The President who will govern Brazil from January the1st, 2023 will have to face an economic situation characterized by a slightly improving internal situation, but by an unfavourable international context. The future economic policy will be very different in the case of the victory of Jair Bolsonaro or Luiz Inácio “Lula” da Silva.

The commitments announced in the election campaign confirm their respective positions, widely known given that Bolsonaro has ruled the country for the last four years, while Lula has already been President of Brazil from 2003 to 2010. Although both have stated that they intend to continue with cash transfers to the poorest families, fiscal policy will be very different.

Lula, who has an advantage in all the polls and could win in the first round on October the 2nd, will focus on increasing social expenditures and on redistributive fiscal policy, while maintaining attention to sound public finances. Lula intends to remove the limits to the expansion of public spending and to reform the tax system, which will most likely include an increase in taxation for the wealthiest part of the population, in addition to providing for a necessary simplification. For any reform proposal in Brazil to be approved, however, the Congress always remains an obstacle, especially so since once again it will be a very fragmented one. Lula’s vision is nothing new: more public spending on education, health and infrastructure financed with more tax revenues so as not to worsen the sustainability of public finances. If Bolsonaro were re-elected, he would probably confirm the current economy minister Paulo Guedes and his market-oriented policy of reducing the presence of the state in the economy. This takes the form of containing public spending and continuing the privatization plan. Lula will not make major new privatizations, for example Petrobras, but does not intend to block or reverse the initiatives already taken.

The international context will be less favourable than in 2021 if, as expected, growth in the world’s major economies – the US, Europe and China – slows down, if commodity prices decline and if US monetary policy continues to be restrictive with rising interest rates. For Brazil, this will mean lower export earnings and a possible outflow of financial capital attracted by higher returns on US dollar assets. There is a broad consensus that the South American country's growth in 2023 will be lower than in 2022. The IMF estimates that GDP growth in 2023 will drop to 1.1% compared to 1.7% in 2022 (IMF, World Economic Outlook Update, July 2022).

After months of double-digit levels, inflation has been decreasing since July (8.7% in August) thanks to the highly restrictive monetary policy which, since the beginning of 2021, has increased the reference interest rate (Selic) up to the current 13.75%. The increase in prices was also contained by some temporary reductions in energy taxes. Even if inflation is falling, interest rates are likely to remain high as long as inflation remains higher than the Brazilian Central Bank's inflation target of 3.5% (with a tolerance margin 1.5%). Therefore, the high real interest rates will curb investment spending by companies, with negative effects not only on short-term growth, but also on the accumulation of fixed capital and on the dynamics of productivity. However, it does not appear that Lula could try to intervene in the decisions of the Brazilian Central Bank, which is now independent, given that in the past he declared that inflation is the worst enemy of the poor.

Even if international interest rates are rising and the Brazilian currency could depreciate, vulnerabilities on public debt should not emerge, because the external public debt is low and the country has abundant official reserves, i.e. foreign currencies.

Lula wants to remove the limits on public spending to increase social spending and public investment, financing this higher spending with a tax reform that increases the progressivity of taxes as well as simplifying the tax system. Lula’s choice of Geraldo Alckmin, a former presidential candidate with the centre-right Partido da Social Democracia Brasileira (PSDB, the PT's main rival since the 1990s), as his running-mate indicates his inclination towards moderation and fiscal responsibility. Bolsonaro, on the other hand, claims he wants to respect the fiscal rules that impose limits on spending, but in the pre-electoral phase he already exceeded them to increase cash transfers to more than 20 million poor families. On the revenue side of the public budget, Bolsonaro promises tax cuts, as well as simplifications of the tax system. The commitments in the election campaign may be different from the measures implemented, but if the commitments were actually carried out it seems that Lula’s program, which will lead to a greater role of the state, can nevertheless achieve better public finances, providing for an increase in revenues and not just an increase in public expenditures. Bolsonaro could offset some of the larger public spending with proceeds from the privatization of other state-owned companies.

Another economic issue on which the two candidates have opposing views is the protection of the environment and in particular of the Amazon. Lula can guarantee a greater commitment to the defence of the Amazon than what has happened in recent years. This change could unlock the ratification of the Association Agreement between the European Union and Mercosur, which also includes Argentina, Paraguay and Uruguay. The Association Agreement also includes the progressive liberalization of bi-regional trade, which would be a further stimulus to the future growth of Brazil. Under a Lula administration, diplomatic relations should improve not only with European countries, but with Joe Biden’s US and other BRIC countries. Better international relations and a stable internal political and economic context should favour the attraction of direct investments from abroad. Another important difference between the two presidential candidates relates to backing of regional integration agreements, which have always been very important to Lula.

The fiscal policy of the next government will hardly be the supporting force for domestic demand, having to pay attention to the dynamic of public accounts and the sustainability of public debt. However, different choices on the public budget will impact society in different ways. Lula’s proposals should lead to a country with better environmental sustainability and less inequality in income distribution. On the other hand, with Bolsonaro, free private initiative comes before collective goods, in the management of the environment as well as in the fight against violence and crime. If Lula’s policy leads to a reduction in inequality, it could also have the effect of reducing crime. Bolsonaro’s approach, which encourages citizens to arm themselves to defend themselves from criminals, risks increasing violence in the country.