Brazil Fiscal Plan to Stabilize Debt Welcomed by Markets  

Brazil is proposing small but growing primary budget surpluses as part of a much-awaited fiscal plan whose success largely depends on an expansion of public revenue — either through growth or higher taxes.

(Bloomberg) — Brazil is proposing small but growing primary budget surpluses as part of a much-awaited fiscal plan whose success largely depends on an expansion of public revenue — either through growth or higher taxes.

Investors cautiously welcomed the proposal, which sets targets for fiscal surpluses before interest payments that will need to be approved by congress. The Brazilian real gained 0.8%, the benchmark Ibovespa equity index rose 1.9% and most swap rates fell.

“The broad ideas are orthodox and the government does agree with the idea of stabilizing debt,” said Katrina Butt, a senior economist at AllianceBernstein LP. “Still, there are some unanswered questions and the government seems to bank on economic growth to be able to achieve the targets, given an increase in the tax burden doesn’t look feasible at this moment.”

The proposal is crucial for President Luiz Inacio Lula da Silva to win over investors, who have been worried about the health of public finances since the leftist leader obtained congressional authorization to boost outlays, bypassing current spending rules that will be replaced by the new fiscal framework. Since then, concerns about swelling debts have helped to fuel inflation expectations — keeping, in turn, borrowing costs high.

It’s still unclear, however, whether the central bank will see the proposal as giving it enough room to start cutting interest rates that stand at a six-year high of 13.75%.

“There’s a lot of goodwill from the finance ministry to implement a robust fiscal framework,” central bank chief Roberto Campos Neto told journalists just as details of the plan were presented in a separate news conference. “We are going to analyze what’s being announced.”

Surplus Targets

The new fiscal framework targets a primary fiscal surplus of 0.25% to 0.75% of gross domestic product for 2025 and 0.75% to 1.25% of GDP for 2026. For 2024, the goal is to eliminate the primary fiscal deficit, which doesn’t take into account interest payments, but the range of tolerance would still allow for a gap of 0.25% of GDP.

The proposal also sets a ceiling — and a floor — for the expansion of public expenditures, limiting it to 70% of the revenue growth, or 50% when the government fails to meet its budget surplus targets. Primary spending, however, will always increase between 0.6% to 2.5% a year, even if the economy shrinks.

“This is the beginning of a long journey,” Finance Minister Fernando Haddad told reporters as he explained the plan, adding that an upcoming tax reform is also needed to put the country’s finances in the right direction. “If those who don’t pay taxes start to pay them, all of us will benefit from lower interest rates.”

In order to boost revenue, Haddad said the government will send congress a series of measures intended to bring 100-150 billion reais to public coffers. Those will include an adjustment in exemptions that are no longer efficient for the economy, he said. 

What Bloomberg Economics Says

“The fiscal framework plan should help mitigate fears of an expansionary fiscal policy leading to a public debt spiral. Still, a slow pace of adjustment and spending rules that may incentivize a higher tax burden are less desirable features.”

— Adriana Dupita, Brazil & Argentina economist

Click here to read the full report.

In the finance ministry’s most bearish scenario, Brazil’s gross debt would continue rising to 77.3% of GDP until the end of Lula’s term, from an estimated 75.1% at the end of this year. It would stabilize at around 75%, however, if the yield curve narrows by 1 percentage point. In the most optimistic scenario, it would fall to 73.6%, if the curve tightens by 2 percentage points. 

Investors will now be following the proposal as it goes through the lower house and the senate. 

“Monitoring likely adjustments in Congress and implementation of the new fiscal program will be key, along with perceived confidence in committing with the new fiscal anchor,” said Joel Virgen Rojano, head of Latin America strategy at TD Securities. “There is still a bumpy road ahead.”

–With assistance from Felipe Saturnino, Josue Leonel, Davison Santana, Simone Iglesias, Barbara Nascimento and Maria Eloisa Capurro.

(Updates with closing prices.)

More stories like this are available on

©2023 Bloomberg L.P.