Facing an international environment that demands quicker fiscal adjustments and a domestic economy expected to slow down, impacting revenue collection, Brazil’s federal government is likely to face greater challenges in 2025 to meet its primary deficit target. According to the median of 52 projections from consultancies and financial institutions surveyed by Valor, the government is expected to close 2025 with a primary deficit of 0.5% of GDP. This result is 0.25 percentage points below the zero-deficit target, taking into account a tolerance band of 0.25 percentage points.
The estimates, all predicting deficits, ranged from 1.1% of GDP to 0.1% of GDP. For 2024, the median indicates a deficit of 0.3% of GDP, and for 2026, a deficit of 0.6%.
As the electoral calendar approaches the second half of 2025, those monitoring fiscal policy are becoming increasingly concerned that the government, seeking greater popularity, might resort to more expenditure than revenue allows. A more contractionary monetary policy this year presents an additional challenge to fiscal consolidation, given that interest rates have a direct impact on the country’s debt.
The median projections collected by Valor indicate that the central government’s gross debt is expected to rise to 82% of GDP by the end of 2025, up from 78.3% projected for 2024. For 2026, the estimated ratio is 85.6% of GDP.
Last week, Finance Minister Fernando Haddad stated that the federal government could end 2024 with a primary deficit of 0.1% of GDP and a 3.6% growth in activity.
With less room from a “macroeconomic balance” perspective, 2025 is expected to be more challenging fiscally than 2024 was, according to Ítalo Franca, an economist with Santander.
“We are facing less favorable external winds, which increase pressure. In Brazil, we conclude 2024 with an estimated GDP growth of 3.5%, which is positive, but there is little room for further growth in 2025. The labor market is tight, making it difficult to have employment surprises without impacting inflation. There is less room to demonstrate fiscal consolidation, which would need to be swifter given the less favorable external scenario,” he said. Santander projects a primary deficit of 0.6% of GDP this year for target accounting, excluding expenses like court-ordered payments of federal debts.
Brazil enters 2025 with a much more pressured fiscal landscape than it did in 2024, says Raí Chicoli, Chief Economist at Citrino Gestão de Recursos. “There is no way to improve revenue through more measures. The government continues to pursue this, but Congress is unwilling.”
On the revenue side, expectations are not for strong growth in collections, both due to the “base effect,” since 2024’s growth is expected to have been robust, and because of the anticipated economic slowdown in 2025. Considering what’s accounted for in measuring the target, Mr. Chicoli estimates a primary deficit of 0.27% of GDP in 2025.
Optimistically, Flávio Serrano, Chief Economist at Bmg, projects a deficit of 0.1% in 2025 for target compliance. The economist anticipates less fiscal stimulus from the government this year. “There is a submitted budget, and we will have to operate based on it. It’s a slightly more challenging year for revenues. Royalties and dividends should aid collections, but there is spending pressure, primarily from social security. Considering social benefits and income transfers, these expenses account for more than 50% of total spending and grow in real terms as revenues are expected to lose some dynamism, especially in the second half of 2025.”
The main question of the year, said Mr. Franca, is when the measures from late 2024 will begin to take effect. “There have already been measures from July and August starting to show impact, but it’s slow. The pace of materialization has its challenges. The fiscal debate should focus more on expenditures in the first half of the year and gain additional concern about revenues in the second half.”
Mr. Franca believes that more confidence is needed that the limit for real spending growth of 2.5% will be met in 2025, which is a source of “much tension and great uncertainty.” The approved package at the end of 2024 was “a first step,” he said, but further progress is necessary. The forecasted spending on social security, for instance, is still underestimated. “There will be a pressure of R$10 billion to R$15 billion, even with the package, for a block at the beginning of the year,” he estimated. “The second step will be the approval and discussion of the 2025 Budget, and the third will be this block. Fulfilling these steps, depending on these negotiations, we will have a bit more confidence that the limit will be met.”
The government is considering issuing a decree to establish stricter rules for executing public spending at the beginning of the year. The idea is to issue a decree allowing ministries to spend only one-eighteenth (1/18) in the early weeks of 2025 while awaiting the approval of the Annual Budget Bill (PLOA) of 2025 in Congress.
Mr. Chicoli believes that the government will meet the 2.5% spending cap, but there are still doubts, for instance, about the savings achieved through the social benefits fine-tuning announced in mid-2024. “The government spoke of R$25 billion; we are thinking more about R$10 billion to R$15 billion.”
The package of measures approved at the end of 2024 could generate savings of around R$18 billion in 2025, Mr. Chicoli estimated. “The measures presented do not seem to indicate much ambition for drastic changes in spending.” In Congress, he said, there was a dilution of “something that was already not very good.” “It will help meet the cap, provide more freedom for discretionary spending, but won’t generate significant savings,” he noted.
In 2024, Matheus Pizzani, an economist at CM Capital, recalls there were symbolic dates for fiscal matters, such as the revision of primary targets for 2025 and 2026 in April. “It was a significant turning point for the market. In 2025, I don’t expect a similar movement,” he said.
For him, in 2025, the dates for the release of the bimonthly revenue and expenditure reports are likely to be the main fiscal events. “At those times, we will see how the economic team’s projections are faring and, crucially, what we will face in terms of contingencies and blocks. It is clear that, even with the approved fiscal package, there is still a significant gap to the target that will require balancing public accounts,” he said.
Despite the potential effects of the package, there are short-term elements that could unsettle the market, said Mr. Pizzani. “Measures such as changes to the minimum wage, the Fundeb [Fund for Maintenance and Development of Elementary Education], and the salary bonus will need to be monitored month by month to see if they take effect. These are not like the delinking of health and education floors that economists can project and account for in advance. This monitoring is likely to generate turbulence throughout the year,” he said. CM Capital estimates a primary deficit of 0.5% of GDP in 2025.
For Gabriel Leal de Barros, Chief Economist at ARX, a major concern is the “growing trend of excluding expenses from the primary result rule to meet the target.” “My assessment is that the government has a strategy to keep the economy running above potential. This was evident with the Transition PEC, when primary expenses rose by R$170 billion. Later, at the end of 2023 and the beginning of 2024, nearly R$100 billion in registered warrant payments followed. For 2025, we see increasing use of state-owned companies and off-budget funds.” At the end of 2024, he highlighted, the federal government used a judicial decision to publish a provisional measure to exclude climate disaster relief expenses from the spending rule and primary result target. Mr. Barros refers to MP No. 1,282 of December 24, which opened an extraordinary credit of R$6.5 billion for the Ministry of Cities for infrastructure recovery in areas affected by extreme weather events.
Mr. Barros projects a deficit of 0.4% of GDP for 2025. For 2026, the total primary deficit estimate is 1.5%, with a target around 0.8%. “The deterioration in 2026 is due to it being an election year, likely leading to off-budget spending. The government is unlikely to accept an economic slowdown next year because what’s at stake is the election, the most crucial issue for the government,” he said.
With economic deceleration expected in the second half of 2025, Mr. Serrano from Bmg believes that bimonthly reviews may eventually highlight a more challenging scenario. During the year, the Treasury team may introduce other measures to improve revenue dynamics and at least achieve the lower band of the target, he suggests. “In this process, at some point during the year, we may fall below the target, necessitating government contingencies, but I think the solution will come through tax increases on the revenue side.”
Even adhering to the framework, there is a point where the government won’t see significant effects on assets because the main issue now is the debt trajectory, observes Mr. Chicoli. Citrino estimates a central government gross debt-to-GDP ratio of 81.4% by the end of 2025. For 2026, the projection increases to 85.6%.
Economists note that public debt might slightly decline at the end of 2024. It fell from 77.8% in October to 77.7% in November due to factors such as a higher nominal GDP (including inflation), the denominator of the ratio. It is expected to continue decreasing in December, mainly due to strong dollar sales by the central bank.
This movement, however, is likely to be offset by a more pressured trajectory in the short term due to higher interest rates. Santander expects the Selic policy interest rate to peak at 15.5% in 2025. Mr. Franca noted that each additional point in the Selic rate “costs” the government debt R$50 billion, in annualized terms.
“The market pays a lot of attention to both expenses and this interest rate pressure because debt is on a rising trend. The scenario has changed,” said Mr. Franca. To improve the Brazilian assets’ prices and a more favorable environment ahead, he believes more measures and greater confidence in fiscal consolidation are needed. Santander estimates the federal government’s gross debt to be around 83% of GDP by the end of 2025.
