On January 5, 2026, Brazil’s President Luiz Inácio Lula da Silva will be sworn in for an unprecedented fourth term following an election marked by historic firsts. In the first round of the election on October 4, Lula was the first incumbent leading the polls to be defeated in the first round when he lagged behind his main opponent, Senator Flávio Bolsonaro. In the second round of the election on October 25, Lula then engineered a remarkable campaign turnaround to become the first candidate to win the runoff after a first-round defeat. Notably, his second-round victory took place following an equally historic victory for the right in the congressional and gubernatorial races. Lula’s fourth term in office will therefore feature a unique combination of a popular, left-leaning president, an energized, large conservative majority in Congress, and right-leaning governors in nearly all major states. This will create a challenging political and policy environment for U.S. and international businesses seeking to make investments and expand their market opportunities in Brazil.
President Lula’s victory will likely result in a misalignment on economic policy between his administration’s goals and market players’ expectations. At present, the Lula administration does not appear poised to make any significant course correction, pointing to two key indicators to justify its policy stance: reasonable GDP growth in the past three years—3.2 percent, 3.4 percent, and 2.3 percent, respectively, in 2023, 2024, and 2025—coupled with relatively low unemployment, currently at 5.6 percent. Market players, however, believe that these positive results came, to a large extent, at the expense of an unsustainable fiscal policy that significantly raised Brazil’s public debt from 73.5 percent in 2022 to an estimated 82.9 percent in 2026. The Lula administration’s new fiscal framework, approved by Congress in 2023, did not curb this rise, with the administration failing—every year—to achieve its initially proposed annual fiscal targets for the 2023-2026 period.
Most market players believe that an unsustainable fiscal policy anchored in government spending resulted in both economic growth and persistent inflation, overburdening Brazil’s monetary policy and forcing the Central Bank to maintain a high benchmark interest rate, currently at 13.75 percent. Many investors would like to see substantial changes in the Lula administration’s economic policy, in particular a robust fiscal adjustment focused on reducing government spending through reforms of social security entitlements, benefits, constitutionally mandated education and healthcare spending, government human resources, and tax subsidies. To the extent that the Lula administration will favor a fiscal adjustment, it will be more likely to take the form of tax hikes instead of spending cuts, repeating a strategy from President Lula’s third term that faced substantial congressional opposition. Even more concerning are behind-the-scenes and informal discussions to adopt a benchmark interest rate ceiling, in practice limiting the Central Bank’s independence when making monetary policy decisions—which was formally established by law in 2021.
In 2023, Congress—with the support of the Lula administration—approved a historic tax reform. The constitutional amendment codifying the reform merged five federal, state, and local consumption taxes into a new so-called “dual” value-added tax (“VAT”), composed of federal and subnational components. The reform also created a new excise tax on products and services deemed harmful to health and the environment, and made changes to certain taxes on inheritance and assets. Finally, the constitutional amendment mandated the executive branch to introduce proposals for further income and payroll tax reforms in Congress.
The tax reform was a key achievement that will increase efficiency and transparency, and reduce the burden on companies. However, there is a growing concern that the large quantity of special tax regimes and exceptions will push the new VAT to be one of the world’s highest. In addition, a variety of interest groups are pressuring Congress to reopen aspects of the tax reform, even as implementation is already under way.
The Lula administration will face a substantial challenge as it aims to shield the reform’s core elements from change, accelerate its implementation, and navigate criticisms that the reform might raise the tax burden for economic sectors. Moreover, there will likely be pressure for income and payroll tax reforms, as the administration has not yet complied with the constitutional mandate to introduce them in Congress, despite approving a bill of limited scope to tax dividends.
Digital regulation will remain a top priority for the Lula administration.
These efforts will build on steps during the Lula administration’s previous term, when it focused on approving a new legal framework for social media and instant messaging—the so-called “Fake News Bill”—but did not have enough support in Congress. In response to congressional inaction, the Supreme Court decided to strike down the “safe harbor” provision of Brazil’s internet governance law, effectively establishing new civil liability rules for digital companies. This step was followed by the approval of a new law to protect minors online, and three presidential decrees regulating the Supreme Court decision and the new law, as well as creating additional rules to protect women in the digital environment.
This patchwork of legislation, regulation, and court decisions effectively emerged as Brazil’s new legal framework for digital companies, which has been implemented by a newly empowered National Data Protection Agency (“ANPD”). Despite the large number of new instruments, key areas of the digital economy remain unregulated, including artificial intelligence, cybersecurity, competition in digital markets and, to a certain extent, e-commerce and the role of digital platforms during elections. These are target areas for a further legislative and regulatory push by the Lula administration, but also for opposition by the right-leaning parties in Congress, which perceive some of these instruments as undue intervention by the state in markets and in individual freedoms.
The Lula administration successfully implemented its trade strategy in the past four years by securing key new free trade agreements between the Southern Common Market (“Mercosul”) and the European Union, the European Free Trade Association, and Singapore. It also helped launch a landmark negotiation between Mercosul and Japan, and advanced negotiations between the South American trade bloc and Canada and the United Arab Emirates. This strategy also responded to President Donald Trump’s administration’s imposition of additional tariffs and sanctions against Brazil in 2025 and 2026.
The Lula administration will likely continue to pursue an ambitious trade agreement program, looking to diversify Brazilian export markets, while also adopting domestic trade reforms to strengthen the country’s trade remedies and anti-coercion instruments, expand its export credit mechanisms, and further implement trade facilitation and industrial policy measures.
During its first term, the Lula administration pursued an ambitious—and sometimes perceived as confrontational—diplomatic strategy to reinsert Brazil into key international fora and negotiations in various areas, from international security to climate action to trade. It was successful in hosting large plurilateral and multilateral events, such as the G20 and the Climate Summit, but less so when it came to carving out a role for Brazil in negotiations over the wars in Ukraine and Gaza, and to reacting to the rigged 2024 Venezuelan presidential election. President Lula also engaged in active presidential diplomacy, including hosting or being hosted by all major world leaders.
After President Trump’s victory in the 2024 U.S. presidential election and a substantial change in U.S. foreign policy, the Lula administration pursued a more cautious approach, avoiding confrontation with the American administration and its allies in South America. While balancing these relationships with those maintained by Brazil with the BRICS countries, the Lula administration also began to pursue greater coordination with democratic nations facing domestic polarization and threats from authoritarian countries.
The Lula administration will likely continue to employ this approach to Brazil’s international relations. The core elements of the strategy will include seeking an accommodation and, potentially, agreements in areas of mutual interest with the United States; pursuing closer relations with other Western democracies; maintaining working relationships with South American neighbors governed by right-leaning presidents; and deepening its partnerships with China and Russia.
The large conservative majority elected to Congress, as well as the right-leaning governors of the largest states, will likely pursue their own policy agenda while at times supporting and at other times opposing the Lula administration.
The key agenda items for the conservative movement will likely include: a reform of the Judiciary, whose reputation (according to recent polls) plummeted as several Supreme Court justices were involved in the country’s largest ongoing corruption scandal; and new legislation to fight crime, including the potential reduction of the age of criminal responsibility and the classification of domestic organized criminal groups as terrorists.
While Congress will likely continue to create and update sector-specific legal frameworks to boost private investment, it may also pursue large pro-business and fiscally conservative reforms as it did in 2017 (labor laws), 2019 (social security entitlements), and 2023 (consumption taxes). One possibility is a so-called “administrative reform” to improve government planning and management, human resources, and digital services.
Markets reacted negatively to President Lula’s victory, prompting the administration to initiate discussions on its economic policy adjustments. The Lula administration will likely announce its new economic policy team and priorities before the start of President Lula’s fourth term on January 5, 2027. The administration might also announce priorities in other policy areas, as well as pursue congressional approval of some of these items in the short window before the new and more conservative Congress takes office on February 1, 2027.
In parallel with the policy announcements, both President Lula and the conservative opposition will begin negotiations to secure control—directly or through allies—of the speakership of the House of Deputies and the presidency of the Federal Senate. In the Brazilian political system, both offices command substantial agenda-setting powers. The election for Speaker of the House and President of the Senate will be on February 1, 2027.
If you have any questions concerning the materials discussed in this update, please contact the following members of our Brazil Initiative team.
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