By Marcela Ayres, Lisandra Paraguassu, Bernardo Caram and Paula Arend Laier
BRASILIA (Reuters) – Brazil’s latest cabinet shuffle has left Finance Minister Fernando Haddad with no strong supporters in President Luiz Inacio Lula da Silva’s inner circle for his moderate fiscal approach, fueling fears of a populist pivot to revive the aging leftist leader’s popularity.
Haddad, who has butted heads with members of the cabinet who favor ramping up spending despite a solid economy and rising inflation, had looked to outgoing Institutional Relations Minister Alexandre Padilha for support during policy debates and to lead negotiations with a Congress dominated by conservatives.
The cabinet shuffle announced on Tuesday made Padilha the new health minister. On Friday, the government announced that Gleisi Hoffmann, the president of Lula’s Workers Party (PT) and a staunch advocate of state-driven economic stimulus, would take over his former role.
Hoffmann has criticized the Finance Ministry for pursuing what she sees as a punishing austerity campaign and lambasted the central bank’s monetary tightening, even as Haddad publicly acknowledged the need to slow the economy to avoid imbalances.
“The problem for Haddad is that his strongest opposition comes from within his own party because no one, including the president, believes that spending cuts should be a priority,” said Ricardo Campos, CEO and chief investment officer at Reach Capital. “For this government, what matters is spending to keep the economy moving.”
A government source, speaking anonymously due to the confidential nature of discussions, said Lula’s allies have pushed for measures to curb food prices, including unconventional proposals such as taxing exports, an approach Haddad opposes.
Rising inflation has helped tank Lula’s approval ratings, overshadowing stronger-than-expected economic growth and historically low unemployment in Latin America’s largest economy.
The Finance Ministry declined to comment.
GROWING HOSTILITY
The cabinet reshuffle has strengthened a circle of aides around Lula who, whether publicly or privately, oppose Haddad’s agenda for what they see as an excessive focus on fiscal austerity. The group is led by Chief of Staff Rui Costa and Mines and Energy Minister Alexandre Silveira.
Two Finance Ministry officials, also speaking anonymously, acknowledged a growing hostility toward Haddad within the government but maintained there is firm internal conviction in sustaining his policy agenda.
Haddad’s influence has waned as Lula’s third non-consecutive term in office reaches its mid-point and the 2026 presidential election approaches, two sources close to Haddad said. The minister, they added, has privately acknowledged he is close to losing this tug-of-war.
But no one expects Haddad, who was the PT’s presidential candidate in the 2018 election, to quit.
“He believes he has a job to do, and he will do it as well as he can. We just shouldn’t expect to see him fighting anymore,” one source said.
Andre Esteves, chairman of Brazilian financial firm BTG Pactual, voiced support for the finance minister at an event on Tuesday, saying he was “proud to have Haddad at the helm of the Finance Ministry” and that “it is up to us to support his battle for economic common sense.”
But others in the private sector have deep reservations about Haddad’s policy approach. While the minister has stressed that fiscal accounts can be improved, he argues the focus should not be solely on that matter, noting that the central government delivered its best primary budget outcome in a decade last year, backed by a new fiscal framework passed by Lula.
Excluding interest payments, the 2024 primary deficit stood at 0.38% of gross domestic product, according to central bank data, well below initial market estimates and a sharp improvement from the 2.42% deficit in the previous year.
However, it fell short of the 0.55% surplus recorded in 2022 under former President Jair Bolsonaro.
Haddad’s team argues Bolsonaro’s figures were artificially boosted by the suspension of court-ordered debt payments, which were regularized under Lula.
Critics, however, counter that Lula, 79, has permanently increased mandatory spending, relying on higher but uncertain revenues to offset the impact. This compensation has not materialized even amid strong economic growth and record tax collection in 2024, raising doubts about when and how Brazil would stabilize its growing public debt.
For now, the economic outlook hasn’t deteriorated sharply. The Brazilian real, which lost more than 20% against the U.S. dollar last year, has gained more than 5% on a year-to-date basis, benefiting from a more favorable environment for emerging markets as concerns ease over U.S. President Donald Trump’s trade policy.
Amid the market lull, Haddad announced that the government would soon introduce new rules for payroll-deductible loans and release resources from a private sector workers’ severance fund, measures that could stimulate the economy even as the central bank aggressively raises interest rates to cool it.
The tension between officials who want more spending and the economic team “is normal in any government,” said Roberto Ellery, an economist at the University of Brasilia. “But there is a perception in the current government that the economic team is losing out more than normal.”
(Reporting by Marcela Ayres, Lisandra Paraguassu and Bernardo Caram in Brasilia, and Paula Laier in Sao Paulo; editing by Manuela Andreoni and Paul Simao)
