Most of Lula’s Spending Package Sits Outside the Fiscal Cap

The bulk of the Lula spending package sits outside Brazil’s fiscal cap, with only a sliver counted under the very rule his government wrote, yet economists say it still drives the public debt higher.

Brazil’s government has rolled out a wave of election-year measures, from fuel subsidies to cheap credit and debt relief. The collection has a nickname in Brasília: the “pacote de bondades,” or package of goodies.

The headline number is large. One widely cited tally puts the package at about 215 billion reais ($42bn) this year, while another count reaches 227 billion reais ($45bn), or close to 2 percent of the economy.

The striking part is not the size but the structure. Almost none of it is counted against the spending limit that President Luiz Inácio Lula da Silva’s own government created in 2023.

How the Lula spending package skirts the cap

The rule in question is the “arcabouço fiscal,” a framework that caps the real growth of federal spending and sets a target for the primary budget result. It was meant to reassure markets that Brazil would keep its accounts in order.

By the calculation of Marcos Mendes, an economist at the Insper business school, only about 9 billion reais of the package falls inside that cap. The Rio Times notes that this is barely 4 percent of the headline total, leaving roughly 96 percent outside the rule.

The trick lies in how the spending is classified. The cap counts only “primary” expenses, so anything booked as financial or kept off the federal budget simply does not register against it.

Much of the package is built exactly that way. A large share runs through subsidised credit lines, channelled via the state development bank to truckers, taxi drivers, app drivers and home buyers.

These are recorded as financial operations rather than ordinary spending. According to the Finance Ministry’s own subsidy budget, the implicit cost is the gap between what the Treasury pays to borrow and the cheaper rate it charges on these loans.

Other parts lean on legal exceptions. Mendes says some measures sit outside the cap because of carve-outs approved by Congress or ordered by the courts, a pattern Brazil has leaned on repeatedly.

Why investors should still care

The classification may dodge the rule, but it does not dodge the debt. Whatever the accounting label, the spending feeds the public debt, which is the number that drives Brazil’s borrowing costs.

That debt is already at a record. Net public debt reached about 67 percent of the economy in April, the highest since the series began in 2001.

It has kept climbing for the past year. Each new reading has set a fresh record, a trajectory that leaves little room for added borrowing.

Watchdogs have taken notice. The federal audit court, the TCU, criticised what it called “parallel structures” used to run policy outside the budget and ordered greater transparency.

The off-cap habit is not new, and it is not small. The Senate’s independent fiscal body estimates that spending kept outside the targets between 2023 and 2026 will approach 400 billion reais ($79bn).

The connection that matters is between credibility and cost. When a government leans on its own exceptions, investors question whether the framework binds at all, and they demand a higher return to hold the country’s debt.

For a foreign holder of Brazilian assets, that is the forward implication. A package that looks compliant on paper but still lifts the debt is the kind of signal global funds watch closely.

The read-through is straightforward. It points to interest rates staying higher for longer and a currency more exposed to swings in confidence.

Frequently Asked Questions

What is the Lula spending package?

It is a set of election-year measures by President Lula’s government, nicknamed the “pacote de bondades,” spanning fuel subsidies, subsidised credit and debt relief. On the main tallies it totals around 215 to 227 billion reais, close to one and a half percent of the economy.

How does it stay outside the fiscal cap?

The cap counts only primary spending, so measures booked as financial operations or kept off the budget do not register against it. Much of the package runs through subsidised credit lines and legal exceptions, leaving only a small share inside the rule.

Why does it matter for investors?

Even spending that escapes the cap still raises Brazil’s public debt, already at a record share of the economy. That feeds doubts about the framework’s credibility, which can keep interest rates high and leave the currency more exposed.