As is well known, Lula surprised investors by committing his government to maintaining the pillars of macroeconomic stability introduced by his predecessor: a floating exchange rate, primary budget surpluses (before debt payments) big enough to keep the ratio of public debt to gross domestic product on a downward course, and inflation targeting, under which the central bank has been free to set interest rates to keep inflation in check.

But while monetary policy has been consistently tight under Lula, fiscal policy has been fast and loose. The structural reforms left undone by the previous government (often due to PT opposition) have made almost no progress. And while quicker economic growth (the fruit of stability and benign global conditions) and more efficient collection have boosted the government's tax receipts, spending has kept pace.

The central bank continues to fight inflation, last week surprising many economists with a 0.75 percentage point increase in its Selic overnight rate to 13 per cent a year - the third and biggest hike this year. But the bank is battling against increasingly loose fiscal policy. According to a weekend editorial in O Estado de S. Paulo, the government's tax take has risen by R$31.4bn this year and spending on payroll by R$32.1bn. Meanwhile, also this year, the government has created 56,000 civil service jobs, of which 10,000 will be filled this year and the rest up to 2012 - two years into the next government. A cursed inheritance indeed.

Jonathan Wheatley