Brazil’s public spending watchdog to review debt forecasts

The assessment inside Brazil’s Federal Court of Accounts, known as the TCU, is that the proposal does not clearly explain the assumptions underlying the projected trajectory and eventual stabilization of public debt.

One issue raised is that while the government frequently predicts an eventual turning point for public debt, the outlook often worsens again within a few months, as seen in previous years, delaying stabilization.

Even if the watchdog ultimately determines that the government’s information is accurate, it still plans to keep a close watch on the issue.

In a statement, Brazil’s National Treasury said it “recognizes the importance of oversight institutions” and noted that “audits and information exchanges are conducted continuously.”

Brazil’s fiscal framework law, approved in 2023, requires the government to present in the budget guidelines proposal the fiscal results needed to stabilize public debt as a share of gross domestic product over a 10-year horizon.

The 2027 proposal, however, showed a deterioration compared with the previous version.

Under the 2026 budget guidelines proposal, gross public debt was expected to peak at 84.2% of GDP in 2028, then begin to decline the following year.

In the new 2027 proposal, the peak has been postponed to 2029 and revised upward to 87.8% of GDP, with debt declining only from 2030 onward.

From that point, the government projects a gradual decline to 83.4% of GDP by 2036.

In the document, the government says the scenario assumes the continuation of fiscal reforms over the coming years to make the projected primary-balance trajectory feasible.

“In this context, the importance of deepening public spending review measures and initiatives to increase public revenues should be emphasized,” the document says.

“The implementation of a fiscal adjustment capable of supporting the projected primary-balance path is a requirement for stabilizing the macroeconomic scenario over the medium term.”

Besides the primary fiscal balance, debt projections are also directly influenced by variables such as GDP growth and Brazil’s benchmark interest rate, the Selic.

According to the government’s projections, the central government’s primary balance would improve from a deficit of 0.44% of GDP in 2026 to a surplus of 0.05% in 2027.

The government expects gradual improvement in subsequent years, with the surplus reaching 0.62% of GDP in 2028 and 0.93% in 2029.

From 2030 onward, the projections assume primary surpluses above 1% of GDP, reaching 1.5% by 2036.

The proposal also assumes a gradual decline in interest rates and continued economic growth throughout the next decade.

The government projects the average Selic key rate at 13.6% in 2026, falling to 10.6% in 2027 and 9.3% in 2028 before stabilizing at 6.4% from 2031 onward.

For GDP, the projection is for real growth of 2.3% in 2026, accelerating to 2.6% between 2027 and 2029 and reaching 3% from 2034 onward.

Another important variable is the cost of debt, measured by the implicit interest rate on Brazil’s gross general government debt.

According to the proposal, the nominal implicit rate would fall to 9.8% in 2027 and 9.1% in 2028, down from 11.8% in 2026, and then reach 7.2% from 2034 onward.

The real implicit rate, adjusted for inflation, would decline from 7.8% in 2026 to 6.6% in 2027, then continue to fall until stabilizing around 4.1% from 2033 onward.

For economist João Pedro Leme of Tendências Consultoria, the government is working with overly optimistic parameters, producing a more favorable debt trajectory.

He argues, however, that the repeated revisions to the debt outlook impose a “reputational cost” on the government and make fiscal policy management more difficult.

Leme also said that the lack of detail regarding certain fiscal assumptions in the 2027 proposal creates uncertainty.

The document projects net primary revenue remaining elevated as a share of GDP, rising to 19.2% in 2030 from 18.9% in 2026.

At the same time, expenditures would decline by almost 1.5 percentage points of GDP over the same period, falling to 18% in 2030 from 19.4% in 2026.

The economist acknowledged that the budget guidelines proposal is not intended to detail specific adjustment measures.

Even so, he argued that the absence of clearer signals from the economic team regarding that agenda increases skepticism toward the projected scenario.

“That puts market participants in a wait-and-see position,” he said. “We have not seen a fiscal consolidation of this magnitude in a very long time.”

“There are doubts about how the government intends to organize spending cuts equivalent to 1.5% of GDP without creating a contractionary effect while still delivering economic growth close to 3% per year, which is above what used to be considered Brazil’s potential growth rate,” Leme added.

Alexandre Andrade, director at Brazil’s Independent Fiscal Institution, a Senate-affiliated fiscal policy watchdog, said the perception that the debt turning point is constantly postponed is confirmed when comparing successive budget cycles.

According to him, this partly reflects what the government describes as the real cost of financing, but that is not the only factor complicating debt stabilization.

Andrade contended that, despite the government’s plan assuming adherence to the fiscal framework, including primary surpluses and ongoing spending reviews and reforms, the actual primary balances in 2024 and 2025 were inadequate to limit the increase in gross public debt.

“Legal deductions from expenditures in calculating the primary result may help the government formally meet the target set in the budget guidelines law, but the effective fiscal result ends up weaker—and that is the variable that affects public debt dynamics,” he said.

Another issue raised by Andrade concerns the gap between the government’s projections and market estimates.

“As a rule, the executive branch’s projections tend to be relatively more optimistic,” he said.

The Treasury also said it “publishes the Fiscal Projections Report every six months,” which also includes debt estimates.