Brazil faces stronger-than-expected growth, falling unemployment and apparent fiscal health, but the economy could be in poisoned apple for the winner of the election Sunday, in which President Jair Bolsonaro and former President Luiz Inácio Lula da Silva face off.

Favorable economic numbers might be like just a mirage in a country still recovering from the effects of the pandemic and the war in Ukraine, such as rising inflation and skyrocketing debt.

“A tax bomb”

Bolsonaro, who according to all polls will lose the elections against Lula, will close his first term with a Brazil is more in debt than when it took over power (equal to 77.6% of GDP last July) and will leave what economists have called a “fiscal bomb”.

“It seems that we are in a good situation, of tax relief, but it is only a frame, when we see the full film we see several worrying threats for 2023,” economist Julliana Damasceno, an analyst at the consulting firm Tendencias, told EFE.

Various economists consulted by EFE agree with Damasceno that the expenses are contained and there are social demands that will put pressure on the budget and the country’s tax situation.

Damasceno cited as an example the more than likely maintenance of social assistance of 600 reais per month (about 115 dollars) for the poor or a possible salary increase for civil servants, whose paychecks have been frozen since 2017.

Neither proposal is found in the draft budget sent by the Bolsonaro government to Congress, but the social pressure it can make your approval inevitable.

“Many problems are being pushed for the next year, mainly on the fiscal side,” warned Efe Bráulio Borges, economist of the Getulio Vargas Foundation (FGV) and of the consulting firm LCA.

A robust GDP in 2022 and stagnation the following year

According to Borges, the “benefits” that the Bolsonaro government has granted in fiscal terms to revive the economy in the middle of the election year it will compromise the country’s economy in the coming years.

Brazilian GDP grew 1.2% in the second quarter of 2022, above expectations, and prompted the government to raise its forecast for this year from 2% to 2.7% annually.

“This growth has been very surprising, but partly it has to do with the very expansionary fiscal policy that the government is promoting to win his re-election,” Borges said.

The market expects slight growth of 0.50% in 2023. The brake, the economist pointed out, will also be a deferred reflection of the monetary policy implemented by the Central Bank to contain inflation.

High interest rates and inflation

The interest rate rose from 2% in March 2021, an all-time low due to the pandemic, to 13.75% this month, the highest level since 2016.

The incessant rise in interest rates by the Central Bank has managed to halt, in part, the advance of inflation, which closed in August at 8.7% yoy after exceeding the two digits.

However, the moderation in prices has also contributed to the reduction in fuel taxes controversially announced by Bolsonaro a few months before the elections in which he will seek re-election.

Source: EFE