Divisions and policy confusion in Brazil’s new government

In his government’s first week, Brazil’s new President Jair Bolsonaro faced divisions between his political and economic teams over plans to overhaul a messy tax code and costly pension system to bring a high budget deficit under control.

President Bolsonaro’s comments in interviews and Twitter posts have been at odds with senior aides, which has supposedly concerned investors who expected the government to arrive focused on a swift pension reform to shore up its finances before tackling an array of hot-button social issues and foreign policy proposals. President Bolsonaro told reporters he was increasing the tax on financial operations and cutting the highest income tax rate, prompting a quick denial from an undersecretary to Economy Minister Paulo Guedes, with Chief of Staff Onyx Lorenzoni later, saying the President was mistaken.

Investors had been pleased at the team of orthodox economists assembled by Minister Guedes, many of whom are fellow alumni of the University of Chicago’s free-market school of economics. Investors fear the government will turn first to the social issues dear to President Bolsonaro’s conservative electoral base, burning political capital needed for the unpopular pension reform.

Brazil's stock market has been one of the best performing in the world over the past six months, with the benchmark Bovespa stock index .BVSP climbing 25 percent as President Bolsonaro won election in October and appointed his market-friendly cabinet. Wednesday saw a record high for the Bovespa. “Optimism about the new Brazilian government is adding to the global scenario,” the President said on Twitter.

President Bolsonaro had proposed in an interview with the SBT television network that the new minimum retirement age would be 62 for men and 57 for women, higher than now but lower than ages proposed by the previous government. Investors read that as a sign that he could water down the bill written by the prior government to limit the political costs, easing passage through Congress but requiring further legislation down the road. Minister Guedes has said he favors a tougher proposal that may be politically difficult but would make a larger and more lasting impact on public debt, which has soared to 77 percent of gross domestic product.

The political and economic teams are at odds. There is a lack of cohesion and even coordination between President Bolsonaro’s closest aides,” said Leonardo Barreto, head of Brasilia-based political consultancy Factual. He also said Minister Guedes is taking an all-or-nothing approach to fiscal reforms, while Chief of Staff Lorenzoni has signaled he would make concessions to lawmakers to shore up political support. The contradictions highlight broader tensions in Bolsonaro’s government, which brings together statist former military officers, right-wing nationalists, the Chicago-trained economists, and Christian evangelicals, all of whom have different priorities within the coalition.