Brazil’s fiscal framework: potential good news for investors


Published on Wednesday, 19 April 2023 Back to articles

Brazil’s Finance Minister Fernando Haddad in Beijing – 14.04.23

One of foreign investors’ overriding concerns over at least the last ten years is that successive Brazilian governments have run larger-than-prudent fiscal deficits, which have pushed total public debt to higher and non-sustainable levels equivalent to over 70% of GDP. One attempt to enforce greater discipline came with the 2017 introduction of a constitutional amendment obliging governments to freeze year-on-year real terms public spending. While the spending cap did contribute some temporary restraint, it rapidly lost credibility. Creative accounting was used to enable greater spending as well as securing congressional waivers for particular types of expenditure. The spending cap was also inconsistent with other desirable policy options, such as running a counter-cyclical fiscal policy.

Finance Minister Fernando Haddad presented an alternative approach, known as the fiscal framework, in late March. It seeks to satisfy the demands of various competing groups. Financial markets and investors want better fiscal management and more sustainable debt. President Lula wants increased social spending and investment and above all an increased economic growth to boost his levels of electoral support. The PT’s ‘political wing’ would like to fund a surge in public sector wages and aggressive lending by state banks. Domestic business wants lower interest rates and, in some areas, a more dynamic role for state enterprises. 

The new framework proposes to limit annual expenditure growth to 70% of the rise in revenues which essentially ensures that over time the budget balance will move towards surplus. This provides a ceiling for annual spending which pleases financial markets. But it also provides a floor for primary spending, which will be allowed to rise by 0.6%-2.5% every year in real terms, even if the economy shrinks, pleasing Lula and his party’s political wing. According to Finance Ministry’s calculations, under the new framework the primary budget deficit excluding interest rate payments will be limited 0.5% of GDP this year and will transition to a surplus by 2025. On this projection the current 73% debt-to-GDP ratio will peak at 75.7% in 2024, fall to 75.0% in 2026, and continue on a gradual downward path thereafter. 

YearPrimary Surplus as % of GDP
2023-0.25 to -0.75
2024-0.25 to +0.25
2025+0.25 to +0.75%
2026+0.75 to +1.25
Source: Finance Ministry

The fiscal framework was well received by business and the financial sector, with some expressions of caution. A key issue is whether it will be enough to persuade the Central Bank to ease interest rates in the second half of this year. Is president’s initial reaction acknowledged ‘a lot of goodwill from the Finance Ministry to implement a robust fiscal framework. Various analysts expressed doubt, however, over whether government revenues can be raised sufficiently enough and quickly enough, to meet the early targets. 

Looking ahead

Government leaders say the fiscal framework could be approved in Congress by mid-year, and that it will be submitted as a supplementary bill which requires a simple majority — 257 votes in the Chamber of Deputies and 41 in the Senate — for approval. The government lacks the necessary majority but is likely to intensify talks with allied, opposition, and ‘independent’ parties such as União Brasil to get the bill approved. It will probably have to offer concessions and possibly ‘jobs for the boys’ with the appointment of politicians to key posts. Separately, Haddad has also indicated he will seek approval of other revenue-raising bills, including plans to tax global e-commerce companies and online gambling, and close some corporate tax loopholes. Progress on these and wider tax reforms will be closely followed to assess the government’s real ability to tighten fiscal control. 

This excerpt is taken from our Brazil Focus monthly intelligence report which also included the following:


  • First 100 days: peaceful political transition largely achieved despite the risks
  • Implications
  • Lula’s big new team: from left to centre-right
  • Key to the Lula 3.0 presidency: Congressional politics
  • Less than a honeymoon: Lula and business
  • A change of position on the Amazon
  • Opinion polls deliver mixed results for first 100 days


  • Slower growth on the way, but no immediate recession
  • The fiscal framework: potential good news for investors

Industry, Trade, Business

  • Record soya harvest expected
  • Nervousness over Lojas Americanas scandal
  • Second attempt for bullet train project
  • Brazil assesses semi-conductor opportunities

Contact for subscription details.

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