BRAZIL · FISCAL POLICY
Key Facts
—What happened: Brazil’s Congress approved a bill easing the rule.
—How big it is: The bill covers towns of up to 65,000 people, most of Brazil’s 5,570 municipalities.
—What it means: Small towns with unpaid taxes or unverified accounts can now receive federal transfers and earmarks.
—The catch: Congress passed the bill through both chambers in a single day, and the cost is unpublished.
—Who it hits: Taxpayers may end up paying, if the change means more spending or less revenue.
—What comes next: President Lula must sign the bill or veto parts of it.
Congress passed a bill on 3 September easing the rules on federal money for small towns. Towns with unpaid debts can now receive it.
What the bill does
Brazil’s Congress approved a bill on 3 September that eases the fiscal rules for small towns. The bill is PLP 74/2026, a supplementary bill that needs a higher majority than an ordinary law.
The Chamber of Deputies, Brazil’s lower house, passed it by 346 votes to 46, with three abstentions. The Senate approved it the same day by 66 votes to nil, without changes.
The bill changes the Fiscal Responsibility Law, known as LRF, which sets limits on government spending and borrowing. It also adds a new clause to the LRF.
That clause lets municipalities with up to 65,000 residents receive voluntary transfers from the federal government. These include parliamentary amendments, even if they have unpaid taxes or have not accounted for past funds.
Understanding Brazil’s fiscal rules
Brazil’s Fiscal Responsibility Law, or LRF, has anchored public accounts for 26 years. Economists treat it as a key test of fiscal discipline.
The law caps how much governments can spend on staff and how much they can borrow. It also requires towns to be up to date with their debts and accounts before they get certain federal money.
Voluntary transfers are not automatic payments like pension or health funds. They are one-off grants for local projects, usually negotiated with politicians.
Parliamentary amendments are a type of voluntary transfer that lawmakers can direct to their home towns. They are called emendas parlamentares in Portuguese.
The Fiscal Responsibility Law, or LRF, was created in 2000 to bring discipline to public accounts. It applies to the federal government, states, and municipalities.
The law caps how much governments can spend on staff and how much they can borrow. It also requires governments to publish regular reports on their finances.
Its goal is to prevent governments from spending more than they collect. That keeps public debt from growing too fast.
The LRF has anchored Brazil’s public accounts for 26 years. Economists treat it as a key test of fiscal discipline.
Why small towns get blocked
Under the LRF, a municipality that owes federal taxes is treated as being in default. The Portuguese term is ‘inadimplente’.
It also counts as in default if it fails to file proper accounts. Being in default blocks it from receiving voluntary transfers.
The rapporteur in the lower house was Deputy Isnaldo Bulhões. His report set out the case for the change.
He argued that small towns lose access to money over paperwork rather than over waste.
Small towns often miss deadlines or make errors in their accounts. That marks them as in default, even when the problems are simple paperwork.
What changes for small towns
The new clause covers municipalities with up to 65,000 inhabitants. Those towns can now receive voluntary transfers and parliamentary earmarks even with pending problems.
That includes unpaid taxes, loans and accountability filings. This means mayors of small towns could get federal money in an election year without clearing their debts first.
Congress overrode four of Lula’s vetoes to the 2026 budget guidelines law on 21 May.
That move freed roughly 3,000 municipalities to receive transfers again.
That earlier change also waived compliance requirements for towns up to 65,000 people. The new bill writes the waiver into the Fiscal Responsibility Law itself.
The Redata tax break
The bill does not create Redata, a special tax regime for data centers. That regime was set up by a provisional measure in September 2025 and re-enacted this year.
Data centers are large facilities that store computer servers. They are essential for cloud computing and internet services.
What the bill does is exempt Redata from the 2026 ceiling on new tax breaks. The benefits must still fit the year’s budget target.
The tax break aims to attract investment in digital infrastructure. But it also reduces federal revenue.
Who gains and who loses
The main winners are small municipalities that are in debt. They can now access federal funds for local projects, which may help mayors show progress before elections.
Taxpayers may end up paying, if the change means more spending or less revenue. No official estimate exists.
The main objection is fairness. Towns that paid their taxes on time gain nothing from the change.
Critics argue that loosening the rule is risky. It could encourage irresponsibility and lead to more debt.
What is not yet confirmed
The Senate approved the bill the same day, without changes. It now sits on President Lula’s desk.
Lula has 15 working days to sign or veto. He has not said what he will do.
The government’s budget office has not published a cost estimate for the measure. The full fiscal impact is unknown.
The bill is PLP 74/2026. Its progress can be tracked on the Senate website.
PLP 74/2026 is a package, not a single measure. It also covers the Manaus Free Trade Zone, paternity leave, the Pronon and Pronas health programmes and reinsurers.
That is why no single cost figure has been published. The pieces are costed separately, if at all.
PLP 74/2026 is a package, not a single measure. It also covers the Manaus Free Trade Zone, paternity leave, the Pronon and Pronas health programmes and reinsurers.
That is why no single cost figure has been published.
Why this matters for foreigners
For investors and expats, this shows how money flows to Brazil’s thousands of small towns. It also loosens fiscal discipline in an election year.
Rating agencies monitor Brazil’s fiscal framework. None has commented on this bill.
The move is part of a broader pattern in 2026 of Congress easing rules on transfers to municipalities. That raises concerns about the government’s ability to control spending.
Brazil holds general elections in October 2026. The timing of the bill adds to those concerns.
What a parliamentary earmark is in Brazil
A parliamentary earmark is a type of federal transfer that lawmakers can direct to their home towns. They are called emendas parlamentares in Portuguese.
These earmarks are often used for local projects like paving roads or building schools. They are a key way for politicians to bring resources to their constituents.
In recent years, these earmarks have grown in size and importance. They are now a major part of the federal budget.
The bill allows small towns to receive these earmarks even if they are in default. That makes it easier for lawmakers to send money to their bases.
What critics say about loosening the rule
Critics argue that loosening the rule is risky. It could encourage irresponsibility and lead to more debt.
They also worry about the timing. The bill comes in an election year, which could make it a tool for political gain.
Some say that letting towns with unpaid debts receive money is unfair. It rewards those that do not follow the rules.
Others point out that the fiscal cost is unknown. Without a clear estimate, it is hard to judge the impact on public finances.
Frequently Asked Questions
What is the Fiscal Responsibility Law?
It is a Brazilian law that sets limits on government spending and borrowing. It also requires municipalities to be financially healthy to receive certain federal transfers.
Who qualifies as a small municipality under the bill?
The bill applies to municipalities with up to 65,000 residents. That covers the vast majority of Brazil’s towns.
What are voluntary transfers and parliamentary amendments?
Voluntary transfers are discretionary federal grants for local projects. Parliamentary amendments are a type of voluntary transfer that individual lawmakers can direct to specific municipalities.
What is Redata?
Redata is a special tax regime for data centers. The bill exempts it from the 2026 ceiling on new tax breaks, which could reduce federal revenue.
What happens next?
Both houses passed the bill on 3 September. Lula can now sign it or veto parts.
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