Brazil’s Hidden Bill: How Lula’s Off-Target Spending Masks a Growing Debt

In recent days, Brazil’s government under President Luiz Inácio Lula da Silva announced a new relief program, Brasil Soberano, meant to shield exporters from steep U.S. tariffs of up to 50 percent on steel, aluminum, and other products.

The plan offers around R$30 billion ($5.5 billion) in loans, subsidies, and tax breaks, of which R$9.5 billion ($1.7 billion) is excluded from the country’s fiscal target.

With this, spending that sits “outside the books” in Lula’s third term now totals nearly R$388 billion ($70.5 billion). The rationale is presented as national defense: Washington’s tariffs, imposed by Donald Trump in 2025, threaten Brazilian jobs and industries.

Yet the financial reality is heavier—Brazil’s total debt already stands at R$9.4 trillion ($1.71 trillion). Each new exclusion weakens the fiscal anchors designed to curb overspending, spurring concerns over higher borrowing costs and eroding investor trust.

The Roots of the Gap

Most of these hidden expenses—87 percent—did not begin with Lula. They reflect unpaid bills left by Jair Bolsonaro’s government.

The largest was the delayed payment of court-ordered debts, or precatórios, totaling R$92.4 billion ($16.8 billion), which the Supreme Court forced Lula to release in 2023.

Another big item was the PEC da Transição, passed at the end of Bolsonaro’s term, which freed R$145 billion ($26.4 billion) for Lula to restore social programs like Bolsa Família.

Other carve-outs were tied to urgent crises: R$30 billion ($5.5 billion) for Rio Grande do Sul after catastrophic floods, R$4 billion ($727 million) for cultural programs lacking prior funding, and R$8 billion ($1.5 billion) from judicial or oversight rulings.

Economists warn that unpaid court debts could add another R$55 billion ($10 billion) outside the target by 2026.

The Fiscal Rule

Brazil’s fiscal framework, originally established in 2000, was created to prevent a return to the runaway debt and inflation of past decades.

A 2023 update added flexibility; for 2025, the target is a zero deficit with tolerance for up to R$31 billion ($5.6 billion) in red ink, shifting in 2026 to a surplus of R$34.3 billion ($6.2 billion).

But Lula’s government has systematically relied on exceptions that make accounts appear healthier than they truly are. Analysts at BTG Pactual, XP Investimentos, and Tendências Consultoria say this “creative accounting” risks credibility.

Some exclusions, such as legal debts or flood relief, are seen as unavoidable. Others, like tariff protection, might have been handled through budget reallocation rather than pushing the costs outside fiscal limits.

Why It Matters

For Brazilian families, the impact is not abstract. If deficits deepen, inflation erodes purchasing power, interest rates rise, and credit and investment become more expensive.

That strains jobs, wages, and the very social programs the spending is meant to protect. Brazil’s history of hyperinflation in the 1980s and early 1990s is a reminder of what is at stake—and why the fiscal anchor was created in the first place.

The Story Behind the Story

Lula’s fiscal maneuvering is less about economic theory than political survival. He inherited a budget hobbled by Bolsonaro’s deferrals and priorities, while promising to revive safety nets and now defend workers from foreign tariffs.

This dual pressure leads to constant detours around fiscal rules. The deeper question is not whether these exceptions are legal—they often are—but how long Brazil can sustain them before credibility frays.

With presidential elections looming in 2026, the contest may hinge as much on fiscal trust as on social promises. In the end, the choice falls to voters and investors alike: whether the political logic of spending today outweighs the economic risks waiting tomorrow.

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