R$51 billion package exposes the “pretend” of Lula’s government finances

The need for a R$51 billion package , announced by the government of Luiz Inácio Lula da Silva (PT) to close the gap in public accounts, shows that the 2025 Federal Budget, approved in April by Congress, is far from the reality of budget management.

The amount corresponds to the total of blockages and contingencies necessary to meet the fiscal target of R$31.3 billion — detailed in the Primary Revenue and Expenditure Assessment Report (RARDP) — added to the additional revenue of R$20.5 billion from the increase in the Tax on Financial Operations (IOF).

The two measures were announced almost simultaneously last Thursday (22), in a communication strategy considered “clumsy”, which affected the mood of the financial market.

Some economic agents assessed that the freezing of resources was robust. On the other hand, the increase in the IOF by presidential decree made it clear that the trajectory of public spending is increasing and that the strategy is to seek fiscal balance by prioritizing increased revenue.

“The problem is that the budget was already very unrealistic at the time of approval,” says Rafael Prado, an economist at GO Associados. “As always, they overestimated revenue and underestimated expenses. That’s why they had to resort to increasing the IOF.”

For Izak Carlos da Silva, a specialist at the Millenium Institute and chief economist at BDMG, the Budget is a "piece of fiction, which at times has the contours of an opera, with ups and downs". "It was made 'for show', and we all know that it will not be fulfilled, as it was not in previous years", he says. "The government is managing month by month, using instruments to increase revenue."

He believes that the government needed to make a contingency to prevent a “negative spiral cycle on macroeconomic variables”, as happened in November, with the joint announcement of a package of spending cuts and the exemption of Income Tax for those who earn up to R$5,000.

“On the other hand, it did this precisely so that it could continue spending. It was necessary to make contingencies to make another 'tortoise in the tree' viable, which was the increase in the IOF, signaling that there is no intention of adjusting the accounts on the expenditure side”, he says.

Government only withdrew part of the IOF

The negative reaction of economic agents forced the government to review two points regarding the increase in IOF on the same night. On Friday (23) morning, Finance Minister Fernando Haddad held a press conference to inform that the zero IOF rate on investments of national funds abroad would be maintained — a common strategy in multimarket products. The decree provided for a charge of 3.5%.

The economic team also backtracked on the same increase in taxation on remittances sent by Brazilian taxpayers to their own accounts abroad. With the change, the 1.1% rate will once again apply.

The decline, however, should reduce the amount to be collected in IOF by only R$2 billion this year. For 2026, the projection of R$41 billion in additional revenue announced will be reduced by around R$4 billion.

Haddad had classified the measure as a "one-off" adjustment. For the Millenium expert, however, the size of the package was surprising. In its original form, the measure would increase annual revenues from the IOF to almost R$110 billion next year, the equivalent of a 60% increase over the amount collected in 2024, from R$68.8 billion to the federal coffers, in values ​​adjusted for inflation up to December.

"The government continues to spend as if there were no tomorrow, but tomorrow always exists," he notes. "But before tomorrow arrives, it goes out there and asks society to make a greater contribution through taxes so that the accounts balance."

Despite the setback, he believes that the measure has not been ruled out. “The government has not stopped signaling that it intends to do this, it just hasn’t managed to do so now,” he says. “It is warning the market to protect itself, because at some point it may try again.”

Income up, expenses down

In practice, the figures presented in the first Primary Revenue and Expenditure Assessment Report (RARDP) of the year reveal how revenue projections were optimistic, while mandatory expenses, such as social security, social benefits and payroll, were underestimated.

Regarding revenues, the projection in the Annual Budget Law (PLOA 2025) was R$2,930.3 billion, or 23.2% of the projected GDP. However, the assessment of the 2nd two months of 2025 indicated that the expected revenues are R$2,899.0 billion, equivalent to 22.8% of the GDP. This represents a shortfall of R$31.3 billion in revenue.

In terms of expenses, the budget projection was R$2,389.6 billion, compared to an actual expenditure of R$2,415.4 billion. In other words, an increase of R$25.8 billion. The main reason for the variation was the government's mandatory expenses, which increased by R$36.4 billion, from R$2,168.5 billion to R$2,204.8 billion. Among these, the most notable were expenses with Social Security, which increased by R$16.7 billion, and with Continuous Benefit Payment (BPC), which increased by R$2.8 billion.

“We have seen a significant increase in BPC, which is a cause for concern, amplified by fraud,” says Prado, from GO Associados. “There is a budget of R$112 billion for BPC, which is almost exceeding the Bolsa Família budget.” He points out that mandatory expenses, which are growing above inflation due to the minimum wage increase policy, are squeezing discretionary expenses and making investments unfeasible.

Government contracts fiscal crisis

For Izak Carlos, the budgetary and fiscal problems are well known, but the current government is not willing to face them, especially at a "time of falling popularity" for President Lula.

To reverse the situation, the government has invested in a series of "benefits" that should put even more pressure on public finances in the coming years. In addition to the project to expand the income tax exemption range for those who earn up to R$5,000 per month, which is currently being processed in Congress, it has also launched a line of credit for private sector workers, including domestic and rural workers, with lower interest rates guaranteed by the FGTS.

Other initiatives include the free distribution of cooking gas to approximately 22 million low-income families and the recent expansion of the social tariff for electricity, via a Provisional Measure. In addition to the fiscal impact, these measures may affect the middle class, which will pay for the subsidies for the exemption from tariffs.

“We need to review tax and social benefits,” said the chief economist at BDMG. “We have had Bolsa Família for over two decades, and the number of beneficiaries is only increasing. We have not found a way out, there are no incentives for them to enter the formal job market. We need to redesign the social program and ease this burden on public finances and the state.”

Another critical point is the issue of the constitutional minimums for Health and Education, which are growing above what is allowed by the fiscal rule. “The math doesn’t add up,” he warns. “We established a constitutional minimum and even so, since 1989, we have not been able to achieve satisfactory indicators for health and education. We need to discuss the efficiency of public spending.”

For the economist, the lack of realism in Budget management “will inevitably lead us to a fiscal crisis in 2027”.

“The government is managing, but the economy is not alchemy — the bill will come due,” he says. “After the election year, it will be very difficult to keep this problem under control. We have seen this movie before, especially between 2013 and 2014. And we know how it ended. It could be the same story.”