Adjustment in public accounts: what’s on Lula’s desk and what’s off the president’s radar

President of the Republic, Luiz Inácio Lula da Silva, during the 1st Meeting of the National Council for the Industrialization of Critical and Strategic Minerals (CIMCE), at Palácio do Planalto, Brasília - DF — Photo: Ricardo Stuckert

Since the results of the polls, which guaranteed President Luiz Inácio da Silva (PT) his fourth term, he has been under pressure to announce the name who will lead the Ministry of Finance.

The financial market reacted to the election result with a drop in the stock market and a rise in the dollar.

Based on the proposals presented and Lula's statements during the campaign, analysts assessed that the PT member would not prioritize the adjustment of public accounts in the next four years of government.

Market expectations

Inflation projections increased and economic growth expectations fell. Economists also began to estimate a higher level for the dollar.

In an interview with TV Globo, Lula stated that the growth of public debt is a concern, but argued that the solution to the Brazilian fiscal problem involves stimulating economic growth, and not necessarily cutting expenses, especially if they affect the poorest population.

Interlocutors from the president's economic team have said that the government will make a consistent and gradual fiscal adjustment to guarantee a reduction in interest rates and the long-term maintenance of all of the Lula government's social policies.

No 'hobby horse'

With no seat confirmed in Lula's fourth term, the current Minister of Finance, Dario Durigan, was highlighted by the campaign team to speak and signaled that there will be no "hobby horse" in the economy.

With a change of direction of this magnitude between 2027 and 2030, the result of public accounts would go from a primary deficit of around 0.4% of GDP in 2026 to a surplus of 1.6% of GDP in 2030.

➖Deficit: when the government spends more than it collects.

➕Surplus: when there is a surplus of money in the cash register, after the government pays all expenses.

🟰Primary result: is the difference between government revenues and expenses. This account does not consider what the government spends on paying interest on the debt.

According to the June Fiscal Monitoring report from the Independent Fiscal Institution (IFI), a body linked to the Senate, a surplus of 2.1% of GDP would be necessary just to stabilize public debt, that is, for it to stop growing.

The Lula government will, however, face a challenge in the first year of its fourth term due to the measures announced in the campaign that increased expenses and will need to be accommodated.

What's on the table

Although the economic team has not yet detailed the package being prepared to improve public accounts, members of the government have already indicated some of the measures being studied.

These include a more explicit commitment to meeting the fiscal target, the review of tax benefits and new initiatives to reinforce the fiscal framework, with new restrictions to contain the pace of expenditure growth.

The fiscal framework was the rule created by the Lula government, at the beginning of the third term, replacing the spending ceiling, which was in force during the governments of presidents Michel Temer and Jair Bolsonaro. The first year of validity was 2024.

One of the differences between the two standards is the way in which expenses can grow. Under the spending cap, expenses increase in line with inflation. In the fiscal framework, the increase in spending is conditioned by the growth in revenue.

The framework also created a tolerance range for the fiscal target, which is how much the government commits to obtaining in the final result of the accounts. With this, the government is able to meet the target even when fiscal performance falls short of expectations.

At the end of last month, the Minister of Finance announced that the government will send a bill to the National Congress to expressly establish the commitment to reaching the center of the fiscal target in 2027.

When aiming for the center of the goal, in theory, the government may need to block more resources throughout 2027, limiting ministries' spending.

The central target proposed by the government for 2027 foresees a primary surplus of R$73.2 billion, equivalent to 0.5% of GDP, with a tolerance margin of 0.25 percentage points up or down. The government can, therefore, formally meet the target even with a surplus smaller than the central value, as long as it reaches at least R$36.6 billion.

Furthermore, R$64.7 billion in expenses with court orders — debts that the government is obliged to pay by court decision — and projects in the areas of defense, health and education may fall outside the fiscal limits. These exceptions were approved by parliamentarians in recent years.

In addition to reducing expenses, through greater cuts in ministries' budgets, the economic area has also said that it will seek to reduce tax benefits in Lula's fourth term.

Durigan has recalled that a measure approved at the end of 2026 instituted a 10% reduction per year in tax benefits that are not provided for in the Federal Constitution.

In the vocabulary of the current economic team, however, tax benefits are not exactly equivalent to measures listed by the Federal Revenue Service in the budget proposal. Tax increases for offshore companies, exclusive funds and increased taxation of interest on equity, for example, have already been classified by the Ministry of Finance, for example, as a reduction in tax benefits.

The minister has also mentioned, in his speeches, the need to continue with measures to reinforce the so-called fiscal framework. With this objective, the government has already limited, in the past, the adjustment format to increase the minimum wage and included a trigger in the rule that reduces transfers to Education.

Off the radar

At the same time, some proposals cited by economists to cut spending and reduce pressure on interest rates and debt do not appear among the measures signaled by the government.

This is the case of the end of the real increase in the minimum wage, the decoupling of social security benefits from the national minimum wage, and the formulation of interest targets, with a gradual reduction in the rate and debt currently linked to the Selic.

The government also rules out cutting social programs and benefits.

During the campaign, the Minister of Finance, Dario Durigan, confirmed that the current formula that foresees an increase above inflation for the minimum wage (limited to a 2.5% real increase) would be maintained in a possible new Lula term.

The president and the Minister of Finance have said that there will be no decoupling of social security and assistance benefits from the minimum wage. As a result, pensions will continue to be linked to the value of the minimum wage, that is, they cannot be lower than this value.

"The fiscal adjustment process initiated in 2023 will continue, which reduced the deficit by approximately 2% of GDP, preserving the formula for adjusting the minimum wage, with real gains, as per the proposal presented and approved, as well as the links applicable to social security benefits", informed Minister Durigan, during this year's presidential campaign.

More recently, Durigan denied that proposals such as establishing targets for interest rates to gradually reduce them are being evaluated for the fourth term of President Luiz Inácio Lula da Silva (PT), thus reducing the size of the public debt, currently linked to the Selic.

One of the risks highlighted by the proposal is the devaluation of the real. This would occur because a reduction in the Selic would make investments in reais less attractive, which, in turn, could cause an outflow of resources from the country.

In this case, according to the suggestion, Brazil's foreign exchange reserves, estimated at US$350 billion, could be used to contain sudden changes in the exchange rate.

The minister's demonstration occurred after Lula's interlocutors commented on the possibility of the president meeting with economist André Lara Resende, one of the creators of the Real Plan and defender of the proposal.

Finally, both President Lula and the Minister of Finance have publicly and repeatedly denied the possibility of cutting social programs to promote the adjustment of public accounts.

"Always very attentive to the commitments and the outcome of the election, we will never propose measures that harm the poorest people. On the contrary, when we make gradual adjustments, we implement measures, looking at cutting privileges, resuming a series of benefit reviews, primary spending reviews, we provide the conditions for the budget to be in surplus and we begin to discuss what other conditions are necessary for the interest rate to decrease," said Durigan.