The Real is devalued in Brazil: Lula da Silva announced a growth in debt while massively increasing public spending

The contradictory measures of the progressive-globalist president progressively deteriorate confidence in the Brazilian currency. The debt increases while the fiscal deficit rises in the first months of 2023.

The new government shows no qualms about abandoning fiscal discipline and consuming the surplus inherited from the Bolsonaro administration.

President Lula da Silva announced that the exemption from the Federal Fuel Tax would continue to be in force in 2023, while the previous administration had scheduled its repeal.

The tax exemption will remain unchanged until December in the case of diesel and biodiesel.

It will last until March for gasoline and ethanol, as provided in the Official Decree of the president issued on Monday.

For the federal government, Lula da Silva’s measures mean a cost equivalent to R$52.9 billion (US$9.87 billion) for the entire 2023 fiscal period, a strong blow to the tax revenues provided for in the Budget.

But at the same time that the Government announced the extension of tax deductions, the lifting of the spending ceiling for a value of US$28 billion this year was also approved.

The ruling party’s measures aim to unbalance public finances and generate more pressure on the deficit in the first quarter.

Even Finance Minister Fernando Haddad, who had emerged as a critic of fuel tax relief and publicly opposed the measures, finally had to give in to pressure from the President and abide by the decision regardless of any imbalance that might be generated.

The Minister promised to reduce the fiscal deficit ceiling of R$220 billion by 2023.

Still, the measures provided to date are moving in the opposite direction, and no compensatory changes in income or other expenses have yet been implemented.

This episode shows that the figure of Haddad will be reduced to being a mere decoration within the cabinet of ministers, and Lula da Silva will be his own Minister of Economy, emulating the strategy followed by Néstor Kirchner in Argentina.

The Brazilian Real depreciated sharply by 3.8% against the dollar only in the first three sessions of 2023 and since Lula da Silva came to power.

The currency’s parity shows the climate of mistrust after the first announcements of the new President, an effect similar to that caused by the former minister Liz Truss in the United Kingdom.

The markets discount that the debt capacity of the Brazilian Government is very modest due to the reversal of international liquidity, the growing interest payments, and the increase in the debt stock caused by the pandemic in 2020.

For all these reasons, the margin maneuver for fiscal indiscipline is reduced, and any irresponsible movement generates impacts on the exchange rate.

The Central Bank of Brazil also warned that irresponsible fiscal policies deteriorate the effectiveness of monetary policy and threaten to de-anchor inflationary expectations.

The institution’s president, Roberto Campos Neto, warned about the inflationary effect of Lula da Silva’s outlandish measures.

With information from La Derecha Diario