by John Fitzpatrick

As President Luiz Inacio Lula da Silva approaches the halfway stage of his mandate, an opinion poll has given him an impressive popularity rating. The poll of 2,000 people carried out by the CNT/Sensus organization in December showed that 65.4% approved of Lula´s performance, compared with 58.8% in September. Simulated polls against possible presidential contenders, such as São Paulo state governor, Geraldo Alckmin, the integration minister, Ciro Gomes, and the former governor of Rio de Janeiro state, Anthony Garotinho, also gave Lula a commanding lead. More importantly, perhaps, was the finding that 73.5% of those polled thought that 2005 would be a better year than 2004 and almost 72% thought the economy would grow.                              

These figures show that, despite the uncertain outlook and the constant criticism to which Lula is subjected in the Brazilian press he still retains tremendous popular support.

I am normally a bit skeptical about polls and other indicators but I think we can accept that these figures are an accurate reflection of Lula´s standing. He has made many mistakes and gaffes over the last two years but he has shown that he can cope with the burden of office and the tortuous entanglements of the Brazilian political system. He is constantly in the public eye and hardly a day goes by in which he does not make appearances and speeches up and down the country. Unlike his predecessor, Fernando Henrique Cardoso, who would keep a low profile for lengthy periods, Lula is here, there and everywhere, speaking the language of the people and conveying his own personal warmth. He is capable of taking on any audience, whether it consists of businessmen calling for lower interest rates or trade unionists demanding higher wages and more jobs. No other public figure in Brazil comes near him in terms of stature.

Having said that, I believe Lula could become a bit complacent and endanger the limited achievements his government has made so far, such as overseeing higher-than-expected GDP growth for this year and falling unemployment rates. He and the Workers Party (PT) leadership are a little too ready to pat themselves on the back whenever any good news is announced. We saw this recently when Lula made the absurd claim that Brazil was living in a “bed of roses”.

For example, he has just announced (mid-December) that the minimum wage from next May would be R$300 a month (around US$107 at the current exchange rate). First of all, he is to be congratulated on getting this particular subject out of the way as early as possible. Normally it clogs up the first quarter of every year as unions demand impossibly high increases, and the government´s economic team spends much of its time crunching numbers to test the various alternatives, and nauseating politicians pontificate. This is quite a substantial increase on the current minimum wage of R$260 and comes to 8.4% in real terms. It shows that Lula is trying to meet his election pledge of making a real increase after last year´s paltry rise of around 1%. At the same time, this generous rise will be costly to the taxpayer and the government, since hundreds of thousands of public service workers and pensioners have their pay and pensions based on the minimum wage. The government also announced that the rate at which individuals would start paying tax would be “corrected” by 10%. This will raise the current monthly figure from R$1,058 to R$1,164.

The extra cost of these two measures has been estimated at R$4 billion (around R$1.42 billion) by a well-known Brazilian economist, Raul Velloso, quoted in the Estado de S. Paulo newspaper. The Estado said the minimum wage would add an extra unforeseen R$2.37 billion to the budget and the income tax readjustment would cost R$ 1.5 billion. How will this money be found? The obvious answer is by borrowing and increasing taxes elsewhere.  

Ironically, this news appeared on the same day as the Central Bank´s monetary policy committee, the Copom, raised base interest rates to 17.75% from 17.25%. This was the fourth successive month in which the rate, known as the Selic, was raised. Most observers believe the rising trend will stop but there are some who feel another increase could come in January. This is because the government is committed to an inflation target of 5.1% in 2005. While the professional economists and bank analysts believed the Central Bank had acted properly there was the usual criticism from industry and politicians of all hues.

So far, Lula has paid no attention to these complaints and has stuck loyally to his finance minister, Antonio Palocci. There is no sign that he will give way but it would not surprise me if this was the thin edge of the wedge. Do not be surprised if the current tight monetary policy starts to become a little looser over the next year, as preparations begin for the 2006 presidential election, perhaps with a change in the inflation target figure.

December 19, 2004

(c) John Fitzpatrick 2004