Brazil's Economic Reality Check

Lula has made his way back from a prison cell to the presidency, but his challenges are just beginning

- Martha Viotti Beck and Barbara Nascimento

Two decades after assuming Brazil's presidency the first time around, Luiz Inácio Lula da Silva is once again preparing to take the reins of power in Latin America's biggest economy. After eking out a narrow win in a bitterly fought race against incumbent Jair Bolsonaro, the 77-year-old leftist leader now faces the hurdle of paying for his ambitious pledges and keeping the politically divided country growing in the face of increased global economic and financial headwinds.

Lula is returning at a moment of acute political and social tensions in Brazil, where poverty is increasing and the economy hasn't fully recovered from the damage wrought by the Covid-19 pandemic. Revisiting themes from his first stint-he was in office from 2003 to 2010 and subsequently imprisoned after a now-quashed corruption conviction-Lula has vowed to extend beyond the end of this year an augmented program of monthly cash transfers to the poor, exempt more people from income taxes and boost the minimum wage by more than the rate of inflation. Although these measures will help some, there's also a risk they will stoke price pressures-a global problem that officials are battling hard to contain.

He needs to find a way to finance them, too. Brokerage firm XP Inc. has estimated that the measures Lula campaigned on could cost at least 140 billion reais ($27 billion) next year. The current budget bill for 2023, which takes into account Bolsonaro's recent tax cuts but not Lula's campaign pledges, estimates a primary deficit equal to 0.6% of gross domestic product, and XP predicts that with extra spending from Lula, the shortfall will expand to 0.9%.