The federal government will immediately begin dismantling emergency fuel subsidies created after the start of the war in the Middle East, in an attempt by President Luiz Inácio Lula da Silva to signal greater fiscal responsibility, according to a person with knowledge of the matter.
The first step will be to reduce diesel subsidies, said the source, who spoke on condition of anonymity. The measure will partially reverse a temporary package of tax cuts and incentives created to protect consumers from the shock in oil prices caused by the conflict with Iran.
Brazil’s nominal deficit reached 9.6% of the Gross Domestic Product (GDP), the Central Bank reported this Tuesday, amid increased stimulus by the government to reinforce Lula’s re-election campaign. The billions of reais in extra spending have increased investor concerns about a broader deterioration in public accounts. At the same time, this fiscal impulse makes it difficult for the Central Bank to bring inflation back to the 3% target, in an environment of very high interest rates.
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The fiscal framework is a long-standing headache for Brazil, which lost investment grade in 2015, mainly because of rising deficits and public debt. Since then, different governments have found it difficult to reorganize the accounts and regain confidence in the conduct of the Budget.
The decision marks the beginning of the dismantling of one of the Lula government’s largest emergency packages. At the beginning of this year, the government announced that it could spend up to R$2.9 billion per month to pay for subsidies for gasoline and diesel. Also considering the other exemptions and incentives adopted since the start of the war in the Middle East, the total cost is around R$13 billion.
Among the emergency measures adopted are the cut in taxes on biodiesel and aviation kerosene, the subsidy for the import of cooking gas, the incentive for domestic diesel production and the release of credit lines for airlines through a national fund.
The government also authorized Petrobras to readjust fuel prices, after the state-owned company postponed increases to cushion the impact of international volatility.
Last week, the Central Bank again raised its projection for the growth of the Brazilian economy in 2026, now to 2%, citing factors such as stronger demand, supported by fiscal and credit stimuli.
At the same time, the monetary authority warned that these measures could increase pressure on inflation, which has been above 3% since the most acute period of the Covid-19 pandemic, in 2020.
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Lula is trying to win a fourth term in the October elections.
© 2026 Bloomberg L.P.
