Former Brazilian president Luiz Inácio Lula da Silva, top contender to return to the job in October’s election, has long concerned investors with his apparent disregard for fiscal responsibility. These worries remain sharply in focus ahead of a year in which Brazil’s budget deficit is forecast to expand to around 8% of GDP and government debt may reach 83% of GDP. When Lula recently announced that he intends to “make inequality a priority, and not the spending cap”, it’s clear why some would worry.

On the surface, this statement appears to contradict our analysis presented in January’s World Ahead 2022 webinar. Yet, there remains good reason for optimism that the spectre of fiscal deterioration under a Lula presidency is overstated. With inflation running hot, poverty rates rising and unemployment high, no candidate would campaign on a platform of cutbacks that would likely drive down living conditions.

Instead, Lula is signalling his intention to pursue a more moderate platform respectful of fiscal responsibility in other ways. Advisors close to the candidate have suggested that a Worker’s Party-led government would alter, not abolish, the spending cap, linking it to GDP growth rather than inflation. This fits comfortably with the broader tempering of his economic manifesto, which recognises the need to draw votes from moderate voters and form alliances in a divided Congress. Negotiations with former Sao Paulo mayor Geraldo Alkmin, a renowned centrist, to run as Lula’s Vice President are indicative of this new direction.

Conversely, President Jair Bolsonaro’s recent taste for disregarding fiscal rules by ramping up welfare payouts to recapture votes undermines his earlier reputation as a candidate for budgetary responsibility. Even greater expenditure is likely to follow if he continues to lose ground to Lula, further destabilising Brazil’s precarious fiscal balance. Coupled with his unpredictability, Bolsonaro’s volte face on spending may yet drive investors to the previously unlikely conclusion that a Lula presidency might be the preferable outcome.