Executive Summary
- President Luiz Inácio Lula da Silva concluded his second year with contradictory economic results: high GDP growth and low unemployment combined with rising inflation, high interest rates, and a record devaluation of the Brazilian currency.
- The Lula administration’s strategy put the country’s fiscal framework in peril and left economic policy agenda items unfinished, while its democracy-strengthening agenda remained largely paralyzed. There were mixed results in President Lula’s foreign policy.
- Congress continued to approve economic modernization bills, focusing on sector-specific frameworks and in the implementation of the 2023 historic consumption tax system reform.
- In the year ahead, companies doing business in Brazil should pay attention to the implementation of the 2023 tax reform, as well as to a proposed new income tax reform. They should also pay attention to further congressional activity on AI, cybersecurity, social media, and regulatory agencies, among others.
Analysis
President Luiz Inácio Lula da Silva’s main goal in 2024 was to deliver a strong economic performance that could be translated into positive political results for his party and allies in the mid-term local elections. These elections were a crucial stepping stone towards his likely reelection campaign in 2026.
Contradictory Economic Results
Market players began 2024 expecting Brazil to grow 1.52 percent, an economic slowdown from the 2.92 percent GDP growth in 2023. By December, these expectations improved to 3.42 percent, pointing to an accelerating economy.
At the same time, these players began 2024 expecting annual inflation to be 3.90 percent, within the inflation target’s upper range of 3 to 4.5 percent. However, by December, expectations deteriorated to 4.89 percent. The official inflation was confirmed at 4.83 percent, an annual increase above the target ceiling.
Economic growth resulted in an all-time low unemployment rate, although nearly half of Brazil’s working-age population is out of the labor market. At the same time, persistent inflation forced the Central Bank to interrupt the benchmark interest rate (“SELIC”) reduction cycle and, later in 2024, to initiate monetary policy tightening, with the rate increasing 1.75 pp., from 10.50 percent to 12.25 percent—including a forward-looking statement with two additional 1 pp. hikes in early 2025 if economic conditions remain the same.
These contradictory economic results fueled political polarization. On the one hand, supporters of the administration argued that the independent Central Bank’s monetary policy, supported by most market players, was excessively orthodox and was hampering economic growth. On the other hand, opponents and most market players argued that part of this performance was the result of a lax fiscal policy, creating inflationary pressures.
Fiscal Framework in Peril
One of the key goals of the Lula administration in its first year was to get the National Congress to approve a proposal for a new fiscal policy for Brazil, the so-called “fiscal framework.” To implement it, the administration needed to pursue a vigorous fiscal adjustment, first by aiming to eliminate the primary fiscal deficit by the end of 2024; and second, by achieving annual primary fiscal surpluses in the second half of President Lula’s term, in 2025 and 2026.
However, instead of adopting both revenue-generating and spending cut measures from the outset to achieve these goals, the Lula administration opted to solely focus on revenue increase, combined with a weakening of its own fiscal framework rules.
By the second quarter of 2024 this strategy reached a political limit and eventually generated a credibility crisis that saw the Brazilian currency reach a record devaluation against the U.S. dollar. This forced the Central Bank to aggressively sell part of its reserves to smooth exchange rate fluctuations. This crisis also forced the administration to introduce a last-minute package of spending cut measures to keep the fiscal framework afloat. In December, Congress approved a watered-down version of this package.
Unfinished Economic Policy Agenda
The administration’s fiscal policy strategy also created an unnecessary backlog in the implementation of the economic policy agenda. Instead of having a credible and fully functional fiscal framework by the end of 2024, President Lula and Minister of Finance Fernando Haddad will likely have to pursue additional measures in 2025 in order to avoid a second fiscal policy crisis.
Moreover, implementation of the historic consumption tax system reform, approved in 2023, was delayed. Only one of the two implementing bills introduced by the Lula administration in 2024 was approved by Congress, and the introduction of other necessary bills was postponed to 2025.
Finally, the administration also pursued a number of policies throughout 2024 that point to increased government intervention in markets. Many of these policies are similar to Brazil’s first attempt at State capitalism since its return to democracy in 1985, and that eventually led to a recession that reduced the country’s GDP by 8.1 percent between 2014 and 2016.
Paralyzed Democracy-Strengthening Agenda
Another key goal of the Lula administration in its first year was to curb what it perceived as threats to Brazilian democracy. To do so, it focused its efforts on two main policy initiatives: a new legal framework for social media and instant messaging and a constitutional amendment to automatically send to the reserve any member of the Armed Forces on active duty that decides to run for office.
In 2023, the Speaker of the House of Deputies attempted to put the social media and instant messaging legal framework bill—the so-called “Fake News Bill”—to a vote and failed. It tried again in 2024, but after a second failure decided to abort any further consideration of the bill. Despite the lack of action by Congress, the Supreme Court actively pursued cases involving social media regulation, including a high-profile dispute that temporarily shut down operations for one social media company in Brazil, and an ongoing case on the safe harbor provision of the Civil Rights Framework for the Internet Act of 2014.
With limited instruments, the executive branch also pursued action focused on large technology companies, including owners of social media and instant messaging platforms. One example was a public consultation initiated by the Ministry of Finance with a view to proposing changes to antitrust legislation to specifically address competition in the digital economy. Another example were investigations conducted by the Brazilian National Data Protection Authority (“ANPD”) targeting technology companies on violations of existing data privacy legislation when training AI models.
The constitutional amendment related to the Armed Forces was introduced in Congress in September 2023 after extensive negotiations with the Army, Navy, and Air Force. The amendment was included in the Federal Senate voting schedule twice during 2024, but never voted on. The Lula administration seems to have placed more emphasis on a different draft constitutional amendment to improve law enforcement agencies’ coordination to fight organized crime, a growing and urgent threat to Brazilian democracy.
Mixed Results in Foreign Policy
Like in 2023, President Lula invested considerable time in active presidential diplomacy during 2024, with the same mixed results.
On one hand, the administration was successful in hosting the G20 summit, and three high-profile official visits to Brazil—by French President Emmanuel Macron in March 2024, Japanese Prime Minister Fumio Kishida in May 2024, and Chinese President Xi Jinping right after the G20 summit. It also played an important mediation role in a territorial dispute between Venezuela and Guyana. Finally, the Lula administration announced the conclusion of the European Union-Mercosul free trade agreement negotiations, Brazil’s most important trade agreement since the establishment of Mercosul in 1991.
On the other hand, President Lula’s and his chief international advisor’s stances on the rigged Venezuelan presidential election and the Middle East conflict seemed to have hurt the administration politically. It is notable that the Brazilian federal government recognized the October 7, 2023 Hamas attack as terrorism in an official press release for the first time only in 2024 and right after President Lula’s Workers’ Party (“PT”) underperfomed in the mid-term local elections.
Congressional Action
Following the trend started in 2015, the large conservative and pro-business majority in Congress continued to pursue economic modernization initiatives. While no major so-called “structural reform” was adopted in 2024, Congress approved the first tax reform implementing bill, the largest biofuels legislation in half a century, and new sector-specific frameworks on (i) agricultural bio-inputs, (ii) carbon markets, (iii) green hydrogen, (iv) offshore wind power, (v) private insurance and (vi) space activities. There was also an intense political dispute among the three branches of power over control and oversight of congressional budget earmarks.
The Year Ahead
2025 is the last year for the Lula administration to secure major policy changes before the 2026 presidential campaign.
First and foremost, the administration will have to handle the unfinished economic policy agenda of 2023 and 2024, including additional measures to make the fiscal framework sustainable, and the full implementation of the consumption tax reform.
Second, the administration will likely introduce one or more bills to pursue income tax reform, both for individuals and corporations. The goals would be to increase the tax exemption bracket for low-income individuals; secure a minimum income tax for high-income individuals; and simplify the income tax system and accessory obligations for corporations. It is also likely that the administration will propose a new withholding tax on dividends.
Third, Congress will likely continue to vote sector-specific frameworks. A key goal will be the approval of a new artificial intelligence legal framework, already approved by the Senate in December 2024 and pending debate in the House. The Lula administration may use this legislative vehicle to do a final push on social media regulation. It might also introduce bills to create a new cybersecurity legal framework and to change antitrust legislation with a focus on technology companies.
Congress might also vote draft constitutional amendments on the Central Bank, strengthening its independence, and federal regulatory agencies, increasing congressional oversight. Finally, the conservative majority might try to approve social measures aligned with its electoral base with a view to the 2026 election, which will renew the entire House and two-thirds of the Senate.
To secure his agenda, President Lula is already negotiating with the likely new Speaker of the House and President of the Senate, to be elected in February 2025. After center and center-right parties outperformed in the 2024 mid-term local elections, President Lula is also considering a cabinet reshuffle to increase participation of these parties in the administration.
Policies to be adopted by the Trump administration in the United States will likely affect Brazil, directly and indirectly. The looming tariff war between the United States and other major economies, such as China, Canada and Mexico, will provide both risks and opportunities for Brazil. Exporters and import-competing domestic producers will pressure the Lula administration to adopt divergent policy directions. Moreover, new U.S. fiscal and monetary policies might result in further devaluation of the Brazilian currency, additional inflationary pressure, and an aggravated domestic fiscal scenario.
Finally, Brazil will host the United Nations Framework Convention on Climate Change (“UNFCCC”) 30th Conference of the Parties (“COP30”) in 2025, as well as the annual BRICS Summit.
If you have any questions concerning the material discussed in this client alert, please contact Diego Bonomo in our Latin America Public Policy group.
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