By Marcela Ayres and Bernardo Caram
BRASILIA, Sept 24 (Reuters) - The two leading candidates in Brazil's tightly contested presidential race differ sharply on how fast they would tackle the country's fiscal challenges, but both have stopped short of detailing the politically costly measures likely needed to deliver on their promises.
But behind the scenes, advisers for leftist President Luiz Inacio Lula da Silva, who is seeking a fourth non-consecutive term in next month's general election, and right-wing
Senator Flavio Bolsonaro, the son of former President Jair Bolsonaro, are discussing measures to stabilize public debt and create room for lower interest rates, according to sources familiar with the deliberations.
Lula's team has reiterated a commitment to improve Brazil's primary balance to achieve an effective surplus of about 1.3% of gross domestic product by 2030, from a projected deficit of 0.4% this year. The plan implies a gradual fiscal adjustment, which officials say would protect social programs.
Advisers to Senator Bolsonaro, by contrast, have pledged an adjustment equivalent to about 1.5% of GDP in only 18 months, arguing that the more aggressive fiscal shock would lower long-term borrowing costs in Latin America's largest economy.
Economists say both strategies ultimately run into the same obstacle: the growth of mandatory spending, particularly on pensions and social benefits, which has steadily squeezed room for investment.
But fiscal issues have featured little in either of the main contenders' campaigns, despite Brazil's gross public debt having climbed over 10 percentage points during Lula's current term, reaching 82.5% of GDP.
The country's nominal deficit stands at 9.3% of GDP — well above the 5.8% average projected by the International Monetary Fund for emerging economies this year — with interest payments having become its largest driver, as investors demand higher premiums amid doubts about Brazil's willingness to contain spending.
LULA TEAM SEEKS TO REASSURE MARKETS
Brazilian voters will go to the polls on October 4. If no presidential candidate wins a simple majority, a second round will be held on October 25.
Under pressure from investors to offer clearer evidence of fiscal commitment, Lula's advisers have sought to reassure markets that his government would maintain Brazil's fiscal framework, though possibly with more ambitious primary surplus targets or tighter spending growth limits.
That message has at times contrasted with Lula's own rhetoric.
"To create jobs, the economy needs to grow, and for the economy to grow, the government needs to invest. And for the government to invest, we need to stop this nonsense about generating fiscal surpluses and maintaining strict fiscal controls. Brazil's biggest debt problem is the interest rate we pay," Lula said at a campaign rally in Curitiba earlier this month.
Privately, however, officials involved in Lula's campaign say they are considering several policy changes, including changes to rules linking healthcare and other spending increases to revenue growth and reviews of social programs, particularly the BPC benefit for the elderly and disabled.
One source, speaking on condition of anonymity, added that Lula is unlikely to pursue a broad pay raise for civil servants similar to the one granted in 2023.
The campaign is also studying a new round of tax-break reductions, higher taxation of top earners, and efforts to curb the use of contractors to avoid payroll taxes.
BOLSONARO PUSHES FOR FASTER CONSOLIDATION
Senator Bolsonaro's advisers have centered their strategy on a new constitutional fiscal framework that they hope Congress will approve shortly after an election victory, though that would imply an aggressive adjustment that could prove politically challenging.
According to people familiar with the proposal, gross debt-to-GDP would serve as the main fiscal anchor, with spending growth constrained until debt reaches a sustainable level, which the campaign has yet to define. Adolfo Sachsida, a lawyer and economist who is advising the Bolsonaro campaign, has written articles about setting the threshold at 65% of GDP.
A similar mechanism approved in 2016 gradually lost credibility after Congress authorized exceptions and successive governments, including that of former President Bolsonaro, relied on measures to bypass it.
Daniella Marques, the coordinator of Senator Bolsonaro's economic platform, has called for the creation of a fiscal governance council involving all branches of government to help sustain such a measure.
Securitization of delinquent tax credits, asset sales and privatizations are among the ideas that have been discussed by advisers. Jair Bolsonaro's administration pursued all of these ideas with limited success. A return to a policy of leaving vacancies unfilled after civil servants retire is also on the table.
Critics, however, say the debt reduction targets envisioned by the Bolsonaro camp are unlikely to be achieved without curbing growth in mandatory expenditures, especially if Senator Bolsonaro keeps his promise of reversing some tax increases, including on financial transactions.
"I won't balance the books on the backs of minimum-wage workers or retirees. I'll do it by cutting corruption, taking a chainsaw to bureaucracy and lowering taxes," Bolsonaro said during a recent campaign appearance.
Although his team is also considering cutting tax breaks, Senator Bolsonaro during a campaign stop in the Amazon region last week wore a t-shirt emblazoned with the words, "100% Free Trade Zone." That regional tax incentive costs about 30 billion reais ($5.86 billion) a year.
($1 = 5.1172 reais)
(Reporting by Marcela Ayres and Bernardo Caram; Editing by Manuela Andreoni; Editing by Paul Simao)
