Brazil’s fiscal stability is at risk as mandatory spending on social security, health, and education is set to exceed last year’s fiscal framework limits.
This increasing expenditure presents significant challenges to maintaining the nation’s economic sustainability.
Under President Luiz Inácio Lula da Silva’s administration, a critical decision is approaching.
The choice is between adhering to the fiscal framework or maintaining essential spending on health and education.
Although parts of the government advocate for these sectors, the economic team expresses concerns due to the escalating costs.
The framework allows spending to increase by up to 70% of revenue growth, with an annual cap of 2.5% above inflation.
However, mandatory costs are rising faster than these limits, potentially squeezing out other budget areas.
Experts, interviewed by Estadão, predict that health and education spending could increase by up to 4% annually above inflation until 2028, exceeding the 2.5% cap.
This surge in mandatory spending could deplete all discretionary funds by 2028, impacting investments in infrastructure, university operations, and other government functions.
Constitutionally, health and education must consume 15% and 18% of net current and tax revenues, respectively.
These floors were reinstated after being frozen and are now compelling the 2025 budget to allocate additional funds to meet these requirements.
This could potentially reduce discretionary spending from 1.40% of GDP to just 0.68%.
This decrease could result in a budgetary blackout, where only minimal investments are feasible, endangering essential public services and infrastructure projects.
Economists agree that without revising the funding approach for health and education, achieving fiscal balance might be impossible.
The ongoing debate may lead to necessary adjustments in spending caps, which are crucial for shaping Brazil’s economic future.
Background
A couple of days ago, the International Monetary Fund (IMF) downgraded its fiscal projections for Brazil.
They now predict continued budget deficits until the end of President Luiz Inácio Lula da Silva’s term.
Revised IMF forecasts, unveiled during Spring Meetings in Washington, reflect consequences of Brazil’s fiscal target adjustments by the economic team.