Our View
The 2025 federal budget, totaling BRL 5.86 trillion, a 5.45% YOY increase, was presented by the executive to the Chamber of Deputies on the night of August 30. While the budget aims to zero out the deficit by next year, which is a positive development, this outcome hinges on securing additional revenue that may not materialize without congressional approval of certain measures—a challenging process in itself. Furthermore, the bill shows few robust mechanisms for spending cuts.
While this bill represents a significant step toward fiscal credibility for a government that has faced persistent criticism in this area, it heavily relies on external factors and requires substantial cooperation from the legislative branch to achieve its intended results. The coming months will be crucial in determining whether the goal of a zero deficit for the next year is attainable.
Business implications and market concerns
- A tight budget: Considering the limited reductions and increased expenditures, the projected spending is near the upper limit permitted by Brazil’s fiscal responsibility laws. This leaves minimal room for unforeseen expenses, similar to those encountered in Rio Grande do Sul this year. This may cause a fragility in the budget that could lead to higher spending than anticipated, one of the market’s main concerns.
- Increased tax collection to enhance public revenue: One of the main sources for additional revenue next year is the bill to increase the rates of the Social Contribution on Net Profit (CSLL) and the taxation on payments of interest on own capital (JCP). This measure would have to pass in Congress, which will be a tough sell. Additionally, further enhancing corporate tax will be a very unpopular measure in the productive sector, which believes the tax burden in Brazil is already quite high.
- The predominance of obligatory expenses: Due to structural reasons, mandatory expenses are still suffocating resources for public investments, which will stand at their constitutional minimum in the best case scenario, limiting, once again, potential benefits for the productive sector.
- Expenses underestimation: The anticipated increase in routine expenditures outlined in the budget is viewed by financial institutions as underestimated. This could result in higher spending than initially planned, potentially jeopardizing the goal of a zero deficit.
Details
According to the new budget, expenditures for the year will represent 19.3% of GDP, close to the 19.2% average from 2015 to 2023. Revenues, on the other hand, are expected to rise to 19%, up from the 17.5% standard in 2023 and the 18.8% projected for this year. The only anticipated cut for the coming year remains the previously announced BRL 25.9 billion, achieved through a detailed review of social benefit expenditures. Thus, the expected increase in spending will largely be covered by additional revenues.
For 2025, the government expects approximately BRL 168.3 billion in additional revenues, of which 46 billion are conditional, meaning they depend on changes in laws that must be approved by Congress. This will likely represent the biggest challenge for the approval of the new budget.
Regarding resource allocation, most funds will go, as usual, to mandatory expenses. Of the BRL 143.9 billion in additional funding in the 2025 budget compared to this year, 132.2 billion will be allocated to mandatory expenses, while the remainder will be for investments. As usual, the largest portion of these mandatory expenses will go to social security. Both education and health budgets are over their constitutional minimum, at 77% and 6% respectively.
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