new proposal in Brasilia establishes severe limits and automatic tax targets

Investors closely monitor discussions about the balance of public accounts. Senator Alessandro Vieira (MDB-SE) announced that he had presented the Fiscal Credibility Law on December 5, bringing new guidelines for federal budget administration.

The proposal establishes a multi-year plan for the primary result, which should be included in the first LDO of each mandate. The text determines a path of increasing adjustments between 2027 and 2030, requiring a fiscal effort that starts with half a percent and advances to one percent, one and a half percent and two point one percent of gross domestic product annually.

The validation of the numbers will be the responsibility of IFI, with a deadline for delivery by the end of the first quarter of each year. Adjustments to targets will only be permitted in critical situations such as calamities or severe recessions, while any technical failures will be investigated solely by the Federal Audit Court.

The matter also limits the increase in state spending. The limit for real expenditure growth will be reduced to one point five percent annually from 2028 onwards, also determining the blocking of parliamentary amendments in the same proportion as the cuts imposed on the Executive in case of non-compliance.

Penalties become stricter if the government fails to meet targets. A first infraction will result in the suspension of subsidies and salary adjustments above inflation, in addition to doubling the cut in tax benefits from ten to twenty percent. If there is a consecutive recurrence or a deviation greater than half a percent of GDP, the reduction in tax incentives will reach thirty percent.

The urgency for restrictive measures arises from unfavorable projections prepared by the IFI. The agency calculates that the country would need to achieve a surplus of two point nine percent of GDP just to stabilize the public debt, whose trajectory points to a mark of one hundred and twenty-four percent of GDP by 2036.

What changes for the investor

The discussion of rigid expense control mechanisms and automatic punishments for non-compliance with targets directly affects the State's expectations of solvency. For those who operate and invest in local assets and in the formation of the interest rate curve and the dollar, the introduction of tougher legal restrictions and the role of technical bodies in monitoring the budget bring new parameters for the pricing of sovereign risk and macroeconomic predictability in the medium and long term.

Automatically translated from Portuguese.