Experts warn that regardless of an improvement in the fiscal outcome, a cloudy horizon lies ahead.
The agenda to improve public finances based on increasing revenue, implemented by the government of Luiz Inácio Lula da Silva, showed signs of exhaustion this week with the rejection of a provisional measure (MP) and the strong reaction from the financial market due to the lack of action on spending cuts. Experts warn that the spending floors for Health and Education, in addition to the linkage of Social Security to the minimum wage, will strangle the Budget in the coming years. Therefore, regardless of improvements in the fiscal outcome, a cloudy horizon lies ahead.
This is an unprecedented scenario. During the enforcement of the spending cap, from 2017 to 2023, the increase in benefits and spending floors was restricted to inflationary variation. Previously, there was no spending limitation rule, only a primary surplus target (revenues minus expenses, excluding interest payments).
The tightening occurs because benefits linked to the minimum wage and the spending floors for Health and Education grow, on average, faster than the expenditure limit set by the fiscal rule — the framework approved in 2023, now only in its first year of enforcement. In practice, the room for “free” spending will be constrained as early as 2027, creating a risk of altering the current fiscal regime and increasing distrust over public accounts.
In addition to the spending floors, last year the government resumed the real appreciation of the minimum wage, a campaign promise of Lula, based on the variation of the Gross Domestic Product (GDP) from two years prior. Social security benefits, as well as unemployment insurance, wage bonuses, and the Continuous Cash Benefit (BPC), are linked to the minimum wage.
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Rule Consistency
By the end of the government, the gain would be minimal, at R$ 3 billion, with a negative impact in 2025. AZ Quest’s chief economist, Alexandre Manoel, calculated the same for the minimum wage and concluded that the fiscal room would be about R$ 8 billion by the end of the government, considering the impact on social security benefits.
Economist Italo Faviano, from Buysidebrazil consultancy, argues that minimum spending rules are necessary to guarantee investment in areas like Health and Education, but the spending does not need to increase in real terms every year:
— As it stands, the rule created by the government itself does not fit.
