Oct. 30 (Bloomberg) -- Brazil's benchmark stock index had its biggest decline in almost a month and bonds and the currency fell on concern President Luiz Inacio Lula da Silva will increase spending in a second term to stimulate economic growth.

Lula, the former union leader who won re-election yesterday with 61 percent of the vote, vowed to double the pace of economic growth in the next four years and keep spending in check. His pledges include plans to build more roads and railways and put a greater emphasis on impoverished regions, where the government increased cash handouts during the first term.

``Who is going to pay for all the things Lula plans to do, for all the people he has put in the government, for all the bills coming due?'' said Plauto Fraga, a currency trader at Corretora Souza Barros, a Sao Paulo-based brokerage. ``If Lula doesn't manage to build a coalition right away, we are in for a lot of trouble.''

The Bovespa stock index dropped 1.4 percent to 38,768.79 at 12:32 p.m. in New York, the steepest decline since Oct. 3. Brazil's currency fell for the first day in four, losing 0.38 percent against the dollar. The yield on the benchmark dollar-denominated bond due 2040 rose for the first day in four.

Lula, 61, beat former Sao Paulo state Governor Geraldo Alckmin on promises he will accelerate economic growth and create jobs. Lula maintained support amid allegations of government corruption by tripling the number of families who receive stipends to send their children to school and raising the minimum wage.

Inflation Versus Growth

``Is the government going to spend more? Is it going to sacrifice inflation to spur growth?'' said Fabio Cardoso, who helps manage about 400 million reais for Maxima Asset Management in Rio de Janeiro.

The yield to the 2015 call date on Brazil's benchmark 11 percent bond due in 2040 rose to 6.28 percent, and the yield to maturity rose to 8.232 percent from 8.225 percent, according to JPMorgan Chase & Co. The bond's price, which moves inversely to the yield, fell 0.10 cent on the dollar to 131.40.

``We are ready to enter a new stage,'' Institutional Affairs Minister Tarso Genro said in an interview in Brasilia. ``We obtained macro-economic balance, a great amount of reserves, interest rates are coming down, so we are convinced we could have low inflation and faster growth.''

`Leap Ahead'

The president's spending pledges have raised concern among some investors after the government boosted expenditures 16 percent in the first nine months of the year, more than the 12.8 percent increase in tax collection during the same period. Lula's spending cuts upon taking office in 2003 helped spark a rally in the nation's bonds, stocks and currency.

``There's been almost a continuous rise in public spending as a proportion of'' gross domestic product, said Philip Poole, head of emerging markets research at HSBC Holdings Plc in London. ``It's imperative that, under this new administration, this is topped and rolled back, and inevitable means tackling spending on social issues.''

Lula may keep most of his economic team unchanged, including Finance Minister Guido Mantega, Planning Minister Paulo Bernardo and central bank President Henrique Meirelles, said James Barrineau, who helps manage $9 billion in emerging-market debt at Alliance Bernstein, said in a phone interview from New York.

Lula will work to persuade investors that anti-inflation policies will be maintained, said William Landers, who manages $4 billion of Latin American assets for Blackrock Inc., said in a phone interview from Plainsboro, New Jersey.

``Continuity is always good for investors, though they will look for signs of renewed fiscal efforts by Lula's next administration, especially because spending rose ahead of elections,'' Barrineau said in a phone interview from New York.

Inflation

Inflation dropped to 3.7 percent from 14 percent during Lula's first term, the currency strengthened and unemployment declined.

``Investors expect Lula to make positive announcements this week regarding economic policies in the direction of continuing what we saw in the first term,'' Landers said. He also expects Meirelles to remain as president of Brazil's central bank though believes ``there's some doubt over whether Mantega stays or not.''

Lula, who sold peanuts in the streets as a child and now commands a $790 billion economy, last night underscored his commitment to fiscal restraint.

`Strict Policy'

``We're going to have a strict fiscal policy,'' Lula said. ``We can't spend more than we earn.''

Lula said he expects the economy, Latin America's largest, to grow 5 percent next year, twice the 2.5 percent average rate of his first term. Neighboring Argentina is growing at three times that level. He also pledges to lower social security costs, limit bureaucracy and improve conditions for investment in the country.

Some of that growth will be powered by infrastructure projects already underway, Lula said.

``The solution to Brazil's problems isn't to make the people suffer with onerous adjustments, but rather through economic growth and higher income levels,'' Lula said last night.

His victory gives another four years to the first working- class government in Brazil, where a military dictatorship fell just over two decades ago. Lula ran unsuccessfully for president three times before his 2002 win.

Lula lost support ahead of the first-round vote Oct. 1 because of charges of graft that dogged his administration during his first four years and cost several of his top aides their jobs.

Mantega

Mantega, a former president of Brazil's state development bank, was named finance minister on March 27 after Antonio Palocci quit amid allegations he was involved in violations of bank secrecy laws.

A first goal for Lula is to build a coalition in Congress to push through promised legislation, John Welch, senior Latin America economist at Lehman Brothers Inc., said in a phone interview from New York. He needs backing from the Democratic Movement Party, known as the PMDB, Welch said.

``The support from the PMDB will be key for Lula to approve important legislation in Congress next year,'' Welch said. The PMDB elected 89 deputies in Brazil's lower house, more than any other party, and won 16 seats in the Senate.

To contact the reporters on this story: Andrew J. Barden in Sao Paulo barden@bloomberg.net Fabio Alves in Brasilia at Falves3@bloomberg.net

Last Updated: October 30, 2006 12:51 EST