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At the end of June 2026, Brazil’s National Treasury published a document forecasting the nation’s fiscal future, though it read more like a confession of failure than anything else. The eighth edition of the Fiscal Projections Report, first issued just over three years ago, was phrased in the usually dry government statements of routine transparency: reference scenarios for fiscal projections, sensitivity exercises on macroeconomic parameters like interest rates and inflation, a box on how oil prices are predicted to hit federal revenue, and so on.
The headline fact, however, was clear: the government’s own fiscal targets are unreachable beginning in 2028. The government’s arithmetic shows that it is no longer able to reach these goals, and what makes matters worse is that there is no permissible measure capable of closing the fiscal gap that yawns beneath the target.
Brasília’s targets rise from a surplus of 0.5 percent of GDP next year (2027) to 1 percent in 2028, 1.25 percent in 2029, and 1.5 percent in 2030. These are good goals to set, yet against those numbers, the Treasury projects a scenario that already assumes that the state freezes everything that it possibly can: contingency blocks of 66.6 billion reais ($13 billion) in 2028, and 68.4 billion reais ($13.37 billion) in 2029.
Even after that fiscal restraint, the projections miss the target entirely, and the shortfall widens dramatically from 10 billion reais in 2028 ($1.95 billion) to 80.6 billion reais in 2029 ($15.75 billion), and yet even further to 136.4 billion reais in 2030 ($26.65 billion). At a certain point, cutting expenditure only goes so far, and when the knife scrapes the bone, the strategy might need to change.
The near term flatters the framework, and is somewhat misleading: the Treasury expects to stay inside the tolerance band through 2027, with a deficit of 0.4 percent of GDP in 2026, and only 0.1 percent in 2027 (though this is still missing the target). Thereafter, the picture changes dramatically.
This is, the cynic would suggest, by design, as the period of realistically achievable targets ends in 2028, at the same time the current presidential term ends. Fiscal consolidation has been scheduled for a presidential term and a mandate that no one in the present cabinet is guaranteed to serve. In some ways, the fiscal rules buy three good years—and mortgage the rest.
Established in 2023 by Fernando Haddad during his tenure as finance minister (he has announced his intention to step down and run for governor in the São Paulo elections this year), the fiscal rule caps real spending growth at 2.5 percent and tethers outlays to a proportion of revenue growth. Originally sold as fiscal discipline, it binds only the discretionary portion of the budget, and does nothing to address structural fiscal spending, making it a “discipline” in name only. The Treasury’s own numbers state the scale of the coming collision: mandatory spending that goes untouched by the cap (pensions, continuous benefit, unemployment insurance, floors for health and education that are constitutional requirements) grows at 2.7 percent a year in real terms, forcing discretionary spending to contract by 3.2 percent a year. Since only the latter (i.e., discretionary spending) can be cut in the constitutional allowance, only the latter is.
One rejoinder to the shortfall projections is that this may be born of pessimism, and takes an unnecessarily unfavorable view of the economy. Not so: Marcos Mendes of Insper observes that the projections presuppose favorable conditions, including growth above 2.5 percent, inflation converging to target, and real interest rates falling to a third of their current levels of 9 percent. Even under a scenario as favorable as this, the gap still yawns.
This is not, however, a consequence of incompetence or mismanagement; it is a choice. The government adopted these rules for a political purpose, and one that it has fulfilled quite well: it reassured the markets without disturbing the coalition, committing Brazil to surpluses while shielding the transfers upon which President Lula’s support rests. Yet the price for doing so is legible in the price of Brazilian debt: 10-year yields sit above 14 percent; the Selic rate (Brazil’s benchmark interest rate) is at 14.25 percent and ranks among the steepest real rates in the world. It is a verdict from the market on the fiscal rule’s shelf life, and a damning one at that.
Brazil’s economic outlook goes from bad to worse when the gross general government debt is taken into account: reaching 83.5 percent this year, and climbing to 87.9 percent by 2029, this is a debt that is climbing even before the current fiscal rules are projected to become unsustainable. Reviewing Brazil’s economic positions in May, the IMF put it plainly: meaningful reforms are needed to place debt on a firm downward path, and spending rigidities must be addressed.
If Brazil wishes to look elsewhere for what might happen if these reforms are not pursued, it should see Europe. The post-war social contracts, generous in their indexation and humane in their intent, drove governments into the grim arithmetic of austerity, both in the 1970s and in the 2010s. When Italy dismantled the scala mobile in the 1980s, it took the better part of a decade and a currency crisis to be finalized. Indexation is easy to legislate, and brutal to unwind.
There is some good news for Brazil, however: political choices are not permanent. Brutal though the unwinding may be, the promise of democracy, the reality of political action, is that if the people are sufficiently in favor of changing a binding rule, it can be unbound. A rule only binds as far as the coalition prepared to enforce it—and when that enforcement turns against the constituents of the coalition, the coalition quickly collapses. The Treasury’s June warning is honest precisely because it is written by officials with no seat to defend (such are the benefits of independent institutions, which we forget at our peril). Brazil will need new measures, but that is not the hard part: the hard part is the admission beneath the need to generate these new measures in the first place. It is the admission that the fiscal rule was never a true constraint on spending, but merely a deferral of the decision over where that constraint should really lie. The can that was kicked down the road only has so much further it can go.
Dr. Jake Scott is a political theorist specialising in populism and its relationship to political constitutionality. He has taught at multiple British universities and produced research reports for several think tanks.
