Lula's push to boost spending in Brazil rattles markets

RIO DE JANEIRO (AP) — On the campaign trail, Luiz Inácio Lula da Silva promised to sustain a massive welfare program, increase the minimum wage and boost health and education spending. Now, Brazil's president-elect is trying to make good on those pledges — and investors are showing concern.

Da Silva's transition team on Wednesday night presented Congress with an outline of a proposal to skirt a constitutionally imposed spending cap by creating a carve-out for welfare. Then, at the climate talks in Egypt on Thursday, he reiterated that he pays little heed to whether his plans to lead a socially responsibile government might cause jittery speculators to sell off.

When trading opened Thursday, Brazil's currency slid to its weakest level against the dollar since July and the benchmark Bovespa stock index fell more than 2.5%. Traders have begun pricing in interest-rate hikes next year rather than cuts, as da Silva’s proposal “confirmed (fiscal) risk that before was just a rumor,” said Sérgio Vale, chief economist at MB Associados.

Several times, da Silva has said market reactions appear overblown and claimed that investors are holding him to a different standard than incumbent President Jair Bolsonaro. He has pointed to his record of generating inclusive growth while adhering to fiscal responsibility during his prior two presidential terms, from 2003 to 2010.

But the current state of the Brazilian and global economies stands in stark contrast to the heady days of the commodities super cycle, and da Silva has much less room to maneuver. In his final year in office, more than 21% of his executive branch’s budget was discretionary, versus just 6.3% in 2023, according to a congressional report on next year’s budget.

Investors' skepticism of his leftist Workers’ Party's...