Economy

Emmanuel Macron and his far-right rival Marine Le Pen will face each other in the second and final stage of the French presidential election on April 24 after beating the other candidates in the first round of voting on Sunday, according to early estimates. With two-thirds of the votes counted, polling agency estimates based on results so far showed Macron winning about 28 per cent and Le Pen 23-24 per cent of the first-round votes, ahead of the far-left candidate Jean-Luc Mélenchon with 20-21 per cent.The result of Sunday’s vote suggests that the 53-year-old Le Pen is closer than ever to winning power for the far right in France and emulating the nationalist victories of Donald Trump in the US and supporters of Brexit in the UK six years ago. Le Pen is sceptical of the EU, has said she would withdraw from Nato’s military command structure and has in the past been an admirer of Russia’s Vladimir Putin. If she wins it would send shockwaves across Europe and the world at a time when Russian forces are waging war on European soil in Ukraine.Alluding to her plan to go beyond her supporters in the far-right Rassemblement National party, Le Pen said she planned to be president of “all the French”. She told cheering supporters that the final vote in two weeks would be to decide the fate of “society and even of civilisation” and that if she won she would restore the country’s “prosperity and grandeur”. These comments follow the theme of her campaign, during which she has strongly addressed the country’s cost of living issue.The latest on the war in Ukraine:

© Zohra Bensemra /Reuters

The Big Read: Amid accusations of crimes against humanity committed by Russian forces, a question arises of whether the international justice system will be able to prosecute the country’s leaders.Diplomacy: Austrian chancellor Karl Nehammer meets Russian president Vladimir Putin today. He is the first European leader to do so since Moscow’s invasion of Ukraine began six weeks ago.Support for Ukraine: British prime minister Boris Johnson met Ukraine president Volodymyr Zelensky in Kyiv on Saturday to pledge additional financial and military aid.Military briefing: Western allies must find a balance between supplying aged kit from former Warsaw pact countries with providing more modern, western-sourced weapons which may require extensive training when time is short.World food prices: Global food prices soared 34 per cent in March compared with the same period last year as the war in Ukraine hit the supply of grains and vegetable oils, according to the UN Food and Agricultural Organization.Energy markets: Japan will ban Russian coal imports, joining the EU and G7 allies to target the country’s energy sector for the first time following Moscow’s invasion of Ukraine. However, EU member states are at loggerheads over demands for an immediate blockade on Russian oil imports.Opinion: Russia’s war in Ukraine has revived the market preoccupation with central banks’ foreign reserves. The issue, explains markets editor Katie Martin, is not whether the dollar will be replaced, but whether smaller currencies take a bigger slice of the pie.Thanks for reading FirstFT Asia. Send any feedback on today’s newsletter to [email protected]. — SophiaFive more stories in the news1. Oil and gas revenues give Russia’s economy a $3.4bn cushion Moscow has boosted the fund that cushions its sanctions-hit economy, thanks to rising energy prices since the start of its war with Ukraine, as it edges closer to its first debt default since 1998.2. Pakistan set to confirm Shehbaz Sharif as new prime minister After Imran Khan was ousted in a no-confidence vote, opposition leader Shehbaz Sharif is expected to take the country’s top job after a parliamentary vote today. Sharif could remain in power until Pakistan goes to the polls again in August 2023. No prime minister has ever completed a full term, but Khan is the first to be removed by parliament in a no-confidence vote.3. US to visit Solomon Islands amid China security pact tensions In a rare high-level visit, the White House’s top Asia official, Daniel Kritenbrink, will fly to the Solomon Islands this month. The trip underscores Washington’s fears that Beijing will gain a strategic toehold in the Pacific, which have intensified after the leak of a draft security pact.4. Peter Thiel accuses ‘finance gerontocracy’ of holding back bitcoin Libertarian tech investor Peter Thiel yesterday accused some of the most powerful players in finance of trying to suppress bitcoin. Speaking at the Bitcoin 2022 conference in Miami, Thiel dismissed revered investor Warren Buffett as a “sociopathic grandpa from Omaha” and said JPMorgan chief executive Jamie Dimon and Larry Fink, head of BlackRock, were part of a “finance gerontocracy”.5. Goldman Sachs offers former partners exclusive access to ‘1869 fund’ The fund invests across multiple private funds managed by the firm’s asset management division. Former partners include Gary Gensler, the chair of the Securities and Exchange Commission, and Steven Mnuchin, who worked as US Treasury secretary in the Trump administration. Malcolm Turnbull, Australia’s former prime minister, is also an ex partner.Coronavirus digestShanghai reported a record 24,952 new coronavirus cases on Sunday as residents remain confined to their homes. Meanwhile, internet censors have cracked down on online complaints about difficult conditions and food shortages in the city.The reluctance for repeated booster shots has driven expected global sales of vaccines to 6bn, down from an earlier forecast of 9bn doses.The day aheadThe EU foreign affairs council gathers in Brussels. The war in Ukraine is a key topic on the agenda.The Bank of Japan holds its quarterly branch managers’ meeting today, with opening remarks delivered by governor Haruhiko Kuroda.Sign up for the FT’s subscriber webinar on the French presidential election today (Monday 11 April) at 5pm London time (midnight Hong Kong) where FT journalists and guests will discuss the results of the first round of voting and their likely impact on France and the rest of the world. Get your free ticket for subscribers at ft.com/francevotes.What else we’re readingLong Covid is an invisible health crisis that’s fuelling labour shortages An estimated 100mn people worldwide suffer from long Covid and many of them have been forced to leave the workforce entirely owing to the debilitating effects of the illness. This has added to an already tight labour market and some companies see it as a serious risk to their business.

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How Kyiv was saved by Ukrainian ingenuity and Russian blunders Ukrainian forces won the battle for the country’s capital with the help of low tech items like gym mats which blocked Russian thermal imaging. Russian mistakes, such as not knocking out Kyiv’s air defence system, helped hand a victory to Ukrainian troops.Is a new era of financial warfare about to dawn? Alphaville editor Robin Wigglesworth looks to the long-term impacts of sanctions on Russia. Such sanctions might become a tempting weapon to deploy more often if the backlash is likely to be minimal and the impact potentially severe.America and China — the defining relationship Competitive co-operation or containment? Martin Wolf reviews two books that set out opposing views on how the US should approach its relationship with superpower rival China. Social media has fully weaponised morality Even as we use the bullhorn of the internet to be more vocally moral, society has become less ethical, rife with inequality and disinformation. From corporate messaging to casual speech, our collective discourse has become deeply concerned with goodness, writes Dan Brooks. Food & DrinkFungi are hot in the science community right now, with a vast new frontier opening up that makes the space race look like a school project. Tim Hayward explores why the future is at our feet.

A selection of fungi More

PARIS (Reuters) – President Emmanuel Macron won’t be able to count on French voters’ traditional anti-far right front in the final runoff and will need to step up his campaign if he is to defeat Marine Le Pen, who has successfully softened her image.Although Macron was projected to win a better-than-expected first round score of 28%, improving on his 2017 result, Macron cannot count on victory: polls forecast a razor-thin margin of victory against Le Pen in the April 24 run-off. In past elections at national, regional and municipal levels, left- and right-wing voters have historically united to block the far right from power, a phenomenon known as a ‘republicain front’. While all mainstream candidates, including those of the conservative Les Republicains and Socialist party, endorsed Macron for the runoff on Sunday night, it is not clear their voters will follow. Moreover, their low single-digit scores were so pitiful that their support may carry little weight.”Among politicians, the republican front is putting itself in motion. It remains to be seen whether voters will follow,” said Mathieu Gallard, head of research at Ipsos France.An Ifop poll taken outside polling stations during Sunday’s vote forecast Macron winning 51% of voter support in two weeks time, a clear indication the “republican front” is crumbling. Complicating Macron’s task, Le Pen has largely dropped her more pugnacious anti-immigration, anti-European Union rhetoric, focusing more on cost of living issues.Another Ifop survey in March showed that fewer than half of all French now found her “scary”. In her speech on Sunday, she painted herself as a unifying figure, who would heal France’s “fractures” and halt the “chaos” supposedly brought about by Macron, a former banker who she said embodied the “power of money” and worked for the few. BATTLE FOR THE LEFTMeanwhile, Macron cannot take left-wing voters for granted.The third-placed candidate, Jean-Luc Melenchon, urged voters not to back Le Pen, but stopped short of endorsing Macron, increasing the uncertainty as to how the projected 21% of voters who backed the far-left firebrand will cast their ballot.Polls show many may decide to abstain.”Macron’s politics … has strengthened the far-right,” voter Lea Druet, 27, told Reuters at Melenchon’s campaign headquarters. She voted for Macron in 2017 and said she would abstain in this month’s runoff. Other Melenchon supporters were still unsure. “I’ll see how the next two weeks go. If the polls say 49-51, at that moment I will vote Macron,” said Guillaume Raffi, 36, a music producer from Montpellier.Macron supporters and campaign insiders say the incumbent leader will have to spend more time campaigning on the ground than he did in the run up to the first round if he wants to counter Le Pen, who has tapped into anger against the rising cost of living and deep-seated discontent towards a distant elite. Macron has acknowledged entering the campaign too late as he focused on dealing with the fallout from the war in Ukraine. “In the second round, Emmanuel Macron will need to roll up his sleeves a bit more than he did for the first,” the former French ambassador to Washington, Gerard Araud, wrote on Twitter (NYSE:TWTR). More

Sunak said he had written to the prime minister asking him to refer Sunak’s ministerial declarations to Christopher Geidt, the independent adviser on ministers’ interests.”I have always followed the rules and I hope such a review will provide further clarity,” Sunak said on Twitter (NYSE:TWTR). Sunak has endured a torrid week in which a substantial increase in taxes came into effect as the tax arrangements of his family also came under scrutiny, and the Sunday Times reported he considered resigning.His wife, Akshata Murty, owns about 0.9% of Indian IT giant Infosys (NYSE:INFY), and has confirmed that she had non-domiciled tax status, meaning she did not pay tax on earnings from outside Britain. While the status was legal, critics said the arrangement was incompatible with Sunak’s decision to raise taxes on workers and employers from April 6 at a time when high inflation is causing a cost-of-living squeeze for many households. On Friday she said she would pay British tax on foreign income.A newspaper report said that Sunak was listed as a beneficiary of offshore trusts linked to his wife’s family business interests, while on Friday he confirmed he only gave up a “green card” for the United States – an immigration status intended for permanent U.S. residents – after he became Britain’s finance minister in 2020.”I am confident that such a review of my declarations will find all relevant information was appropriately declared,” Sunak said in the letter. Geidt, who will lead the review, last year cleared Prime Minister Boris Johnson of a conflict of interest over the refurbishment of his official residence in an report that said the prime minister acted “unwisely” but had not broken the ministerial code. More

Hello and welcome to the working week,Easter is almost upon us — although as Week Ahead readers are well aware it will take a little longer for the orthodox church. This will mean a shorter working week for the next fortnight and we will be taking a break next week.Tragically, one thing that will not be letting up is the war in Ukraine. It will be a key topic on the agenda for the EU foreign affairs council, which gathers in Brussels on Monday. The bloc is under pressure — not least from the EU’s chief diplomat — to do more to punish Russia and the question is whether they will impose a blockade on Russian oil.There will be much discussion about the results of the first round of voting in the French presidential election. You can hear Financial Times journalists and guests sharing their views at a special webinar at 6pm CET on Monday — click here to get your ticket (free for FT subscribers) and follow the live news feed. Just in case you do not have it in your diary — as hard as this is to believe for The Week Ahead subscribers — the second round ballot will be held on April 24.Here at The Week Ahead, we are keen followers of what goes up as well as down and this week we have both: Tuesday is the 61st anniversary of Yuri Gagarin becoming the first man in space, or Cosmonautics Day as it is known in Russia, while Friday is the 110th anniversary of the Titanic sinking to the depths of the Atlantic Ocean.Your comments and suggestions are always welcome — email me at [email protected] dataIt might be a short working week, but it will be packed with economic data, inflation and output in particular, plus interest rate decisions from the European Central Bank and its equivalents in Canada and New Zealand. Mainland China, France, Germany, India, Japan, the UK and the US will all be updating markets on cost of living rises with either consumer price index or producer price index reports, or both.The Bank of Japan will hold its quarterly branch managers’ meeting on Monday, an important opportunity for the central bank to gauge how the Ukraine crisis and rising fuel costs are affecting Japan’s regional economies.The ECB rates decision will be closely watched and will perhaps include a mea culpa about its previous estimates on inflation being too optimistic. However, it is expected to hold rates. On the other hand, expectations are that the Bank of Canada will extend its tightening cycle with a 50 basis points rise to 1 per cent and the Reserve Bank of New Zealand will ratchet up its base rate 25 basis points to 1.25 per cent.It’s a busy week too for UK data with a GDP estimate, monthly activity indicators, labour market data and retail sales figures, all before the nation’s markets take a break for Good Friday.CompaniesAnother earnings season kicks off in earnest this week and the headliners will be US banks, starting with JPMorgan Chase on Wednesday, and retailers, notably Tesco and Asos. There are high expectations for US banks to report higher net interest income for the first quarter but this might not be sufficient to offset the hit to profits from declines in investment banking, as Russia’s invasion of Ukraine has taken the wind out of corporate dealmaking.Labour costs and food price inflation are a concern for the supermarket sector — as my colleague Cat Rutter Pooley explained so clearly this week — so investors in Tesco, the big daddy of the UK sector, will want to see how these have affected the bottom line. On the one hand, the company has said it will cut more than 1,000 roles to reduce its reliance of more expensive night work. On the other hand, it has just announced a staff pay rise that will mean everyone earns at least £10.10 from July, which brings Tesco into line with rivals Morrisons and Sainsbury’s.Key economic and company reportsHere is a more complete list of what to expect in terms of company reports and economic data this week.MondayChina, March consumer price index (CPI) and producer price index (PPI) dataCzech Republic, March CPI dataJapan, March PPI figures plus the Bank of Japan holds its quarterly branch managers’ meeting with opening remarks delivered by governor Haruhiko KurodaUK, March GDP estimate plus trade figures and construction output dataTuesdayAirbus AGMDeliveroo Q1 trading updateEU, European Central Bank’s Q1 euro area bank lending surveyFrance, February trade figuresGermany, March CPI data plus ZEW economic sentiment surveyIndia, February industrial production figures plus March CPI dataOrganization of the Petroleum Exporting Countries monthly oil market reportUK, labour market statisticsUS, March CPI dataResults: Asos H1, JD Sports FYWednesdayCanada, Bank of Canada interest rate announcementEU, February industrial production dataItaly, February industrial production figuresNew Zealand, Reserve Bank of New Zealand monetary policy meetingUK, March CPI and retail price index (RPI) dataUS, March PPI figuresResults: JPMorgan Chase Q1, Tesco H1ThursdayDunelm Q3 trading updateEU, European Central Bank’s monetary policy meeting in FrankfurtIndia, trade statisticsIsrael, Q4 GDP figuresUK, Q1 credit conditions and bank liabilities surveysUS, March retail sales figuresResults: Citigroup Q1, Ericsson Q1, Goldman Sachs Q1, Morgan Stanley Q1, State Street Q1, TSMC Q1, Wells Fargo Q1FridayFrance, Italy, Poland: March CPI figuresUS, March industrial production figuresWorld eventsFinally, here is a rundown of other events and milestones this week. MondayBelgium, EU foreign affairs council gathers in Brussels with an agenda that includes discussion on what to do in light of the Ukraine war.South Africa, corruption trial of former president Jacob Zuma is due to resume before the KwaZulu-Natal high court in PietermaritzburgTuesdayEU, Equal Pay Day marks the day of the year up to which women need to work in order to earn the same salary as men during a full year of workRussia, Cosmonautics Day celebrates the anniversary of the first human space flight on April 12 1961 by Soviet cosmonaut Yuri GagarinWednesdayNew Zealand, Australians allowed to enter the country without needing to quarantine or isolate for the first time since March 2020UK, end of Hilary term, the first term of the legal year in England and WalesUS, Thomas Jefferson Day commemorates the birthday of the third president plus current vice-president Kamala Harris speaks at a fundraising event for the Democratic National Committee in WashingtonThursdayNorth Korea, anniversary of the birth of late North Korean leader Kim Il SungSikh festival of Vaisakhi, marking the Sikh New YearFridayIsrael, Christians gather for Good Friday services in Jerusalem110th anniversary of the sinking of the TitanicJewish festival of Passover (Pesach) beginsUK, 33rd anniversary of the Hillsborough disaster — where 96 Liverpool football fans were killed — will be marked in the city with a memorial serviceUS, deadline to file individual tax returnsSaturdayThe Netherlands, the Invictus Games for wounded, sick and injured service personnel begins in The HagueUS, Pillow Fight in the Park returns to Washington Square Park in New York after Covid forced its cancellation in recent yearsSundayVatican City, Pope Francis leads Easter Sunday Mass in St Peter’s SquareUK, the World Snooker Championship — the sport’s most important tournament — begins at the Crucible Theatre in Sheffield More

By making home, auto and other loans more expensive, Fed interest rate increases and other actions “will help reduce excess demand, which is outpacing constrained supply, and bring price pressures down,” to the Fed’s 2% inflation target, Mester said. “I think it will take some time. … Inflation will remain above 2% this year and even next year. But the trajectory will be moving down.”The Fed is planning a steady series of interest rate increases this year and expects also to trim its holdings of Treasury bonds and mortgage-backed securities as a second method for lifting the cost of credit to businesses and households. Mester, who has said she favors a more aggressive pace of rate increases than some of her colleagues, said she was “optimistic” the current economic expansion and strong job market would continue despite tighter monetary policy.”I think we can reduce excess demand relative to supply without pushing the economy into recession,” Mester said. “It is very important that we get inflation under control. That is the biggest challenge right now.” Annual inflation by the Fed’s preferred measure is currently 6.4%, a level Mester acknowledge was a “real painful problem” for many families. An unemployment rate of 3.6%, low by historical standards, is producing large wage gains for many workers but for many prices are still rising faster. President Joe Biden on Twitter (NYSE:TWTR) Sunday threw the focus on the job market, considered by some economists as among the strongest since World War II.”Americans are getting back to work at a historic pace. Over the last four weeks, fewer Americans filed initial claims for unemployment insurance than at any time in our nation’s recorded history,” Biden said. More

OTTAWA (Reuters) – Canada has an ambitious plan to double the pace of homebuilding within a decade but the first big challenge is finding enough skilled workers, as the country grapples with the tightest labor market on record and with construction already at a multi-year high.Building more homes is a key peg of the C$9.5 billion ($7.5 billion) in housing spending outlined by Prime Minister Justin Trudeau’s Liberal government in their budget on Thursday.The average selling price of a Canadian home has surged more than 50% in the last two years, driven by record low interest rates and tight supply. Construction has failed to keep pace with immigration-driven population growth.But the plan to build hundreds of thousands of new homes runs counter the reality that home building is generally the purview of municipal and provincial governments, leaving the federal government little role beyond handing out money. “It’s very ambitious. I would say it’s going to be equally challenging to pull it off, simply because the construction sector is already more or less operating at full capacity,” said Robert Kavcic, senior economist at BMO Economics.”And we are already building a record number of homes in this country.”Canada has the lowest number of housing units per 1,000 residents of any Group of Seven nation, and that has been on the decline due to population growth, Bank of Nova Scotia economists said https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.housing.housing-note.housing-note–may-12-2021-.html in a report last year. There are nearly 300,000 units under construction across Canada, compared with about 240,000 just two years ago, government data https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-data/data-tables/housing-market-data/housing-starts-completions-units-under-construction shows.Canada is building “a lot and not enough,” said William Strange, professor of economic analysis and policy at the University of Toronto. “We’ve taken decades getting into this situation and we’re not going to get out of it in six months.”Canada has added more than 100,000 construction jobs in the last four months alone, a historic run of increases for the sector. Overall jobless rate fell to a record 5.3% in March. “Just the sheer volume of work that exists within the industry (creates) a lot of pressure on the various trades,” said Jim Ritchie, chief operating officer of Tridel, which develops condominiums in the Toronto area.”So there’s a lot of demand for that workforce.”Canada’s immigration program could be a double-edged sword, as it brings in more skilled workers to replace a fast-retiring workforce, but also fuels housing demand. There is also a mismatch between the workers Canada is currently targeting and those it needs.”Right now, our immigration policies are more geared towards attracting white collar labor than blue collar labor,” said Mike Moffatt, senior director of policy and innovation at the Smart Prosperity Institute.Construction costs rose nearly 10% in 2021 and are set to climb again, driven by higher labor and materials costs, adding to the near-term challenges, said Ritchie of Tridel.Municipal and provincial approval delays, which the federal government hopes to address with a C$4 billion “Housing Accelerator Fund,” and the availability of land add to the hurdles. “There a whole bunch of levers that need to be pulled and increasing labor supply… is one of them,” said Justin Sherwood, a spokesperson for the Building Industry and Land Development Association in the Toronto area.Still, Canada’s Finance Minister Chrystia Freeland was undeterred. “We are going to do everything we say we’re going to do,” she told reporters on Thursday when asked about the challenge of meeting the plan. “A growing population needs a growing housing supply.”($1 = 1.2588 Canadian dollars) More

The sanctions, imposed after Russia invaded Ukraine on Feb. 24 in what Moscow describes as a “special military operation”, cut Russia off from the global financial system and supply channels.Western nations are also moving closer to a complete ban on energy from Moscow to strip the Kremlin of its biggest source of revenue.The government has already pledged more than 1 trillion roubles in anti-crisis support to businesses, social payments and to families with children, which will take up all of this year’s incoming revenues, so there will be no budget surplus.”The funds, among other things, will be used to implement measures aimed at ensuring economic stability in the light of external sanctions,” the government said in a statement on Sunday.The government’s reserve fund is a cash cushion to be used for unexpected spending that was not projected in the state budget. Last year, it was used for one-off social payments and to fight the pandemic. The government said the main source of the reserve fund’s increase was 271.6 billion roubles in additional energy revenues received in the first quarter, as oil and gas prices rose in response to the recovery from the impact of COVID-19 and the Russia-Ukraine conflict raised the risk of disrupted supply.Russia supplies around 40% of the European Union’s natural gas consumption, which the International Energy Agency values at more than $400 million per day. The EU gets a third of its oil imports from Russia, about $700 million per day. ($1 = 77.7500 roubles) More

Brazil needs to overhaul its fiscal rules and increase public spending to boost growth, said a top economic adviser to the leftwing Workers’ party, which is favourite to return to power in elections this year.Guilherme Mello, a professor of economics at Unicamp, said Brazil’s trifecta of fiscal laws — long considered anchors of stability for many in financial markets — were at best outdated, and at worst “out of this world”.“We have to review the rules. The best thing we can do is to sit down and say: ‘Let’s speak seriously. We need a new set of fiscal rules, it can be one rule, two rules, a new set that respects the principles of good fiscal rules,” Mello said. European leaders, such as Emmanuel Macron of France and Mario Draghi of Italy, were also calling for a new approach to fiscal policy, he noted. Known by its Portuguese initials PT, the Workers’ party is headed by Luiz Inácio Lula da Silva, a former trade unionist who was president of Brazil for two terms between 2003 and 2010. He is favourite to beat far-right incumbent president Jair Bolsonaro in elections in October.“[The new set of rules] must be flexible, it must be countercyclical, it must help stabilise the debts in the long run, it must help the state plan spending. Let’s create fiscal rules that are aligned with the world experience,” said Mello, who co-ordinates the economic policy team at the PT’s official think-tank. Brazilian government spending is constrained by three rules: the law of fiscal responsibility, which sets rules on budgetary transparency; the golden rule, which forbids the government from incurring debt to pay current expenses; and the spending ceiling, which for 20 years limits budget increases only to inflation.Of the three, the spending cap — known locally as the teto — is the most divisive. For investors, it is a fiscal anchor that prevents out-of-control spending in an emerging economy, where gross debt reached almost 90 per cent of GDP in 2020.But Mello said the spending ceiling is “not only outdated, it is out of this world. No country in this world has this rule. No economist looks at this and says it is a good idea to freeze spending for 20 years.” He added that the teto had lost credibility given that it had been circumvented so many times under the Bolsonaro administration. Under Lula, the PT’s tenure in government was marked by increased spending on social assistance programmes, such as the Bolsa Familia cash transfer scheme, as well as big infrastructure works, notably in transport, energy and water resources. Much of it was funded from record tax collection as a result of the commodities boom.

Following a deep years-long recession under Lula’s successor, Dilma Rousseff, however, the direction of policymaking changed, with subsequent rightwing administrations opting for fiscal rectitude in the hope of attracting private investment to Latin America’s largest economy.Mello said this approach has been a “huge failure”, noting economic growth since then has largely stalled and that there is now “more poverty, more misery, more inflation and more hunger”.“The direction from 2016 to 2021 was to shrink the state and hope that the private sector would do everything. This strategy cannot continue,” he said. “Brazil is not [bankrupt]. Public spending . . . can be very important to create the conditions to foster growth, diminish inequality, create infrastructure. When you do this, it is an investment that will help increase GDP and reduce debt in the longer run.”The rhetoric is likely to cause consternation among investors, who have largely applauded the Bolsonaro administration’s more restrained attitude towards spending. But Mello argued spending is an effective tool if wielded smartly.“Brazil can spend more if it spends right. You have to choose public programmes that have some characteristics. They must have a high fiscal multiplier in the sense they create more income and jobs; they must have a social impact and they must create conditions for the future,” he said, arguing, for example, that investments in energy infrastructure would lower electricity costs and support the broader economy.Sergio Vale, chief economist at MB Associados, said it was “unavoidable” that the PT would attack Brazil’s fiscal rules if it returned to power given changing global attitudes towards spending.“The problem is that the fiscal situation today is worse than what Lula inherited in 2003. We are going to end the year with a debt of around 84 per cent of GDP, a primary deficit above 1 per cent of GDP and very high interest rates. It’s no use for the government to want to spend if the space for it doesn’t exist,” Vale said.Abolishing the spending cap would be fine if it was replaced by a better rule, but that is not likely to happen, he added.“Their idea seems to be to undo the rule and increase public and social investments, but without a strong adjustment in the rest of spending, this will mean an even greater deficit and an even more serious situation.” For Mello, the clearest validation of his approach was seen during the first year of the pandemic when the Bolsonaro administration unleashed a stimulus worth 8 per cent of GDP, which included a cash handout of R$600 (US$130) per month for nine months to millions of Brazil’s poorest. The programme is credited with reducing the size of the economic contraction in 2020 to minus 4 per cent, considerably better than initial forecasts of minus 9 or 10 per cent.“What we proved in 2020 is that social transfers work. They work for GDP, they work to fight poverty and to fight hunger.”Additional reporting by Carolina Ingizza More