Brazil proposes fiscal adjustment plan of up to 10.8 billions dollars, aiming to cut tax incentives and tighten spending

The Brazilian government has proposed a package of fiscal consolidation measures expected to improve public finances by up to 60 billion reais (about $10.8 billion) next year, in response to ongoing market concerns about the country's debt sustainability.

According to Reuters, Brazil’s Planning Minister Bruno Moretti stated during a congressional hearing on Wednesday that the plan includes measures such as reducing tax breaks, limiting the use of tax deductions, and curbing public sector wages, while also seeking authorization for the government to implement larger spending freezes if necessary.

Moretti said, the government is "absolutely certain" it can achieve a real primary surplus equivalent to 0.1% of GDP next year.

This announcement comes as markets remain under pressure due to concerns over Brazil’s fiscal outlook. Since President Luiz Inácio Lula da Silva’s re-election on October 25, the real has continued to decline, long-term interest rates have climbed, and the stock market has been under strain.

However, the plan has already met significant resistance within Lula’s Workers’ Party, casting uncertainty over its legislative prospects.

According to Moretti, the core of this fiscal package is to tighten further on the existing fiscal framework’s 2.5% real expenditure growth cap, limiting real expenditure growth to 2%.

If necessary, the government can activate a mechanism to limit companies in offsetting taxes owed with tax credits, freeing up about 50 billion reais of fiscal buffer; on top of that, setting caps on specific expenditures would push the overall fiscal impact to 60 billion reais.

The plan also proposes a comprehensive reduction of various tax breaks and to exclude windfall oil revenues from the calculation of net recurring income.

Moretti explained that, since Brazil’s fiscal rules link minimum health spending to net recurring income, this adjustment will effectively restrain the growth of mandatory health spending. In addition, the plan includes measures to curb excessive growth in public sector wages.

Moretti emphasized that these measures are intended to provide the government with more tools to control expenditures and review tax incentive policies, rather than cutting people’s rights or social welfare. Sound public finances, he said, are precisely the prerequisite for sustainable fulfillment of social welfare commitments.

Moretti stated, the primary goal of this plan is to ensure the government achieves its official target of a primary surplus equivalent to 0.5% of GDP next year, while also allowing room for the social spending Lula promised during the election campaign, including expanding the “Bolsa Família” cash assistance program.

Under Brazil’s current fiscal framework, the government may exclude about 65 billion reais of specific expenditures from the 2027 target calculation, and the target itself has a tolerance range of 0.25 percentage points of GDP up or down.

In August of this year, the government already submitted the 2027 budget draft to Congress, which included a forecast of a 0.1% real primary surplus. The draft is still pending congressional approval.

Although the proposal was formally submitted to the Senate by senior Workers’ Party member Jaques Wagner, internal pushback surfaced the same day.

Workers’ Party lawmaker Lindbergh Farias publicly warned that, if the plan is pushed through without broad discussion, it could cause rifts within the governing coalition.

“This is not a formality,” Farias said. “People here truly want the Lula government to succeed.”

This stance highlights the internal tensions the Lula government faces in advancing fiscal consolidation—needing both to signal spending restraint and debt stabilization to markets, and to maintain political consensus within the left-wing coalition for social policy commitments. Whether the plan can ultimately pass Congress remains highly uncertain.