Concerns arise over optimistic revenue estimates and tightening discretionary spending amid fiscal constraints
08/26/2024
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Antonio Anastasia — Foto: José Cruz/Agência Brasil
As the Executive branch prepares to send the 2025 Annual Budget Act (PLOA) to Congress in about a week, Brazil’s public spending watchdog TCU has concluded that the government’s projection for next year’s primary balance carries significant risks. These risks stem from potential revenue shortfalls, increases in mandatory spending, and limitations on budgetary contingency measures.
The findings are detailed in a report by the TCU, which analyzed the 2025 Budget Guidelines Act (PLDO). The fiscal target for next year is zero deficit, with the PLDO forecasting a surplus of R$10.8 billion. The body’s plenary issued a warning with these findings to the economic team, with Antonio Anastasia serving as the rapporteur.
TCU auditors determined that the primary net revenue estimates presented in the PLDO are “optimistic,” exceeding market-based projections by R$35.6 billion to R$50.7 billion. This raises concerns about potential revenue shortfalls.
The technical team also noted that the projected increase in total primary expenditures exceeds the new fiscal framework’s limit of 2.5% real annual growth. This would compress discretionary spending, which includes public investment and operating costs.
The risk becomes even more pronounced in 2027 and 2028, according to the watchdog’s experts. During these years, projections for net discretionary spending, excluding congressional earmarks and minimum requirements, drop to R$11.75 billion in 2028 from R$100.94 billion in 2024—an 88% reduction over the period. This means there would be virtually no funds for investment or operational costs.
“Without legislative revision, the increase in mandatory expenses and expenditures tied proportionally to revenue could lead to a shutdown of government operations or compromise the fiscal anchor of the new framework,” the auditors said.
They also pointed out that while the 2025 PLDO includes measures to review expenditures, it lacks concrete proposals to amend legislation and address the risk of squeezing discretionary spending.
A third risk to meeting the fiscal target in 2025 arises from restrictions on budgetary cuts, should the zero-deficit target be threatened. The auditors noted that, under the new framework, the primary balance is allowed a tolerance range. The government has been targeting the lower bound of the target, rather than the midpoint, explicitly saying this in the 2025 PLDO.
The TCU has emphasized that aiming for the lower bound for cost-cutting purposes, while not illegal, could create “long-term inconsistencies in debt trajectory” and hinder the achievement of the fiscal target. The 2025 PLDO allows for a deficit of up to R$31 billion in 2025.
Another limitation on cost-cutting measures is the stipulation that only the portion of expenditure growth exceeding 0.6% in real terms may be frozen. The legality of this provision is under review by the TCU in a separate ongoing case.
“The scenario presented by the estimates will likely force the Executive branch to choose between two mutually exclusive options: either ensure the proper functioning of the federal administration or preserve the primary spending limit. Both appear to be incompatible under the projected scenario,” the TCU noted.
Finally, the TCU’s technical body said that the assumptions used by the government in the project—namely, spending growing at a slower pace than revenue and a rising primary balance starting in 2026—may be “unrealistic” without a revision of either mandatory or revenue-linked discretionary expenditures.
The ministries of Finance and Planning declined to comment.
*Por Jéssica Sant’Ana — Brasília
Source: Valor International