Brazil’s Fiscal Framework Faces Credibility Test as Lula Government Defends Growth-Oriented Budget Strategy

Sergio Gabrielli, coordinator of President Lula’s government program, stated that fiscal rules cannot oppose economic activity and emphasized combining fiscal balance with growth objectives. Speaking to CNN Brasil, Gabrielli defended the fiscal framework implemented during Lula’s third term but noted that “other instruments exist to balance the accounts.” The government program, due for delivery to Lula and his coalition by July 15, maintains that spending cuts targeting vulnerable populations would weaken economic activity and ultimately harm public accounts through reduced revenues. The administration calculates debt relative to GDP, arguing that a cooler economy would negatively impact fiscal metrics.

The Independent Fiscal Institution, linked to the Senate, identified R$ 60.7 billion in uncertain revenues within the 2026 budget proposal, including R$ 40.7 billion conditional on legislative approval and R$ 20 billion expected from tax settlements with taxpayers. The institution projects an effective primary deficit of R$ 103 billion (0.7% of GDP) in 2026, compared to the government’s targeted surplus of 0.25% of GDP. The IFI forecasts GDP growth of 1.7% versus the government’s 2.4% projection, while estimating inflation at 4.3% against the official 3.6% figure.

At the Anbima Summit in São Paulo, economist Eduardo Giannetti warned that Brazil faces a structural fiscal problem requiring urgent action. Giannetti noted that 93% of budget resources are committed before collection due to mandatory expenses including social security and interest payments totaling 23% of GDP. He criticized automatic indexation of benefits to minimum wage and spending floors that constrain budget flexibility, plus subsidies reaching 6-7% of GDP including Manaus Free Zone incentives.

Ana Vescovi, macroeconomics director at Santander Brasil, stated the central government maintains a structural deficit of 1% of GDP, warning that 4% annual real spending growth proves unsustainable without equivalent economic expansion. She indicated tax increases would suffocate businesses and potential growth unless spending growth falls below 2%. Carlos Kawall of Oriz Partners compared Brazil’s fiscal trajectory to a car with the accelerator floored since the Real Plan, criticizing expansionist changes approved since 2021. He observed that traditional correlations between unemployment and government approval have broken down, with historically low unemployment coinciding with declining presidential approval ratings.

The IFI directors noted that Brazil’s fiscal situation, while less acute than Argentina’s, shows deterioration through explosive debt growth, low investment levels, and loss of framework consistency. They stated that meta changes and expense exclusions from spending limits compromise the framework’s role as a fiscal solidity indicator, rendering the fiscal rule ineffective as decision-makers focus on effective primary results and debt dynamics rather than official targets.