Debts are strangling Brazilian families despite a slight economic improvement

Never before have so many Brazilians held a job, but never have so many families — eight out of 10 — been strangled by debt. Paying it off consumes a third of household budgets in Latin America’s largest economy. And it is there that much of the discontent weighing on Luiz Inácio Lula da Silva’s electoral prospects is born. His 2022 promise that, with him in power, the glorious days of the picanha, the grilled meat, the Sunday barbecue, would return remains a dream for most. For his compatriots, the cost of living is too high. Paying the bills is often impossible, even though the president insists unemployment is at a historic low (5.3%), inequality is falling, and inflation is under control.

Veteran Lula, 80, is seeking reelection for a fourth nonconsecutive term against Flávio Bolsonaro, 45, the son of jailed former president Jair Bolsonaro, in this Sunday’s vote, which is expected to be extremely tight. A Quaest poll published Monday gave Lula a five-point lead in the first round (39% to 34%) and a 42%–42% tie in a head-to-head second round.

Leftist Lula is calling for patience and is unveiling, in the final stretch of the campaign, programs with an evident electoral scent aimed at the least well-off and the lower-middle class. Meanwhile his right-wing, ultraliberal rival promises sweeping cuts to public spending, but says he will preserve aid to the most vulnerable without detailing the always painful how of balancing the books. No other candidate has managed to cast more than the slightest shadow over the two frontrunners, who have been neck-and-neck for months in the presidential race.

Half of Brazilians say the government is handling things badly or very badly; they believe the economy is getting worse. Bolsonaro has seized on that, blaming Lula for the high cost of living and accusing him of squandering public money (public debt is around 82% of GDP and the fiscal deficit 9%). The leftist keeps to his mantra that “devoting public money to education, health, and the fight against poverty is investment, not spending.”

The government has created a website titled El mercado de la mentira (The Market of Lies) to defend its economic performance against the opposition’s propaganda maneuvers. It offers data and short videos to “unmask their lies,” referring to Bolsonaro and his allies.

The years of steady price increases left in the wake of the pandemic are taking their toll on leaders around the world, including Lula. Macroeconomic figures are improving, but ordinary citizens aren’t feeling the difference in their wallets. Brazil’s economic growth during this administration has outpaced that of the United States and the Eurozone. But the ordinary citizen who goes to the market to shop feels that their family’s income isn’t enough to buy the basics needed to make ends meet each month.

And so they ask a friend or relative for a loan or take out a line of credit… the options and possibilities are endless, which can be an opportunity or a serious danger in a country where 60 million customers have gained access to banking services in a decade thanks to the spread of cellphones. The problem is that some of them lack even the most basic understanding of how the simplest financial instruments work. According to official data from August, 82% of households are in debt; one-third have already missed a payment; and 12% estimate that they will not be able to pay what they owe.

Most of those debts were incurred with credit cards. The much-publicized and pernicious programs that encourage spending to accumulate points and obtain discounts are omnipresent. It is not uncommon for a bank to issue multiple cards to the same customer even if they are behind on payments, as Lula himself recently complained to his finance minister.

Such a situation results from a cocktail that includes high interest rates (13.75% after several cuts), precarious employment, rapid banking inclusion, the accelerated digitalization of finance, easy access to credit, and the rising cost of living. A panorama that heightens personal anguish and collective discontent.

It is also linked to other problems, such as the epidemic of sports betting and digital casinos sweeping Brazil. There are those who gamble to try their luck, those who have fallen into addiction, and then the desperate who bet as a last resort, hoping a lucky break will let them clear their debts and balance the household budget.

Faced with that panorama, President Lula decided to cut it off at the root. Nine days before the election he banned all online betting, citing the need to protect families’ economic and mental health. Last year, after discovering that a quarter of beneficiaries of the Bolsa Família social welfare program were gambling, the government created a mechanism that prevents people receiving social assistance from spending the money on digital betting.

During this term, the government, an alliance of Lula’s Workers’ Party and several center-right parties, has launched three programs that make it easier to renegotiate personal and business debts with banks, with reductions of up to 90%. But the results have fallen far short of what the president hoped. Last Friday he unveiled the third. Whereas in the first two the government acted as intermediary, it now increases its role by buying families’ old debts to negotiate with financial institutions afterward.

Another presidential announcement with a huge impact is that the monthly Bolsa Família payment will increase by 15% in mid-October — that is, between the first and second rounds of the election. The package of government measures aimed at winning over voters totals more than 200 billion reais (around $38 billion), according to Folha de S. Paulo.

An increase in spending that raises pressure on public debt, the main point of conflict between the Lula government and the economic elite. The president, who last week attended a dinner with 700 business leaders, has promised spending cuts but alarms economists when he rails against the rigid fiscal discipline they want to impose. He has already warned he will not sacrifice the social agenda, the pillar of all his policy.

Aware that the Workers’ Party is losing ground among the working classes, he approved a tax cut specifically for them and increased taxation on the ultra-rich. Bolsonaro promises tax cuts, the restoration of the fiscal cap, (without providing details), regulatory simplification, and a resumption of privatizations.

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