On October 5, following the opening round of Brazil’s general elections, the nation’s financial markets surged into a state of euphoria. Investors, long grappling with a precarious landscape defined by sluggish economic growth and stubbornly high national debt, welcomed the prospect of leadership dedicated to aggressive fiscal austerity. The market enthusiasm was rooted in a widespread desire for sweeping deregulation, significant tax cuts, spending caps, and the potential privatization of state-owned enterprises. After nearly four years under the administration of left-wing President Luiz Inácio Lula da Silva—widely known as Lula—whose policies have been viewed by the financial sector as overly cautious and slow-moving regarding structural reform, investors had pinned their hopes on a right-wing resurgence to unlock bold economic transformations.
That shift toward the right may well be the reality facing the South American giant. The far-right Liberal Party achieved remarkable gains in the bicameral legislature during the legislative elections, capturing the single largest blocs in both the Senate and the Chamber of Deputies. In the presidential contest, Flávio Bolsonaro, the son of the controversial former President Jair Bolsonaro, outperformed the incumbent Lula in the first round of voting, securing a nearly two-percentage-point lead. While Lula has historically demonstrated a formidable knack for political comebacks throughout his decades-long career, the younger Bolsonaro enters the upcoming runoff vote scheduled for October 25 as the frontrunner.
Yet, a closer examination of the economic landscape suggests that even a decisive victory for Bolsonaro may fail to deliver the salvation anticipated by the markets. The economic proposals advanced by the challenger fall far short of the rigorous fiscal consolidation program urgently required to stabilize the national debt and reignite sustainable private investment. Furthermore, Flávio Bolsonaro’s overt commitment to undermining Brazil’s core political and judicial institutions introduces a level of systemic uncertainty that historically drives wary investors away. While economic growth has undoubtedly faltered under Lula—whose administration has struggled mightily to alleviate heavy debt burdens carried by both the public sector and ordinary households—the true catalyst for a full-blown economic crisis would be the introduction of the authoritarian-inspired governance model championed by the Bolsonaro movement.
CRISIS IN THE MAKING
The structural challenges confronting Brazil are profound and deeply rooted. The country’s sovereign debt-to-GDP ratio has ballooned to an alarming 83 percent, while persistent fiscal deficits leave virtually no maneuvering room for additional government expenditures. Compounding these domestic vulnerabilities, high interest rates continue to squeeze consumers and corporate investors alike. Meanwhile, geopolitical instability, including the ongoing war involving Iran, has driven up the cost of fuel and essential imported goods. This external pressure heavily weighs on household balance sheets that were already strained by domestic debt, leaving millions of Brazilians desperate for effective leadership capable of alleviating daily financial hardships.
This economic predicament has been years in the making. Prior to the 2018 election of Jair Bolsonaro, then-President Michel Temer enacted a strict cap on public spending designed to contain Brazil’s runaway fiscal liabilities. Temer introduced this spending ceiling as a constitutional amendment specifically to prevent future administrations from easily altering the cap to suit short-term political objectives. However, Jair Bolsonaro repeatedly bypassed or raised the ceiling during his tenure, a process that required convincing Congress to amend the constitution. In exchange for legislative cooperation, the executive branch effectively surrendered control over the national budgetary process to the legislative branch.
Consequently, Lula inherited a deeply constrained institutional framework upon returning to office, leaving him with exceedingly narrow margins for fiscal adjustment. His administration made minimal headway in rectifying these underlying imbalances. The resulting high budget deficits and persistent inflation compelled the central bank to implement substantial interest rate hikes. These elevated rates ultimately damaged household balance sheets, depressed overall investment, and choked broader economic growth.
PROMISES, PROMISES
Should Lula secure reelection, he would face immense legislative hurdles in attempting to introduce new fiscal reforms or growth-oriented measures. Although he has campaigned on promises of reduced public spending and proposed a comprehensive overhaul of Brazil’s complex tax system to build a budget surplus and shrink public debt, his path forward is blocked. The Liberal Party and its conservative allies now control majorities in both the Senate and the Chamber of Deputies, positioning them to obstruct any legislative agenda pushed by a returning Lula administration.
At the same time, expecting Bolsonaro to fare better on the economic front is viewed by many analysts as overly optimistic, if not entirely unrealistic. Neither presidential contender has offered granular details during the campaign regarding their specific strategies to rescue the economy. Instead, Bolsonaro has frequently emphasized vague plans for “institutional reforms.” These proposals include amending Brazil’s 38-year-old constitution to introduce greater flexibility into labor and environmental regulations, directly intervening in the operations of the Supreme Court, and granting legal amnesty to his father, who is currently serving a prison sentence for orchestrating a 2023 coup attempt.
Pursuing such an aggressive overhaul of the nation’s foundational political institutions would inevitably require difficult political compromises that could further exacerbate Brazil’s economic distress. To secure the necessary supermajorities in Congress—such as the two-thirds Senate vote required to remove a Supreme Court justice, or the three-fifths majority in both houses needed for a constitutional amendment—the executive branch would be forced to negotiate extensively with lawmakers outside its immediate coalition. These legislators would almost certainly demand substantial federal funds and pork-barrel projects for their home constituencies in exchange for their votes, directly inflating the national budget deficit.
Furthermore, the far-right movement remains heavily focused on maintaining cohesion within its recently forged coalition of governors, mayors, and grassroots voters. A significant portion of this constituency comprises lower-middle-class Brazilians who climbed out of poverty during the commodity boom years two decades ago, during Lula’s first two terms in office. Having experienced prolonged income stagnation in the years since, these voters have migrated toward the Liberal Party, though their political loyalty is relatively fragile. Most are self-employed workers navigating acute economic precarity. Both Bolsonaro and Lula are actively courting these demographics with promises of income-boosting initiatives and household debt relief programs. Yet delivering on such expensive promises—assuming it is even feasible—would only worsen Brazil’s underlying fiscal pathologies.
Bolsonaro’s stated economic platform similarly lacks concrete mechanisms for stability. While his party has pledged to slash government spending by $40 billion, or roughly 1.5 percent of GDP, and achieve primary budget surpluses—a fiscal metric excluding interest payments—it has failed to explain how these targets will be reached. Bolsonaro has provided no realistic roadmap for controlling the relentless rise in public debt, particularly while maintaining firm pledges to leave public pensions and key social welfare programs untouched.
Part of the underlying structural flaw is that the Liberal Party’s economic blueprint lacks a viable framework for expenditure reduction. Proposals to eliminate at least ten government ministries come with no reliable estimates of actual cost savings. When Jair Bolsonaro implemented similar structural downsizings after taking office in 2019, cutting cabinet positions and laying off civil servants, the moves produced negligible fiscal improvements. Additional campaign promises—such as reducing Brazil’s value-added tax, phasing out financial transaction taxes, lowering energy and fuel levies, committing $180 billion to infrastructure projects over four years, and constructing 2.5 million new homes—would not resolve Brazil’s structural deficits. Instead, they would intensify fiscal pressures.
The same shortcomings plague the remainder of Flávio Bolsonaro’s tax proposals. His economic advisers have signaled an intent to reverse every tax measure introduced or raised under Lula’s finance minister, Fernando Haddad. Haddad’s tax adjustments were originally designed to shift a larger share of the tax burden onto higher-income brackets, enhance government revenue, and reduce systemic inequality. While these taxes contributed to a modest increase in public revenue, they ultimately fell short of achieving desired budgetary surpluses.
Bolsonaro has argued that these measures stifle investment by heavily taxing upper-income earners, though empirical evidence supporting this claim is scarce. Conversely, a wholesale repeal of these revenue-generating taxes would severely aggravate Brazil’s fiscal position. Basic economic calculations indicate that Brazil must expand its primary budget balance by approximately six percent of GDP—either through increased revenues, reduced spending, or a combination of both—merely to prevent its national debt from continuing to climb. This adjustment would need to be phased over at least three years to give indebted households and corporations time to adapt their consumption and investment patterns, thereby avoiding a severe recession. Slashing taxes without equivalent spending cuts would simply diminish government revenues and accelerate debt accumulation.
High domestic interest rates pose yet another formidable constraint. The central bank’s benchmark interest rate sits at 13.75 percent, an astronomical figure by regional Latin American standards that drives borrowing costs across the entire economy. Public debt service payments alone consume roughly 8.7 percent of GDP. Bolsonaro would find it impossible to significantly lower interest rates without triggering a recession, leaving him trapped by the exact same macroeconomic dilemma that has constrained Lula during his current term: navigating a narrow path with few viable options for containing runaway debt.
AUTHORITARIAN ECONOMICS
Neither Lula nor Bolsonaro is ideally positioned to untangle Brazil’s complex web of economic challenges. However, a decisive political turn toward illiberalism under a Bolsonaro administration would all but guarantee economic disaster.
Flávio Bolsonaro has consistently avoided disavowing his father’s vocal praise of Brazil’s military dictatorship, which ruled the country from 1964 to 1985, and his Liberal Party shares ideological lineage with the political apparatus that sustained that military regime. Furthermore, he has openly pledged to secure the release of his father and various associates currently imprisoned for staging an insurrection and a failed coup attempt in 2023. His brother, Eduardo Bolsonaro, a former federal lawmaker who is expected to occupy an influential role in a potential Bolsonaro administration, has openly expressed admiration for Viktor Orbán’s illiberal regime in Hungary, explicitly signaling a desire to replicate the tactics used to rewrite constitutions, subjugate independent courts, and silence the press.
The robust far-right bloc within Brazil’s Congress actively champions policies aimed at dismantling key democratic checks and balances, including ongoing efforts to impeach members of the Supreme Court. Although Brazil is not facing an immediate threat of returning to direct military rule, the historical precedent of the twentieth-century dictatorship serves as a stark warning regarding the perils of unchecked illiberal governance. During those two decades of military rule, Brazil sustained unsustainable levels of public spending—primarily funneling capital into inefficient state enterprises to maintain political control—which ultimately culminated in a sovereign debt default, corrosive hyperinflation, and skyrocketing income inequality. Six successive economic stabilization plans failed during that era, leaving economic growth permanently stagnant.
Brazil’s rightward political pivot aligns with a broader regional trend. The common thread uniting Brazil with neighboring nations such as Argentina, Chile, and Colombia is the promotion of a crude libertarian worldview by far-right populist movements. These leaders frequently appeal to voters who experience unstable employment and limited economic security by promising that free-market individualism will usher in widespread prosperity. Yet their populist approaches rarely secure the confidence of institutional investors. Like its regional peers, when Brazil’s far right claims it can overcome severe structural obstacles through institutional demolition and threadbare economic plans, it ultimately offers little more than empty promises.
