The two-stage municipal elections held in October 2012 were closely watched as a gauge of the effect of a notorious vote-buying scandal on the popularity of the main governing PT. In that regard, the results suggest that the PT remains in a strong position to retain control of the presidency in 2014.

The respectable showing of the PSD convinced President Dilma Rousseff to invite the new party to formally join her government. The move will lessen her dependence on the not-always-reliable PMDB in the near term, and reduces the danger that the PSD might team up with one or more opposition parties to challenge the PT at presidential and congressional elections in October 2014.

Rousseff’s expanded majority will not count for much when it comes to breaking an impasse over legislation altering the formula by which royalties on oil production are distributed among Brazil’s 27 states. More than 170 post-salt licenses are scheduled to be auctioned in May, and the much anticipated offer of licenses for offshore pre-salt fields is supposed to commence in November.

However, with the Congress seemingly prepared to override a presidential veto of key portions of the bill, and the oil-producing states threatening to block implementation through the courts, the possibility that the auctioning of licenses might be delayed yet again cannot be ruled out.

President Rosseff has indicated that the 2013 budget—approval of which has been delayed by the congressional impasse over the royalties bill—will extend tax breaks introduced in 2012 as part of a package of stimulus measures. Critics have warned that the extension of the tax breaks could threaten the government’s ability to achieve the mandated primary surplus of 3.1% of GDP.

Any sustained relaxation of fiscal discipline would carry a risk of fueling inflation, which could prompt aggressive monetary tightening that stalls an economic recovery. The government will have a strong political incentive to avoid triggering tightening moves by the central bank, a consideration that will limit the risk of a destabilizing relaxation of fiscal discipline.

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