Prof Joe Stiglitz on BizNews: Brazil cannot afford Bolsonaro's spending cuts

Brazil votes on Sunday in a presidential runoff that Joseph Stiglitz and Laura Carvalho frame as a straight test of austerity against growth. They argue that Flávio Bolsonaro's plan to cut spending by 1.5% of GDP could shrink the economy by 3.2% within two years. Over the same period, they say, Lula delivered faster growth, falling inflation and record-low poverty. For South Africa, the argument cuts close to home. Brazil is a fellow BRICS member and emerging-market peer, and its debate mirrors Pretoria's own: whether fiscal consolidation steadies debt or simply stalls growth, and how far social grants can be protected when budgets tighten..By Laura Carvalho* and Joseph E. Stiglitz*.NEW YORK—Brazil faces a stark choice on October 25, when far-right candidate Flávio Bolsonaro and President Luiz Inácio Lula da Silva face off in the country’s presidential runoff.The economy looms large in any election, and here the two candidates offer vastly different strategies. While Lula has a proven track record, and Flávio does not, Bolsonaro’s approach mirrors that of his father, disgraced former President Jair Bolsonaro, who is now serving a 27-year prison sentence for an attempted coup. The son and his team have also said enough on the campaign trail to give us a clear idea of where Brazil would be headed under his leadership.As economists who have long studied Brazil, we can be unequivocal: under Bolsonaro, unemployment will be higher, growth will slow, poverty will increase, and the middle class will be worse off.Start with Bolsonaro’s promise to cut public spending by 1.5% of GDP. His team says Bolsa Família, Brazil’s cash-transfer program for households, would remain, but has not specified what would be cut. Given that the country’s budget is dominated by pensions, minimum-wage-linked benefits, health, and education, cuts of that magnitude could not spare them.The damage would not be limited to pensioners and welfare beneficiaries. A reduction in social spending equivalent to 1.5% of GDP would be likely to wipe out 2.7% of GDP in the first year and 3.2% over two years, based on standard estimates of fiscal multipliers. That would be enough to turn a slowdown into a recession.Simulations of much smaller cuts have found that lost growth drains tax revenue, leading to more cuts in a vicious downward spiral. The first to feel the pinch would be informal workers, street vendors, app drivers, and small business owners whose sales depend on customers having money to spend. Evidence from South America shows that spending-based fiscal adjustments have historically reduced economic activity and widened inequality.The cuts would not even fix Brazil’s debt problem. About 53% of public debt is linked to the policy interest rate (Selic), and the country’s high interest rates owe more to inflation targets, a dysfunctional financial market, and currency volatility than to public spending. The primary deficit (spending excluding interest payments, minus tax revenue) has been near zero. Bolsonaro appears to believe that interest rates will magically fall dramatically without addressing the factors underlying them. Even if the Selic were to fall to 9%, which we consider unlikely under Bolsonaro, debt would continue to rise despite annual primary surpluses of 3% of GDP.Compounding these problems are Bolsonaro’s proposed tax cuts. In a country plagued by extreme inequality, where those at the top pay a smaller share of their income in taxes, his proposed cuts could hamper long-term growth while worsening the country’s fiscal stance in the short run. Bolsonaro seems unaware of his policies’ macroeconomic consequences and, like Argentine President Javier Milei, does not care about correcting existing tax injustices.The likely damage to Brazil’s economy and the slim prospect that Bolsonaro’s policies would reduce the deficit—which could actually grow if the downturn they induce is severe enough—did not stop markets from cheering his first-round victory. On the first trading day after the vote, the Ibovespa jumped 7.7% to a record high. But a stock-market rally is not the same as a growing economy, and it can quickly unravel in a recession or an institutional crisis, the risk foreign investors fear most.But another future is possible. Three years ago, the market expected Brazil’s economy to grow by just over 1% annually. Instead, GDP grew by 3.2% in 2023 and 3.4% in 2024. Inflation, which peaked at 12.1% in April 2022, fell to 4.22% by August. Unemployment declined to 5.3% in 2026, while poverty and extreme poverty reached record lows. Even the stock market has performed well, rising by roughly 70% since January 2023.These trends reflect the success of Lula’s economic policies. The new Bolsa Família lifted an estimated 6.5 million people out of poverty and extreme poverty. Real minimum-wage increases, associated with a larger wage share, boosted incomes for workers and pensioners. A progressive tax reform exempted low- and middle-income households from income taxes while raising the minimum tax rate for high earners, helping to reduce income concentration at the top. Yet primary deficits shrank to almost zero. And inflation would have fallen even further were it not for reckless wars by Russia and the Trump administration.There is still much to be done. It won’t be easy, but Brazil can create fiscal space by eliminating tax deductions that benefit mostly the richest 10%, reining in parliamentary amendments, and raising the effective minimum tax on the super-rich..Read more:.Brazil’s Bolsonaro on brink of a comeback - why Pretoria should pay attention.That fiscal space should fund strategic investment in public transport, housing, and care infrastructure. These investments would make everyday life more affordable by reducing commuting costs and childcare expenses, while lower interest rates would reduce borrowing costs for families and entrepreneurs.Over the past four years, Brazil has shown that growth and fairness can advance together. The choice facing voters on October 25 is whether to build on that progress or reverse it..*Laura Carvalho is Director of Economic and Climate Prosperity at the Open Society Foundations, Associate Professor of Economics at the University of São Paulo, and a researcher at the Getulio Vargas Foundation’s Brazilian Institute of Economics. *Joseph E. Stiglitz, a Nobel laureate in economics, is a former chief economist of the World Bank, a former chair of the US President’s Council of Economic Advisers, University Professor at Columbia University, and the author, most recently, of The Road to Freedom: Economics and the Good Society (W. W. Norton & Company, Allen Lane, 2024).Copyright: Project Syndicate, 2026.www.project-syndicate.org.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. 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Prof Joe Stiglitz on BizNews: Brazil cannot afford Bolsonaro's spending cuts

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