Peru’s Deficit Targets Collapse Under Spending Wave

Peru fiscal discipline is under its most serious threat in years as Congress approved a wave of pension and salary reforms that the country’s financial watchdog estimates will drain 12 billion soles ($3.45 billion) from public coffers annually. The Rio Times, the Latin American financial news outlet, reports that the spending — equivalent to more than one percent of GDP — has drawn sharp criticism from both the fiscal council and the central bank, with officials warning that the reforms could derail the government’s deficit reduction plan entirely.

Alonso Segura, president of Peru‘s Consejo Fiscal, described the situation bluntly as a fiscal hemorrhage. He said that given the costly reforms and the fact that last year’s deficit target was only met thanks to record mining prices, it will be practically impossible for Peru to achieve its 1.8 percent of GDP deficit goal for 2026.

What Peru’s Congress Approved

The most expensive measure raises pensions for retired public school teachers to 3,500 soles per month, at an estimated annual cost of 5.6 billion soles ($1.6 billion). The bill was approved despite explicit warnings from the fiscal council and after former president Dina Boluarte had returned it to Congress with objections last October.

A second reform overhauls the pension system for police and military personnel, with projected long-term costs of nearly 3.8 billion soles ($1.1 billion) per year. Additional measures grant permanent labor benefits to temporary public sector workers. Over the past 18 months, Congress has also advanced dozens of tax reduction proposals that the fiscal council warned could push the deficit to 5.5 percent of GDP if fully enacted.

Peru Fiscal Targets Now Out of Reach

Peru had been one of Latin America’s fiscal success stories. The country hit its 2.2 percent deficit target in 2025 for the first time in three years, and had laid out a plan to narrow the gap to 1 percent by 2028. But the spending wave now threatens that trajectory at a moment when the economy, while still growing faster than regional peers, can no longer count on the record copper and gold prices that helped cover last year’s shortfall.

Central bank governor Julio Velarde endorsed a legal challenge to the reforms through the Constitutional Tribunal. “The country is weakening, without a doubt,” Velarde said at a press conference. “We are starting on the wrong foot — the measures the new administration could take are being undermined.”

A Deeper Governance Problem

The spending spree reflects what Segura called the “imbalance” of power in Peru, where governments without parliamentary majorities are routinely at the mercy of Congress. The country has cycled through nine presidents since 2016. Interim president José María Balcázar, who took office last month after Boluarte’s removal, will govern only until July, when the winner of the April election takes over.

For investors who have treated Peru as one of Latin America’s most fiscally responsible economies, the message is clear: congressional spending power, chronic political instability, and the absence of executive veto authority are creating permanent fiscal risks that no single president can control. Whoever wins the election in a fragmented field where no candidate polls above 12 percent will inherit a budget already burdened by commitments that the treasury says it cannot afford.

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