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Brazil's Lula Hikes Minimum Wage

Wednesday, Dec. 27, 2006

In an early indication of the tussles to come in Lula's second term, Brazil's president has surprised even his own economic team by agreeing to an 8.6 percent hike in the monthly minimum wage to the equivalent of $176 for 2007 -- while promising lower rises in subsequent years. Finance Minister Guido Mantega wanted a lower increase because public-sector pensions, a huge part of the budget, are linked to the minimum wage.

Brazil's social security deficit is now likely to widen, and room for tax cuts in 2007 will be even more limited. It may be that Lula wanted to shore up support within his own Partido dos Trabalhadores by agreeing to a more generous minimum wage than almost anyone expected -- but the immediate consequence is doubt over economic policy in Lula's second term. Doubt that is compounded by the Central Bank's prediction that the economy will grow by 3.8 percent in 2007 -- rather less than the 5 percent Lula and Mantega had predicted.

For more on the economic outlook for Lula's second term, see here.