Brazil's Fiscal Watchdog Projects Public Debt to Exceed 82% of GDP by 2026

IFI Forecasts Significant Debt Increase

Brazil's independent Fiscal Institution (IFI), the nation's fiscal watchdog linked to the Federal Senate, projects that the country's gross public debt will reach approximately 82.4% of Gross Domestic Product (GDP) by 2026. This assessment, detailed in recent reports, underscores a continuing upward trend in Brazil's indebtedness, extending an upward trajectory through 2035 unless current policy settings are altered. The IFI, established in 2016, provides independent scrutiny of public accounts and fiscal projections, aiming to foster discipline, transparency, and quality in fiscal policy.

Factors Driving Debt Growth

The IFI attributes the projected increase in gross public debt, also known as Gross General Government Debt (DBGG), to several interconnected factors:

• Recurring Primary Deficits: Persistent primary deficits under current fiscal rules contribute significantly to the debt accumulation.
• High Real Interest Rates: Brazil faces stubbornly high real interest rates, with projections near 5.1% in some assessments, and the benchmark Selic interest rate forecast to average 13.11% in 2026. These high rates increase the cost of servicing the existing debt.
• Moderate Economic Growth: An average real GDP growth rate around 2.2%, or 2.44% as projected in the government's 2026 budget bill, is insufficient to offset the rising debt burden.
• Fiscal Gaps: The expiration of Provisional Measure 1,303 has left an estimated R$20 billion gap in the 2026 fiscal plan, necessitating the government to seek alternative revenue sources or spending offsets.
• Increased Mandatory Expenditures: The federal budget is increasingly constrained by rising mandatory expenditures, crowding out public investment and absorbing a growing share of resources for interest payments.

The debt, which stood at 71.7% of GDP in December 2022, reached 78.5% in August 2024 and was expected to close 2024 at 80.0% of GDP.

Implications and Policy Challenges

The IFI's projections highlight acute fiscal pressure on Brazil's federal budget. To merely stop the debt from rising, the institution estimates that a primary surplus of roughly 2.1% of GDP would be required, a figure significantly higher than recent outcomes and the government's current target. The government has set a primary surplus target of 0.25% of GDP by 2026, but the IFI has indicated that achieving debt stabilization would necessitate a primary surplus of 2.4% of GDP, far exceeding this goal. Executive Director Marcus Pestana has warned that public spending faces real limits and that debt dynamics must consider an 'intergenerational pact,' emphasizing that today's consumption financed by tomorrow's taxpayers has consequences that require structural solutions. Director Alexandre Andrade has also commented on the challenging scenario for meeting fiscal targets. The mounting public debt poses obstacles for investments in Brazil, as concerns over fiscal control lead investors to demand higher yields, further expanding the gross debt and potentially hindering public investments in critical areas like infrastructure. The IFI has also warned that Brazil's 2026 fiscal targets are 'unattainable' under current policies, and without urgent structural reforms, public debt could reach 100% of GDP by 2030 and nearly 125% by 2035.