The New Brazilian Fiscal Architecture

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The Minister of Finance, Fernando Haddad. (Photo: Ministry of Finance)

The federal government is preparing to send two new bills to the National Congress that seek to reorganize Brazil’s fiscal system. Under the leadership of Finance Minister Fernando Haddad, and with the political support of President Luiz Inácio Lula da Silva, the plan aims to contain spending, rebalance public accounts, and increase revenue through expanding sectors such as fintechs and online betting. Although the official discourse emphasizes “fiscal responsibility with social justice,” the content of the proposals exposes long-standing tensions in the Brazilian economy: the clash between fiscal adjustment and the protection of rights.

1. Context and Motivations: the Legacy of Provisional Measure 1303 and the Challenge of the Surplus

The initiative stems from the government’s failed attempt to approve Provisional Measure 1303, which expired without a vote in Congress. This measure included a set of actions aimed at increasing revenue, revising tax benefits, and controlling public spending. Parliamentary resistance reflected the difficulty of building a solid political base around economic issues, especially in a pre-election year, when cuts or new taxes are seen as unpopular.

With the MP’s failure, Haddad redesigned the strategy. Instead of concentrating the changes in a single text, the government decided to split the fiscal reform into two distinct bills:

• Project 1: focused on spending containment and limitation of corporate tax credits, aiming to reduce primary expenditure.

  
  

• Project 2: aimed at increasing revenue, with a focus on high-profit, low-regulation sectors such as fintechs and sports betting.

The central goal of the new framework is to achieve a primary surplus of 0.25% of GDP by 2026, a target that may seem modest at first glance but carries significant symbolic and political weight. Technically, the primary surplus represents the positive difference between government revenues and expenditures, excluding public debt interest payments. It is, therefore, the main indicator of fiscal responsibility, used to measure the State’s capacity to meet its financial obligations without relying on further borrowing.

Since the Real Plan in the 1990s, Brazil has developed an economic culture in which the primary surplus has functioned as a signal of market confidence and a precondition for macroeconomic stability. During the governments of Fernando Henrique Cardoso and later Luiz Inácio Lula da Silva (2003–2010), the pursuit of balanced public accounts was seen as a guarantee of predictability for investors, control of inflation, and attraction of foreign capital. This logic consolidated the idea that fiscal credibility is indispensable for any government project, including progressive ones.

However, the debate over the size and role of the surplus has divided economists and political parties for decades. On one side are those who advocate stricter fiscal targets, arguing that persistent deficits increase the cost of public debt, raise interest rates, and erode international confidence. On the other side are those who see the surplus as a form of selective austerity, used to justify cuts to social programs and public investment, perpetuating structural inequalities. Lula’s own government has faced this dilemma before: during his first term (2003–2006), the surplus target of 4.25% of GDP drew internal criticism for limiting social program expansion, though it was crucial for stabilizing the post–currency crisis economy.

In the current context, the 0.25% target appears as a political gesture of reconciliation between these two perspectives. It is low enough to allow continued public investment and social programs, but sufficient to signal to markets and international agencies that the government will not abandon fiscal discipline. This calibration reflects Haddad and Lula’s attempt to rebuild the bridge between fiscal responsibility and social justice, strained after years of ideological polarization and consecutive fiscal crises, especially after 2014, marked by persistent deficits, recession, and a sharp increase in debt.

By adopting a modest target, the government also seeks to buy political time. The reasoning is pragmatic: to keep expectations anchored while the country resumes economic growth, expands its revenue base, and gradually reduces its reliance on emergency measures. In this sense, the 0.25% surplus functions less as an accounting goal and more as a signal of institutional stability, a way of saying that Brazil is committed to balancing its accounts without reproducing the punitive discourse of austerity.

However, the choice is risky. Targets that are too low may be interpreted by the market as a lack of fiscal commitment, putting pressure on interest rates and exchange rates; overly ambitious ones, on the other hand, may require cuts that undermine essential policies. Haddad’s challenge is to sustain the “middle ground” between these poles, showing that the country can simultaneously reduce financial vulnerabilities and expand the welfare state. In other words, the success of this target will not be measured merely by the number itself, but by the government’s ability to convert fiscal stability into social stability, something Brazil has historically failed to do.

2. The Containment Axis: Limiting Tax Credits and Curtailing Spending

The first bill targets so-called tax credits—amounts that companies can deduct from future taxes as compensation for accumulated losses or fiscal incentives granted by the State. This mechanism, originally created to ensure accounting balance and stimulate economic activity, has become controversial over time: although legitimate, it has been routinely used by large corporations to postpone tax payments, undermining federal revenue and widening the gap between small and large companies.

According to the Finance Ministry, this is one of the country’s main sources of tax exemption. The proposed measure would create an annual cap on the use of tax credits and revise the compensation rules for companies with large accumulated losses. The goal is to reduce revenue volatility and improve predictability of public accounts. Although the government has not yet released a detailed technical report on the measure’s impact, internal estimates disclosed by international media, particularly Reuters (Oct. 14 and 21, 2025) and Yahoo Finance Canada, suggest that the changes could generate additional revenues of around R$14.8 billion in 2025 and R$36.2 billion in 2026.

These values reflect preliminary projections from the economic team, not audited calculations. In Brazil, the discussion has been confirmed by outlets such as Agência Brasil and Fenafisco, which reported that the government is considering limiting the use of tax loss credits by companies. In May 2025, the Federal Revenue Service launched an interactive dashboard of tax benefits to increase transparency regarding tax expenditures, reinforcing the importance and timeliness of this debate.

On the expenditure side, the government intends to freeze non-mandatory transfers, postpone slow-execution investments, and restrict automatic adjustments in administrative areas. The justification is to “trim excesses” and contain the automatic growth of public spending without jeopardizing structural policies. However, this is a fine line: poorly calibrated cuts could affect social programs, universities, and cultural policies, undermining the economic, social, and cultural rights guaranteed by the Constitution.

3. The Revenue Axis: Fintechs, Betting, and Financial Capital Under New Scrutiny

The second bill seeks to update the tax structure, targeting high-profit sectors that have so far escaped the same burden applied to traditional industries.

Online betting, which has grown since its 2023 regulation, is expected to see its tax rate increase from 12% to somewhere between 18% and 24%, reflecting the government’s concern with tax evasion and the lack of social oversight in the sector. Fintechs, in turn, will gradually be equated with banks, paying taxes proportional to the nature of their operations—a change that affects both operating costs and competitiveness in the digital market.

Furthermore, the package revives discussions about reinstating taxes on previously exempt investments (such as LCI, LCA, CRI, and CRA) and increasing the tax on Interest on Equity (JCP), a form of shareholder compensation that, critics argue, favors large corporations at the expense of tax progressivity. In practical terms, the government seeks to signal fiscal fairness: those who profit more should contribute more. However, the risk of indirect pass-throughs is real: platforms may raise fees and interest rates, and investors may migrate to less regulated products, offsetting part of the revenue gains.

4. Impacts and Inequalities: Who Pays the Price of Fiscal Balance

The measures affect different social and economic groups unequally:

• Companies with large tax credits will face restrictions and may pass costs on to consumers or employees.

• Betting and financial technology sectors will lose profit margins and may reduce investment.

• Middle- and upper-class investors will see lower returns if tax-exempt products become taxable.

• Vulnerable populations, in turn, face indirect risks: if budget cuts affect income transfer programs, health, culture, or housing, the social impact could be severe.

Brazil’s history shows that fiscal adjustments tend to be regressive when social protection is not shielded. Without explicit safeguards, “balancing the accounts” can simply mean shifting costs from the State to citizens.

Politically, the government tries to balance two permanently tense camps: the financial market, which demands stability and predictability, and the social-progressive base, which calls for the maintenance of rights and public investment. Haddad’s bet is that fiscal credibility will create room for sustainable redistributive policies.

But the challenge is immense. Brazil’s budget is highly rigid over 90% of expenditures are mandatory (salaries, pensions, health, education). There is little room for cuts without political backlash. Moreover, Congress heavily influenced by corporate and regional lobbies, may water down or distort the proposals.

Economically, there is also a timing dilemma: fiscal results appear only in the medium term, while the political cost of adjustment is immediate. The risk is that the government sacrifices public investment in infrastructure and innovation, stifling growth and reducing its own future revenue potential.

More than a set of technical measures, the new fiscal policy is a moral decision disguised as a spreadsheet. It defines who will be spared and who will be sacrificed in the effort to “fix the accounts.” If the adjustment is selective, charging more from wealthy sectors, cutting privileges, and protecting basic rights, it may strengthen the State’s legitimacy. But if it follows the historical path of austerity imposed on the poor, it will repeat the cycle of exclusion that marks Brazilian capitalism.

Ultimately, the Lula–Haddad government seeks to prove that it is possible to combine fiscal responsibility with social inclusion, an equilibrium that has rarely succeeded in Brazil. Success will depend on transparency, technical quality, and, above all, the political will to protect the most vulnerable even under pressure from economic and parliamentary elites.

The new fiscal package represents a turning point for Brazil. It can either consolidate a culture of responsible balance and tax justice or reinforce the old practice of sacrificing rights in the name of the “market.” Splitting the proposals into distinct axes is a smart move, but insufficient without explicit guarantees that health, education, and culture will not be the first victims of adjustment. In the end, the real question is not only “how much the State spends,” but “whom it serves.” If the government can prove that fiscal responsibility and social justice are not opposites but complements, Brazil may take a historic step forward. Otherwise, it will be yet another chapter in the same story: austerity in the name of stability, and stability at the cost of inequality.

References

AGÊNCIA BRASIL. Receita lança painel interativo de benefícios fiscais a empresas. Brasília: EBC, 14 maio 2025. Disponível em: https://agenciabrasil.ebc.com.br/economia/noticia/2025-05/receita-lanca-painel-interativo-de-beneficios-fiscais-empresas. Acesso em: 23 out. 2025.

BRASIL. Projeto de Lei Complementar nº 221, de 2025. Dispõe sobre o plano de redução gradual de benefícios financeiros e creditícios e altera dispositivos da Lei de Responsabilidade Fiscal. Brasília: Câmara dos Deputados, 2025. Disponível em: https://www.camara.leg.br/proposicoesWeb/fichadetramitacao?idProposicao=2573466. Acesso em: 20 out. 2025.

ERNST & YOUNG (EY). Brazilian government announces substantial tax changes affecting interest on net equity, financial investments, betting operations and IOF regulations. Global Tax News, 2025. Disponível em: https://globaltaxnews.ey.com/news/2025-1243-brazilian-government-announces-substantial-tax-changes-affecting-interest-on-net-equity-financial-investments-betting-operations-and-iof-regulations. Acesso em: 25 out. 2025.

O GLOBO. Haddad confirma meta de superávit de 0,25% em 2026; não tem previsão de mudança. Rio de Janeiro: O Globo, 10 abr. 2025. Disponível em: https://oglobo.globo.com/economia/noticia/2025/04/10/haddad-confirma-meta-de-superavit-de-025percent-em-2026-nao-tem-previsao-de-mudanca.ghtml. Acesso em: 25 out. 2025.

REUTERS. Brazil government to resubmit part of fiscal measures to Congress after setback. Londres, 21 out. 2025. Disponível em: https://www.reuters.com/world/americas/brazil-decide-2026-budget-fix-tuesday-says-finance-minister-2025-10-21/. Acesso em: 23 out. 2025.

REUTERS. Brazil to start debating fiscal measures after Congress setback, says finance minister. Londres, 14 out. 2025. Disponível em: https://www.reuters.com/world/americas/brazil-start-debating-fiscal-measures-after-congress-setback-finance-minister-2025-10-14/. Acesso em: 23 out. 2025.