Government outperforms expectations on budget freeze, but IOF hike on credit and FX transactions overshadows positive news – 05/23
In its first fiscal report of the year, the revenue and expenditure assessment surprised on the upside. The federal government announced a total budget freeze of BRL 31.3 billion for 2025, significantly exceeding market expectations, which had anticipated a figure around BRL 10 billion. Of the total, BRL 10.6 billion corresponds to a mandatory freeze due to breaching the 2.5% real spending growth cap, while BRL 20.7 billion refers to a precautionary freeze aimed at ensuring compliance with the fiscal target — both impacting discretionary expenditures.
Additionally, the government announced an increase in the IOF (Tax on Financial Operations) rate on credit, foreign exchange, and international spending, particularly affecting companies and cross-border transactions. In an attempt to standardize the tax structure, the Ministry of Finance raised the IOF rate on transfers related to foreign fund investments — previously exempt — to 3.5%, generating a strong negative response from the financial market. In response, the government revoked the specific clause, effectively restoring a zero rate on those transactions. According to Finance Minister Fernando Haddad, the revision implies a revenue shortfall of approximately BRL 2 billion in 2025 and BRL 4 billion in 2026, so a new announcement of further budget freezes may occur next week to offset these amounts.
In monetary policy, remarks by director Nilton David at an event reinforced the Central Bank’s preference to keep interest rates unchanged, despite easing external conditions. Although trade agreements between China and the United States occurred prior to the release of the COPOM minutes, David signaled that uncertainty still lingers over the markets, given the lack of clarity regarding Trump’s next moves. Considering the still high uncertainty and unanchored expectations, the director reaffirmed the Central Bank’s commitment to the inflation target, emphasizing the effectiveness of monetary policy and the need for continued restriction.
In the United States, the House approves Donald Trump’s fiscal package and the president threatens new tariffs on the European Union. The bill, dubbed the “Big, Beautiful Bill,” addresses key items on the government’s legislative agenda, such as expanding the tax cuts from Trump’s first term, along with new exemptions. The package is estimated to generate a revenue loss of around USD 4.1 trillion over the next 10 years, increasing market concerns about U.S. public debt. On the trade front, President Donald Trump threatened to impose fixed tariffs of 50% on the European Union in response to the pace of negotiations by the bloc. According to Treasury Secretary Scott Bessent, the president considers the proposals made by the EU to be of poor quality, in contrast to ongoing negotiations with other countries.
For more details, please check our Weekly Report 114.
