Rio de Janeiro's fiscal situation shows deficit projected for 2026 and possible reversal with interim government measures

Fiscal indicators in Rio de Janeiro showed a loss of steam during the second term of former governor Cláudio Castro (PL), who resigned in March.

The state's budget result reached a peak in 2021, when there was a boost from extraordinary revenues from the concession of services from Cedae (Companhia Estadual de Águas e Esgotos do Rio de Janeiro) and the oil sector.

Performance, however, remained at lower levels in the following years and was accompanied by a reduction in cash, indicate figures from the Finance Department until 2025.

The recent trajectory resulted in an initial projection of a deficit of almost R$19 billion in 2026, according to the LOA (Annual Budget Law). However, the state tends to close this year with a smaller deficit or even in the positive field.

The interim government of judge Ricardo Couto hopes to reverse the deficit, but has not yet confirmed the size of the surplus that could be achieved by December.

The possible reversal is associated with increases in ICMS (Tax on the Circulation of Goods and Services) and oil royalties after the outbreak of war in Iran.

Furthermore, in June the interim management signed the adhesion to Propag (Program for Full Payment of State Debts), which renegotiates the debt with the Union, and focuses on cost containment measures. The announced expense cuts include contract reviews and dismissals.

Couto took over the Executive in March after Castro's resignation created a void in the succession line. The judge remains in the position of governor thanks to an injunction from minister Cristiano Zanin, of the STF (Supreme Federal Court), endorsed by the court's plenary.

Rio de Janeiro's budget result reached a surplus of R$16.8 billion in 2021, when the privatization of Cedae services took place, in Castro's first term.

The surplus decreased in 2022 and 2023, and the state even recorded a budget deficit of R$2.5 billion in 2024. Last year, the indicator returned to positive territory (R$1.3 billion), but still far from the 2021 peak.

The numbers are adjusted for inflation. Folha updated the nominal data from the Treasury Department's historical series using the December 2025 IPCA.

The budgetary result calculates the revenues made minus the expenses, including those committed. Positive balances are called surpluses, and negative balances are called deficits.

The analysis of the Rio de Janeiro scenario is part of an x-ray by Folha on the fiscal situation of the five most populous states in the country. The main indicators from 2019 to 2025 are observed with the help of experts.

The evaluation shows that different concepts, such as budgetary result, primary result, cash and investments, can tell different stories about the financial health of governments.

"In 2021, there was a peak in budgetary results because it had extraordinary revenues of the once and never again type, while the state used these revenues to commit to expenses once and forever", Rio de Janeiro's Finance Secretary, Guilherme Mercês, tells Folha.

Appointed by Couto last April, he had already commanded the department under former governor Wilson Witzel.

Mercês' first stint at the Treasury ended in May 2021, when the economist was dismissed by Castro after Witzel's impeachment. Witzel won the 2018 elections and had Castro as his running mate.

According to Mercês, the state's total expenses rose by almost R$20 billion after 2021, at a faster rate than revenues. One of the consequences, he says, was the reduction in cash.

In 2022, the last year of Castro's first term, the availability of net cash was R$22.3 billion, in the sum of earmarked (with previously determined application) and non-earmarked (free) resources. The amount dropped to R$14.2 billion in 2025.

When the account only considers unbound resources, with no mandatory destination by law, availability drops from R$17.4 billion in 2022 to R$2.2 billion in 2025. The previous values were updated for inflation until December of last year.

I HAVE RECOVERED INVESTMENT CAPACITY, SAYS CASTRO

Castro states to Folha that he created a developmental government and says that this was the main characteristic of his management in the fiscal field. For the former governor, the policy contributed to the opening of businesses and jobs.

"We were coming from a time of recession. I was the governor who recovered Rio's investment capacity, without taking out any loans."

The amount of investments committed by the state went from R$1.4 billion in 2019, when Witzel was still in charge of the Executive, to R$6.4 billion in 2022.

After the peak in 2022, the level remained above R$5 billion in Castro's second term.

Committed expenditure is that which the government has already reserved in the budget to carry out a specific expenditure, formally undertaking to pay it.

"It was a public commitment to invest Cedae's money. I wouldn't waste the money of an important state-owned company to cover the costs, [it's something] I didn't do. In other times, this money wouldn't have become a benefit for the citizen", he says.

The concession of Cedae services took place through two auctions in 2021. The first auction, in April, raised almost R$22.7 billion in values ​​at the time. The second, in December, raised another R$2.2 billion.

The distribution of resources, which totaled almost R$25 billion, was not restricted to the state and also determined transfers to city halls. "A large part of the concession belonged to the municipalities", states Castro.

He associates what he calls an "imbalance" in the second term's accounts with the impacts of federal laws 192 and 194, which changed the ICMS charge on fuel, energy, telecommunications and transport in 2022. The former governor states that the measures took away around R$25 billion in revenue from the state.

After resigning from the Executive, Castro was the target of search and seizure warrants in PF (Federal Police) operations investigating suspicions in the state government's relations with Banco Master and Refit.

Questioned by Folha about the investigations, the former governor said he could not comment due to judicial secrecy and stated that all clarifications had already been provided in the processes.

PRIMARY SURFACE ALSO SHRINKS AFTER 2021

Rio de Janeiro's primary result, like the budget, saw a jump in 2021. That year, it achieved a surplus of R$18 billion in corrected values from December 2025.

The figure continued to be positive in the following years, but at a lower level. The indicator was R$1.2 billion in 2025. The primary result accounts for revenue minus expenses, not counting financial costs with interest.

The positive data from recent years may give the impression of a healthy fiscal situation, but the situation is associated with non-recurring factors, says Jonathas Goulart, manager of economic studies at Firjan (Federation of Industries of the State of Rio de Janeiro).

In this sense, he cites the impacts of the Cedae service concession, the increase in royalty revenues and the debt relief with the Union. Before joining Propag, the state was part of the old Tax Recovery Regime.

"Revenue from royalties, for example, has no connection with an economic movement towards the development of the state. It has to do with the international price of oil. If there is a change in the international scenario, this revenue can change significantly", he points out.

In Goulart's view, Rio de Janeiro needs efficient fiscal management to control expenses in the coming years and make room for more investments. This is necessary to attract new companies, says the analyst.

INTERIM GOVERNMENT PROJECTS

The interim government announced on August 24 that it is preparing a draft State LRF (Fiscal Responsibility Law). The proposal must be sent for analysis at Alerj (Legislative Assembly of the State of Rio de Janeiro).

Currently, the state only follows the guidelines of the federal LRF. The new proposal will seek to avoid financing permanent expenses through extraordinary revenues, which do not tend to be repeated.

The jump in the collection of oil royalties in a given period and the sale of a state-owned company would be examples of this type of collection.

At the same event where he announced the proposal, Mercês presented data on local expenses and revenues. According to this presentation, personnel expenses have remained below the limit of 60% of the RCL (net current revenue), established in the federal LRF.

However, when disregarding revenues classified as non-recurring, the proportion would be above 60% since 2021. The metric is called RCLE (structural net current revenue) and must be included in the proposed state Fiscal Responsibility Law.

Avoiding the use of extraordinary resources to cover permanent expenses is a measure that goes in the right direction, but it is still necessary to know the details of the interim government's project, points out Gabriel Leal de Barros, chief economist at ARX Investimentos and former director of the IFI (Independent Fiscal Institution).

For Barros, improving Rio de Janeiro's fiscal situation depends on a set of actions in the coming years. Pension reform, restructuring positions and salaries, reevaluating funds and improving spending on education are part of the list of priorities cited by the analyst.

The Finance Department states that the state's total debt was R$242.1 billion in July this year. Of this amount, R$213 billion was related to the Union, while R$25.6 billion involved banks.

In August, the state transferred the second installment of the debt with the Union under Propag conditions. The monthly deposit was R$119 million, lower than the R$436 million that would have been paid without the program.

Propag provides for the correction of the outstanding balance only by inflation and amortization of 20% of the debt. The state also tries to renegotiate debts with banks.

According to the Couto government, 6,145 commissioned employees were dismissed from March 24 to August 21, while appointments totaled 2,496 people. The interim management projected savings of around R$221 million by December from changes in personnel.

The TCE-RJ (Rio de Janeiro State Audit Court) recommended in June, by 3 votes to 1, the rejection of the Castro government's 2025 accounts. The decision on whether or not to approve the numbers rests with the Legislative Assembly.

The court pointed out alleged flaws in the state's balance sheet, including in Rioprevidência, the target of an investigation by the PF for contributions to Banco Master.

Castro criticizes what he considers a change in the TCE-RJ's analysis parameters and calls the vote political. He says that Rioprevidência's resources have already started to be recovered and that there will be no harm to the state.

This is the third chapter of the State of Accounts series, in which Folha analyzes the fiscal situation of the five most populous states in the country: São Paulo, Minas Gerais, Rio de Janeiro, Bahia and Paraná. They are also the largest electoral colleges, where 52.45% of the Brazilian population votes.