Brazil’s government recorded a primary deficit of 53.3 billion reais ($10.2 billion) in May, the National Treasury reported on June 29, the largest deficit for a month in inflation-adjusted terms since 2024. At the same time, Treasury Secretary Daniel Leal said he expects spending as a share of gross domestic product to decelerate and end the year at around 19 percent of GDP. What explains the increase in Brazil’s primary deficit and what is behind the expected decline of spending? How likely is spending to fall to around 19 percent of GDP by the end of the year? How are Brazil’s fiscal policies likely to affect inflation, interest rates and investor confidence in the months ahead, particularly as the government balances its re-election agenda with the need to demonstrate fiscal discipline?

Alessandra Ribeiro, partner and director of macroeconomic and sectoral analysis at Tendências Consultoria: “The large primary deficit in the first half of this year reflects a combination of structural and cyclical factors. Structurally, the main pressures come from social security spending, particularly amid the return of real increases in the minimum wage, which indexes a large share of mandatory expenditures. In addition, stronger tax revenues also raise spending, as they trigger higher outlays on health and education to comply with constitutional minimum requirements. On the cyclical side, the deficit was worsened by the concentration of court-ordered debt payments, the payment schedule of the social security 13th salary bonus and the strong execution of discretionary spending, especially public investment in socially relevant areas, partly due to constraints imposed by electoral legislation. Regarding expenditure as a share of GDP, the National Treasury and the Ministry of Finance are working with more optimistic assumptions than the market and Tendências Consultoria, especially on economic growth. At the same time, the electoral calendar has distorted the usual timing of spending execution, concentrating outlays in this year’s first half and making the second-half outlook somewhat less volatile. Our baseline projects total expenditure at 19.6 percent of GDP this year, remaining above 19 percent at least through 2030. More meaningful declines would require stronger expenditure-side measures, especially on mandatory spending, for which there are still no concrete plans. In the coming months, the electoral campaign is likely to outweigh any commitment to fiscal balance. As a result, we expect further currency depreciation in the second half of this year, inflation reaching 5.3 percent and sustained pressure on forward interest rates.”

Monica de Bolle, senior fellow at the Peterson Institute for International Economics (PIIE) and director for Latin American studies and emerging markets at the Johns Hopkins University School of Advanced International Studies: “The May increase in Brazil’s primary deficit was unsurprising. While spending grew 9.4 percent in real terms, revenues rose only 5.5 percent. The increase in spending was driven mainly by pensions, as the government worked to clear the INSS benefits backlog, which resulted in adding beneficiaries faster than previously estimated. Additionally, court-ordered payments (precatórios) that were scheduled for the second half of 2025 were front-loaded into the first half of 2026. Treasury Secretary Daniel Leal’s expectation that spending will drift back toward 19 percent of GDP is reasonable and reflects the calendar effect in reverse: the large increase in court-ordered payments will not repeat in the second half of 2026. However, the underlying fiscal situation is deteriorating, and the 2026 target will likely be met only because a constitutional amendment excluded some 70 billion reais in court-ordered payments from the calculation. As a result of a weakening fiscal position, inflation is above the target band ceiling, and 2026 inflation expectations have risen above 5 percent, with the central bank explicitly flagging fiscal stimulus as an inflation risk. With real interest rates at about 9 percent, Brazil remains very attractive to investors despite the fiscal deterioration. This said, everyone assumes adjustment will come in 2027, regardless of who wins in October. If the assumption is not validated by the next government, repricing of Brazilian assets will be abrupt.”

Silvia Matos, professor at the Getulio Vargas Foundation: “In May, Brazil’s consolidated public sector posted a seasonal primary deficit of 56.1 billion reais. The 12-month balance widened to 1.1 percent of GDP, even though we observe a resilient revenue. For the central government, the deficit was 53.3 billion reais. The main reason for the fiscal deterioration is the increase in spending. For instance, in May, for the central government, expenditures rose 9.4 percent year-on-year in real terms, driven by pension benefits, mandatory spending and the continued normalization of discretionary expenditures. Stimulus measures during an election year will keep the primary deficit in the first half of 2026 at a higher level. Due to electoral law, there are many restrictions on public spending in the second half of the year. Even anticipating a slowdown in the growth of public spending, we project a primary deficit of 0.6 percent of GDP and gross debt at 84.5 percent of GDP in 2026. The deterioration of public finances is reflected in higher risk premiums demanded by the market to finance the government. Furthermore, with public spending rising at high rates, a higher interest rate is required to keep inflation under control. In summary, there is a need for significant fiscal adjustment going forward.”

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