Lula’s Cabinet Spars Over How Lofty Its Budget Surplus Goal Should Be

(Bloomberg) -- Brazil’s top economic officials are at odds over a closely-watched fiscal target just days before the government must finalize its 2025 budget outline, according to two people with knowledge of the situation.

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The Finance Ministry, led by Fernando Haddad, wants to maintain its original aim for a primary fiscal surplus of 0.5% of gross domestic product next year. But the Planning Ministry, under the command of Simone Tebet, prefers a less ambitious goal, the people said, requesting anonymity to discuss internal matters.

As President Luiz Inacio Lula da Silva’s government prepares to submit its 2025 budget guidelines to Congress before the April 15 deadline, the discord highlights the difficulties the administration has faced in balancing the country’s fiscal realities, its own spending desires and Haddad’s efforts to convince markets that he is committed to shoring up public accounts.

Investors want signs that the administration plans to control spending and limit deficits. But setting targets so ambitious that they are eventually forced to change also carries substantial credibility risk for the government and Brazilian assets.

Haddad has defied at least some of the financial market’s skepticism that he could generate enough new tax revenue to deliver on this year’s promise to eliminate the primary fiscal deficit, which excludes interest payments.

Over the first two months of the year, Brazil has hauled in 467 billion reais ($92.2 billion) in tax collections — a record for the period. The government’s economic team is currently projecting a deficit of 0.1% of GDP, within the tolerance range of new spending rules established last year.

Read More: Brazil Says It’s On Track to Meet Key Budget Deficit Target

Still, analysts broadly expect Lula’s administration will have to alter the zero-deficit target in the coming months, and they remain wary about its ability to deliver a surplus in 2025. Markets are currently projecting primary deficits of 0.7% of GDP in 2024 and 0.6% next year, according to the central bank’s latest weekly survey of economists.

Lula has in recent weeks ramped up pressure on Haddad and other ministers to boost spending in order to bolster growth as the economy slows and his approval rating drops.

Both ministries will monitor tax collections in the coming months for signs that the early-2024 revenue gains are sustainable. That will be a crucial factor for its ability to hit this year’s target — if it falls short of the zero-deficit goal, the government would have very little chance of achieving next year’s more ambitious aims, one of the people said.

A review of the 2025 target would have to be considered if revenues fail to meet expectations, Tebet told reporters in Brasilia earlier this week.

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