The Brazilian government raises its 2026 deficit forecast, intensifying fiscal pressures

⑴ On Thursday, the Brazilian government raised its 2026 primary deficit forecast from approximately 52 billion reais projected in July to about 81 billion reais, equivalent to around 0.59% of GDP. ⑵ The deterioration in the deficit forecast mainly reflects an expected increase in spending of about 22 billion reais and a projected decrease in total revenue of around 16 billion reais. ⑶ The government expects 2026 primary spending to account for roughly 19.55% of GDP, the highest level since President Lula’s current term began in 2023. ⑷ Rising expenditures are at the core of fiscal concerns surrounding the Lula administration, as Lula seeks re-election in October. ⑸ Investors’ doubts about Brazil’s ability to restore fiscal balance have driven up risk premiums and pushed the total debt-to-GDP ratio sharply higher. ⑹ This year’s fiscal target is a primary surplus of approximately 0.25% of GDP, with a tolerance band of 0.25 percentage points, but the government may exclude certain expenditures when assessing compliance. ⑺ Based on this calculation method, the government now expects a primary deficit of about 0.1% of GDP, compared with a previously projected surplus of around 0.08% in the fiscal report. ⑻ To comply with fiscal rules, the government said it needs to freeze around 14 billion reais in spending and block approximately 2.4 billion reais in expenditures.