Institutions have been pointing out for years the need to promote greater fiscal sustainability — Photo: Getty Images via BBC
The need to rebalance public accounts to resume primary surpluses, reduce interest rates, stimulate sustained growth and, thus, contain the increase in Brazilian public debt is not only defended by Brazilian analysts.
In a speech on Sunday (8), President Luiz Inácio Lula da Silva (PT) said he was concerned about the trajectory of public debt, reaffirmed his commitment to fiscal responsibility and promised to create conditions for reducing interest rates, but did not announce concrete measures.
In Brazil, economists' assessments that a more effective fiscal adjustment would be necessary to improve the economy date back even before the beginning of President Luiz Inácio Lula da Silva's third term, in November 2022, still in the transition of the Jair Bolsonaro government.
At that time, analysts already considered more forceful cost containment measures to be essential to offset the expansion of public spending foreseen in the so-called Proposed Amendment to the Constitution (PEC) of the Transition — which expanded the spending space by around R$170 billion per year.
Recommendations from international financial organizations, such as the International Monetary Fund (IMF), the World Bank (IBRD) and the Inter-American Development Bank (IDB), are also nothing new.
These institutions have been pointing out for years the need to promote greater fiscal sustainability and also proposing some measures to contain the increase in debt — which puts pressure on interest rates.
Reticent about the possibility of a more robust adjustment in public accounts, the market reacted negatively after his victory in the elections. There was a sharp drop in the stock market, a rise in the dollar and an increase in future interest rates, while projections for the economy deteriorated.
What multilateral institutions say
To break the current dynamic of pressure on inflation, interest rates and public debt, international financial organizations assess that it is necessary to strengthen public accounts.
Although the proposals vary, they mainly include controlling expenditure growth, reviewing mandatory spending and reforms that contribute to stabilizing public debt.
In July 2025, the International Monetary Fund (IMF) released a document on the so-called "article IV", an economic supervision mechanism for its member countries.
At that time, he noted that the Brazilian economy recorded strong growth in the last three years, that inflation grew especially in 2024 amid strong demand, rising food prices and currency devaluation, exceeding the target tolerance range.
"[IMF] directors praised the authorities' efforts to continue improving the fiscal situation and recommended additional measures to place public debt on a sustained downward trajectory, facilitate a lower interest rate trajectory and open space for priority investments", they say in the document.
The IMF also assessed that measures aimed at mobilizing revenue, including rationalizing inefficient tax expenditures and combating budget rigidity, would support these efforts. "An improved fiscal framework with a strong medium-term anchor would reinforce fiscal credibility and sustainability," added the international body.
In June last year, the World Bank released the document "Policies to Achieve Fiscal and Environmental Sustainability: Review of Brazil's Public Finances". In it, he assessed that "persistent fiscal deficits combined with low levels of economic growth have led to a continuous increase in public debt, which reinforces the need for fiscal adjustment."
The institution assessed that the main factors behind the increase in the ratio between debt and GDP have been the increase in current expenses, especially with social transfers, which mainly benefit the growing number of elderly Brazilians, and concluded that the country would need a fiscal adjustment in the order of 3% of GDP to ensure fiscal sustainability.
He recommended cutting benefits for the richest, expanding the tax base for personal income tax (something that the Lula government did in reverse, further limiting the base and distancing itself from rich countries) and increasing rates for large fortunes and "high incomes", and listed a series of suggestions for spending cuts.
They are:
eliminate indexation rules and expenditure rigidities to create more space in the budget for public policy priorities;
align public sector salaries with private sector benchmarks;
unlink social assistance pensions and the social security floor from the minimum wage and adopt a proportional calculation for contributory pensions based on years of contribution;
equalize retirement ages and social security contribution rates;
reform military pensions, increasing their contribution rate and aligning benefits with those of other regimes;
direct the salary bonus to low-income families; and
sequence the FGTS savings to be used first, before accessing unemployment insurance.
In 2023, the Inter-American Development Bank (IDB), headed by Brazilian Ilan Goldfajn, who presided over the Central Bank under Michel Temer, observed that a level of debt considered safe for a typical country in Latin America and the Caribbean would be around 46% to 55% of GDP. Currently, Brazilian debt stands at 83% of GDP.
The study says that if debt levels become too high, or if debt management is not effective, interest rates rise and the cost of debt service becomes too onerous, which generates bad consequences: "investment and growth suffer".
In November 2024, the IDB released its strategy for Brazil until 2027. In it, the organization assessed that Brazil's fiscal imbalances continue to be a challenge and noted that the country's debt/GDP ratio was already among the highest in Latin America and the Caribbean.
In the document, the multilateral institution states that strengthening the fiscal framework would be essential to provide better social protection, while maintaining macroeconomic and socioeconomic stability, an indispensable condition for robust and sustained growth.
And he points out that one of the strategic objectives would be “to improve the quality of public spending and the sustainability of public debt”.
"Structural reforms are essential to face this problem and avoid a low-quality fiscal adjustment that could penalize investment and harm the well-being of vulnerable groups", says the Inter-American Development Bank, in its analysis.
The document concludes by assessing that addressing fiscal imbalances will allow the government to "invest more effectively, ensuring the well-being of its citizens and paving the way for long-term economic prosperity."
What happened in the Lula 3 government
In 2023, the Lula government approved the fiscal framework, a rule that made a higher spending limit permanent after the Transition PEC, set targets for public accounts and allowed real spending growth of up to 2.5% per year.
The previous ceiling, established by Temer and maintained by Jair Bolsonaro, only allowed expenses to be corrected for the previous year's inflation.
During the current government, the economic team made the goals of the government accounts more flexible, expanding the space for expenses, made use of the tolerance interval provided for in the rules for public accounts and resorted to extraordinary revenues to fulfill commitments. With authorization from Congress, it also incurred expenses outside the limit established by the fiscal rule.
Given the non-compliance with the initial proposed commitments and the increase in public spending, the government's accounts spent the four years of the current government in the red.
According to analysts, this scenario contributed to putting pressure on inflation, deteriorating market expectations, keeping interest rates at a high level and boosting public debt.
