency. In January Lula will become the country’s first democratically elected president to start a fourth term.
The right remains in thrall to Flávio’s father, Jair, a former president serving a 27-year sentence for plotting a coup in 2023, after himself losing an election. It has also resulted in a sky-high real interest rate, now at 9%. But Lula’s government runs a budget deficit of more than 9% of GDP. The IMF predicts that public debt will hit 97% of GDP this year, up from 84% in 2022. Expenses arising from new social policies that Lula has unveiled this year are likely to cost the government the equivalent of roughly 2% of GDP by the end of 2027. Lula, who is 81 years old on October 27th, has harnessed admirable energy in the weeks since the first round of voting humbled him.
Because they trusted his opponent even less, in spite of that, investors were counting on him winning—in large part. Lula’s surprise victory owed much to the inadequacy of Brazil’s right-wing politics. By picking Flávio as its candidate, the right sidelined politicians who would have been much more electable. Flávio spoke of cutting spending, which pleased markets, but provided no credible plans for doing so. His main policy was to spring his father from house arrest. For years successive governments, including Lula’s, have spent wildly. That has left Brazil paying a higher share of GDP in interest on its debt than all but a tiny handful of big countries. This is weighing on investment, squeezing businesses and households, and squashing growth. Though Brazil has vast natural resources, including oil, expansive farmlands and huge stocks of critical minerals, it has for decades grown more slowly than its peers. Cutting government spending is key to getting things moving. And it is far from clear that Lula is preparing to change his ways. On the campaign trail he talked down the need for fiscal discipline. He also promised an extravagance of big new bungs. He regrouped his campaign team, changed his strategy, and powered to a remarkable victory. Now he needs to muster the same energy to relaunch his programme of government. He should make a start immediately by naming a finance minister whom investors will trust. He then must announce a credible plan for fiscal reform. Little of this will be easy for Lula—which is the reason for the markets’ panic. However, if Brazil’s re-elected president believes that his election victory is an excuse to double down on the policies that saw off Flávio, he will cause a fiscal crisis and a deep recession. His golden victory will turn to ashes.
