InsightsBrazil is Back and Open for Business! 

Brazil is Back and Open for Business! 

Lula's impact: reflecting one year later. 

After being elected by the slimmest of margins, Lula Da Silva became president amidst protests, an insurrection attempt and extreme polarisation. Marred by the lingering accusations of corruption stemming from the Lavo-Jato investigation, and without a majority in Congress, he faced challenges from day one. Many from the Brazilian right criticised him, with the neoliberal ex-finance minister Paulo Guedes stating after Lula’s election that “in 6 months, we will be Argentina, and in 18, Venezuela” [i]

Rather than enacting a socialist, anti-business agenda, however, President Lula has exercised pragmatism, attempting to repeat his previous successes in growing the economy while implementing social reforms to reduce inequality. One year in, it appears that he is off to a good start, working with the pro-business Congress to pass important pieces of legislation and implementing some social reforms, all while growing the economy and creating more jobs.  

Tax reform: fiscal madhouse to economic efficiency 

Perhaps the most important piece of legislation success in President Lula’s first year was the tax reform passed by Congress in December 2023. A professor in business and administration studies highlighted that prior to the reform, Brazil “had one of the most complicated system of taxes in the world, and for companies to operate [in Brazil] there is a high cost.” Albert Buyé, an intelligence litigation consultant added, “The new system will replace a tax structure implemented in the 1960s and will see Brazil adopting a value added tax (“VAT”) model which will be phased in eight years, starting in 2026 and being fully implemented in 2033.”  

It is estimated that Brazil’s tax code caused small-to-medium businesses to spend around 1,500 hours annually in dealing with their municipal, state and federal taxes, and resulted in numerous costly litigation processes [ii]. Aside from this, it meant that many products were uncompetitive on the global market, as often exports already had residual taxes embedded within their price [iii].

Mr. Buyé, also an expert in asset recovery commented, “The efficiency of the new tax system will likely attract foreign investors and stimulate private investments that can boost the country’s GDP by 2.4%.” This is especially crucial for Brazil because it relies heavily on taxes from consumer goods, accounting for nearly half of its tax revenue. The projected new headline rate of around 27% is higher than in many other countries, but implementing this rate will streamline business processes, increase predictability and enhance the competitiveness of exports. 

The reform’s passage is a resounding success for Lula, as many Presidents in the last sixty years have tried to reform Brazil’s tax code, described as a “fiscal madhouse” by Arthur Lira, President of the Chamber of Deputies, but none have succeeded. Indeed, after passing the reform, Fernando Haddad, the Minister of Finance, commented on the importance of bipartisan collaboration and said that its successful passage showed that “Brazil has matured” [iv]. Mr. Buyé concluded, “It is now up to Lula and his party’s internal feuds to capitalise on popularity to groom him [Haddad] as a solid 2026 presidential candidate.” 

The bill has been warmly received by most of Brazil’s business leaders, “who widely considered the new tax system as an unprecedented opportunity to overcome years of deadlock,” according to Mr. Buyé. Several senior members of Brazil’s business community, including Igor Rocha, head of the premier federation of businesses in Brazil – the FIESP, have openly praised the reform.  

Rocha emphasised that the previous system was a significant hindrance to industry innovation and the digitalisation process. He anticipates that the reform will create new opportunities for both Brazilian and international businesses [v]. On top of that, “Ricardo Alban, president of the National Industrial Confederation, the largest industrial business association in the country, praised the reform which will make the new system more transparent and that will eliminate distortions that hinder the country’s industry” [vi].  

The dissenting voices, mainly from the “services sector claimed that it will have one of the highest tax rates in the world, amounting to 27.5%,” affirmed the intelligence consultant. This particularly important sector employs around 70% of the nation’s workers and there are some fears that the reform could be damaging to many companies operating in this sphere. He continued, “Most of its regulatory framework is yet to be discussed,” although it is hoped that this will be more than offset by the enhanced simplicity that the reforms offer [vii]

As with all large pieces of legislation, it will take time to evaluate its success, especially given that “the current system is so complex, the reform will take years to be implemented,” concurred the consultant. The final amendments to the bill have still not been made public, and it is expected that they will not be fully known for years to come.  

There are concerns that powerful groups which are over-represented in Congress, such as agribusiness, transportation services and large infrastructure firms could lobby for special exemptions from the tax, giving their industries a disproportionate advantage over others. While the new tax code will certainly be an upgrade over the old one, Mr. Buyé remarked that “the devil is in the detail”, and how successful it is will depend on the small print. 

Brazil’s economic bounce back  

When elected, many feared that President Lula’s policies would create a less business-friendly environment for Brazil than under his predecessor, Jair Bolsonaro. Lula has enacted several parts of his social agenda, including subsidies for low-income individuals to own a house (Minha case, minha vida) and introducing subsidies for poor families, should their children go to school and get vaccinated (bolsa família).  

He has “more recently, increased the minimum wage to BRL 1,412,” informed the intelligence consultant and the threshold at which tax becomes payable, benefitting lower-income workers. In general though, his policies have been more conservative than predicted, exercising fiscal restraint.  

“Lula’s third presidential was arguably a success as the country’s economy grew at 2.9% in 2023, way ahead of the 0.8% expected growth, reported the Brazilian Institute of Geography and Statistics (“IGBE”),” according to Mr. Buyé. However, also in 2023, the Brazilian government’s deficit was the second highest ever and its expenditure rose in real terms by 12.5%. This was caused partially by a court-order to pay USD 18 billion in owed payments to creditors that had been postponed by Jair Bolsonaro, and increased spending by the previous government in the lead-up to the elections [viii].  

Brazil’s total debt rose by 2.2% against GDP in 2023. However, new fiscal regulations that limit government spending, combined with Haddad’s goal of erasing the deficit by 2024, have instilled confidence in the markets. As a result, several major credit rating agencies have upgraded their outlook on Brazil. The intelligence consultant, Mr. Buyé expanded, “Amid this positive economic outlook, Fitch Rating upgraded Brazil’s credit rating from stable (BB) to positive (BB-minus) and highlighted the country’s large and diverse economy, deep domestic markets and large cash cushion.”  

A manifestation of Lula’s fiscal conservatism came recently in negotiations with public servants. Bolsonaro’s government increased their salaries by 9% in his last year, the Lula administration’s proposal is to freeze pay in 2024 and offer a flat raise of 4.5% in both 2025 and 2026. Indeed, public sector workers are now striking much more under Lula’s regime than under Bolsonaro’s [ix].  

Since Lula’s election, there have been several signs of a strong economic recovery in Brazil. The Ibovespa, the Brazilian stock exchange, ended 2023 with an increase of 22.28%, marking the best performance since 2019. The GDP closed the year with a growth of 2.9%, reaching approximately USD 2.2 trillion. “Encouragingly in the last quarter of 2023, 631,000 workers found formal jobs compared to 299,000 informal.” Mr. Buyé continued, “The unemployment rate dropped at one point to 7.5%, the lowest figure since January 2015 reported Brazilian Institute of Geography and Statistics (“IBGE”).” 

A professor in business studies told us “Clearly, these elements reveal a pragmatic character of the government, as Lula’s thinking no longer has the same ideological appeal as in the 1980s.” What is driving Brazil’s economic rebound and whether it is sustainable, is a different question. Mr. Buyé noted, “The 15.1% increase in agribusiness production, with record soybean and corn harvests, and a 3.1% rise in consumer consumption were the main drivers to this growth,” yet whether this fortune, caused partially by ideal weather, will be repeated in 2024 is unknown [x].  

ESG: less deforestation, more drilling 

One of the reasons that Western leaders welcomed Lula’s victory over Bolsonaro was due to concern about deforestation in the Amazon. True to his word, President Lula has reduced deforestation by 50% in the Amazon and the loss of tree cover in Indigenous territories by 73%. “Diplomacy has been resumed, sparking the interest of developed nations in financially contributing to the preservation of the Amazon Rainforest, such as France, Germany and Norway,” expressed Mr. Buyé, making Lula’s anti-deforestation policies popular amongst the international community.  

Brazil has also made positive strides towards a greener agenda, in both electrifying its fleet and upgrading its green energy capacity. Around 80% of Brazil’s energy comes from renewable sources, one of the highest rates in Latin America, and investment is continuing to pour into this sector with major wind, solar and green hydrogen projects in the pipeline. The renewables industry provides for over 1.2 million jobs in Brazil, the second largest globally only behind China, and there is still untapped potential for the industry to grow [xi].  

Despite some positive strides, Lula’s hands are tied by a Congress dominated by the interests of agribusiness. Its powerful agribusiness sector is the main contributor to deforestation and emissions, resulting from cattle herding. Various pieces of legislation have been passed by Congress despite Lula’s attempts to veto them, including the Marco temporal, “which established that Indigenous communities can only claim to land they occupied when the Constitution was approved in 1988,” stated the litigation consultant. Even though President Lula vetoed this bill, a supermajority in congress overturned it, and despite protests from indigenous groups, the bill became law [xii].  

While certain anti-environmental initiatives in Brazil have been propelled by Congress, one domain in which he has been notably engaged is the oil sector. Since becoming president, he has increased exploration for oil deposits, even at the mouth of the Amazon River, endangering the biodiversity there.  

Brazil, under Lula, has joined OPEC which should be no surprise. As Mr. Buyé told us, “Lula was never a convinced environmentalist himself, and he embraced a green agenda in opposition to Bolsonaro’s disastrous record to consolidate his support in the international arena and at home.” Lula has long been a believer in oil’s importance to Brazil, and has auctioned off around 600 oil exploration permits, in what environmental critics dubbed “the end-of-the-world” auction.

Overall, Lula’s green policies have been more environmentally friendly than Bolsonaro, but he is not the environmental champion that some progressives domestically and internationally had hoped for [xiii]. “Brazil continues to be in the top-10 of world’s biggest emitters,” reported Mr. Buyé. “Although Alexandre Silveira, Minister of the Environment, claimed in the past that the government is committed to the UN zero emissions by 2050, it is yet to unveil a plan to phase out fossil fuels.” The consultant furthered, “to add insult to injury, Brazil joined the OPEC group of oil-producing countries in a move that raised eyebrows among his progressive supporters.”

After one year of President Lula’s third term, Brazil is faring better fiscally and economically than anticipated. The passage of the landmark tax reform, coupled with a return to robust economic growth and an upgraded credit rating, suggests the country is on solid ground. Despite this progress, challenges persist. Brazil remains deeply divided, economic projections indicate a cooling trend, and tough decisions are needed to reduce the deficit.

Sustaining this momentum will be challenging, but with Lula navigating a polarised legislature and exercising pragmatism in economic management, the current mood amongst the business community is one of cautious optimism. Mr. Buyé reflected that at the moment, “inflation remains under control at a mild 4.51% in January 2024 and the central bank cut the interest rates to the current 11.25%.” With robust levels of foreign direct investment expected to persist and numerous major projects in development, Lula’s third term has the potential to significantly bolster South America’s largest economy.

___________________________________________________________________________

[i] https://www.lanacion.com.ar/el-mundo/la-advertencia-de-guedes-brasil-puede-convertirse-en-argentina-en-seis-meses-nid02032021/ 

[ii] https://www.wilsoncenter.org/blog-post/tax-brazil-madhouse-much-needed-reform 

[iii] https://www.policycenter.ma/publications/tax-reform-brazil  

[iv] https://www.tpa-global.com/2023/12/18/brazilian-chamber-of-deputies-approves-tax-reform/ 

[v] https://www.cnnbrasil.com.br/economia/a-cnn-economista-chefe-da-fiesp-critica-excecoes-da-reforma-e-diz-que-iva-de-25-e-teto-para-a-industria/  

[vi] https://noticias.portaldaindustria.com.br/artigos/ricardo-alban/reforma-tributaria-traz-competitividade-para-o-pais-diz-cni/ 

[vii] https://www.bnamericas.com/en/features/brazil-ratifies-major-tax-overhaul 

[viii] https://www.reuters.com/world/americas/brazils-central-govt-deficit-soars-2023-marking-second-largest-ever-recorded-2024-01-29/ 

[ix] https://brazilian.report/liveblog/politics-insider/2024/03/04/lula-civil-servants-higher-wages/ 

[x] https://www.oecd.org/economy/brazil-economic-snapshot/ 

[xi] https://www.airswift.com/blog/renewable-energy-brazil 

[xii] https://www.pagina12.com.ar/695568-el-congreso-de-brasil-restablecio-el-marco-temporal-para-las 

[xiii] https://news.mongabay.com/2023/12/brazils-end-of-the-world-auction-for-oil-and-gas-drilling-commentary/

About the Author

Ben Kwasnik
Ben Kwasnik
Ben Kwasnik is an International Political Economy masters student at King’s College London and writes extensively about Latin America. Prior to that, he studied law and spent two and a half years in Latin America, where he learnt Spanish and Portuguese.
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