Structural reforms left out as experts warn of tougher 2027 outlook | Economy

Solange Srour, head of macroeconomics for Brazil at UBS Wealth Management, said the consensus, apparently shared by both politicians and society, that Brazil’s fiscal problems must be addressed, needs to turn into action.

“This consensus is not being put into practice. We haven’t seen any structural reform announcements. It’s crucial to discuss administrative reform, and that discussion must include improving public sector productivity, which would boost GDP overall. But tackling primary expenditures also requires changes to the minimum wage, the growth of spending on the BPC [a benefit for the elderly and disabled], and a pension reform,” she said.

Natalie Victal, chief economist at SulAmérica Investimentos, said the desired cuts in tax expenditures discussed in the meeting between the government and congressional leaders are hard to implement and unlikely to yield the expected results in 2026.

“Debating this through regular legislation seems difficult. Preliminary estimates show about one-third of tax expenditures have a constitutional basis. How are we going to reverse a benefit through regular legislation if it’s enshrined in the Constitution? It seems we won’t be able to deliver savings in 2026,” she noted.

She said tax exemptions are deeply embedded in how both public and private sector companies operate. She pointed to the Perse program, created in 2022 to support the events industry, and said that although the executive branch tried to end it, court decisions have kept the exemptions in place.

“Fiscal adjustment discussions must include members of the judiciary so that decisions made by the executive branch and Congress are upheld,” Ms. Victal said. She noted that tax expenditures have long been identified as major drivers of fiscal imbalance, yet persist. “Economic growth has surprised us for years, and these tax expenditures remain in place even as GDP grows,” she said.

Blanket cuts vs. targeted reforms

Sergio Firpo, a professor at Insper and former secretary for public policy monitoring and evaluation at the Ministry of Planning, said a flat cut in tax expenditures, as floated in the government-Legislative meeting, may be politically feasible but overlooks efforts to evaluate the effectiveness of these policies and the nuances across different sectors.

“We take a step back when we propose a blanket cut and ignore the fact that some subsidies are valuable to society while others are not,” Mr. Firpo said. “What we need is the courage to target the ones that aren’t.”

He added that the current fiscal situation also demands action on the spending side. Pensions and welfare programs, for example, are squeezing discretionary spending, he said.

Gabriel Leal de Barros, chief economist at ARX Investimentos, argued that a 10% cut in tax benefits must be based on cost-benefit evaluations, to indicate “which battles are worth fighting.” He warned against across-the-board cuts, which could sidestep easier targets and focus on politically sensitive ones instead.

He said the tax reform missed the chance to review the Manaus Free Trade Zone tax exemptions. In fiscal matters, he said, the government knows what needs to be done on both revenue and spending but lacks political will.

In the early 2000s, he recalled, tax exemptions amounted to 1.8% of GDP. Today, they represent about 5%. This happened even though Brazil’s Fiscal Responsibility Law prohibits tax breaks without compensation. Mr. Leal de Barros argued that the Federal Court of Accounts (TCU) has failed to enforce this rule.

He also highlighted a lack of centralized data in the federal government. “The agencies holding the pen believe they have so much power they don’t need to share, and that enables fraud,” he said. There is considerable room to reduce such spending without needing congressional approval.

Weak governance and inefficient spending

Sérgio Lazzarini, a professor at Insper, said governance and transparency in resource allocation are as important as cost-effectiveness evaluations. “There’s a lot of room to improve spending efficiency through better governance,” he said.

He pointed to the Simples tax regime for small businesses as Brazil’s biggest tax expenditure. “Simples has known distortions. Companies hit a revenue cap and don’t want to grow, which leads to systemic productivity losses,” he said. He also noted that some companies split themselves into multiple corporate entities to stay below the threshold. “This is a major distortion, and frankly, I don’t know why it’s not being tackled.”

He also criticized the rapid rise in congressional earmarks, many of which are allocated to municipalities and NGOs without any oversight. “No one monitors who’s getting the money or the criteria being used,” he said.

Political commitment and reform scope

Rodrigo Maia, president of the National Confederation of Financial Institutions (CNF), said Congress must play a role in building long-term fiscal solutions, balancing essential public services with spending control. Reforming the tax system, he said, is not just about raising revenues—it’s about giving the private sector legal certainty.

Congressman Pedro Paulo, who coordinates the Lower House working group on administrative reform, said the proposal doesn’t exempt the government from making primary spending cuts. He said these cuts could be part of the reform, but they are not its main focus.

“The debate around civil service reform raises expectations of a major fiscal adjustment,” he said. “But the main goal isn’t cutting primary spending.”

He added that savings from measures like capping ultra-high salaries or reforming military pensions pale in comparison to tackling budget earmarks and tax exemptions. He argued the government has been unable to confront public spending head-on.

Administrative reform not a silver bullet

Mansueto Almeida, chief economist at BTG Pactual and a former Treasury secretary under Presidents Michel Temer and Jair Bolsonaro, agreed that administrative reform would improve government efficiency, but warned it won’t deliver immediate savings. “It won’t bring any significant fiscal impact in 10, 12, or even 15 months,” he said.

Brazil has already sharply cut spending on active and retired civil servants, he noted, with this expenditure now hovering around 3.3% of GDP. The problem, he said, lies in the large salary disparities within the public sector. “It’s a tough discussion, but necessary if we’re talking about efficiency.”

Mr. Almeida welcomed the Sunday meeting between the executive branch and Congress to discuss fiscal measures. He said reforms take time and pointed to the pension reform, which took three years from proposal in late 2016 to approval in 2019.

He stressed that even with revenue recovery, federal accounts are still in the red. “Interest costs are very high, and it’s unclear when debt will stabilize or start to decline.” The nominal deficit reached 8.4% of GDP last year, compared to 8.8% in 2023, and is expected to remain at similar levels this year. “We cut the primary deficit by R$200 billion, but lost almost all of it to a R$160 billion increase in interest expenses,” he said.

Next year, he estimated, the nominal deficit could be around 8.2% to 8.4% of GDP, ending the current administration at roughly 8.5%, placing Brazil among the five countries with the highest nominal deficits in the world.

High real interest rates and reform urgency

He said structural reforms are difficult anywhere, but especially in Brazil, where over half of primary spending—expected to reach R$2.4 trillion this year—goes to pensions and welfare programs, many of them indexed to the minimum wage and growing in real terms.

He praised Brazil’s regulatory frameworks for supporting infrastructure investments but said this progress hinges on expectations of deeper reform and single-digit interest rates returning by 2027. If the adjustment fails and rates remain high, he warned, the outlook will deteriorate. “The situation isn’t good, but we must use this moment of economic strength and employment to move out of our comfort zone, or we’ll face much more serious problems.”

Ms. Srour of UBS agreed, noting that Brazil only carries out structural reforms during major crises—such as hyperinflation or deep recessions—or at the start of presidential terms.

She said recent improvements in Brazilian asset prices and lower risk premiums are tied to external factors, not any domestic improvement in fundamentals. “We’ve made progress in the fiscal debate but taken steps backward in action,” she said. “The new minimum wage rule wiped out most of the savings from pension reform, and the return of spending floors for health and education also adds pressure.”

She said it is up to the market, academia, and political actors to make the urgency of fiscal reform clear. “The country has been growing 3% for three years. The Central Bank is close to ending the tightening cycle, and inflation is not running wild. The situation doesn’t feel urgent like in the past—but paying 8% real interest is not sustainable.”

“In conversations with the market, I don’t see any confidence in the resumption of investments. It’s our job to highlight this urgency—if we wait until 2027, the burden will be much heavier.”