Political scientist Christopher Garman, executive director for the Americas of the Eurasia group, a risk analysis and consultancy company, criticized the Brazilian government’s decision to announce the spending cut package along with the expansion of Income Tax exemption (IR ). According to him, this strategy was a ‘big shot in the foot’.
After weeks of expectation from the financial market, The government sent to the National Congress, at the beginning of the week, a proposal to cut mandatory spending that foresees savings of around R$70 billion over the next two years, including changes to the rules on the minimum wage and salary bonus. a.
The government also intends to forward a proposal to Congress to increase the . The measure, announced by the Minister of Finance, Fernando Haddad, at the end of November, should cause a fiscal impact of R$35 billion in lost revenue, according to the ministry itself.
In contrast, the equivalent of R$50 thousand per month.
Garman explains that the economic team, led by Finance Minister Fernando Haddad, even succeeded in convincing President Luiz Inácio Lula da Silva (PT) on the need to adjust public accounts. He states that concern about public debt has contributed to the devaluation of the real in recent months, generating higher inflation expectations and putting pressure on the Central Bank (BC) to increase interest rates.
“O argument from the economic team was that, if we don’t the adjustments of the accounts now, we will not be able to allow the Central Bank to reduce interest rates in the future”, he said.
However, the director of Eurasia assesses that the political discomfort generated by this announcement was what led President Lula to also propose a more electoral measure, such as the exemption from income tax for salaries of up to R$5,000.
The Eurasia director argues that this combination of measures raised concerns about the ability to finance the exemption and potentially increase consumption and inflation, contradicting the initial objective of fiscal control.
“Isso not just raises concerns about the ability to finance this exemption, but it is also a policy that generates more consumption and, therefore, more inflation exactly when the government’s intention and try to control this more inflationary impulse. The result was a stronger dollar, rising inflation expectations and greater difficulties for the Central Bank.”he noted.
Unfavorable external scenario
The political scientist also highlights that the moment is particularly delicate due to the external scenario. The Donald Trump administration’s policies in the United States, including tougher tariff measures and a more staunch anti-immigration stance, added to the lack of improvement in American public accounts, tend to generate more global inflation and strengthen the dollar.
“All of this generates more inflation and this also translates into a stronger dollar and emerging market currencies, like Brazilmore undervalued. In other words, just when the government needed to give a constructive signal to protect itself before an external environmentthe most adverse, he did just the opposite”, he stated.
“This translates, not Brazil, with higher interest rates, more depreciated exchange ratemore inflation and, politically for 2026, generates more risks for President Lula in the coming years”, he concluded.
