Lula's spending makes adjusting public accounts the next government's biggest challenge in 2027

In a recent encounter during the G7 summit held in France, Brazilian President Luiz Inácio Lula da Silva responded to comments made by U.S. President Donald Trump regarding Brazil's political landscape. The remarks were made during separate press conferences following the conclusion of the summit. Trump expressed concerns about Brazil becoming politically unstable, referencing reports of individuals running for president being detained. He specifically mentioned what appeared to be confusion between Senator Flávio Bolsonaro (PL-RJ), a presidential candidate, and his brother, former federal deputy Eduardo Bolsonaro (PL-SP), who was sentenced on Tuesday (16th) by the First Chamber of the Supreme Court of Justice (STF) to four years in semi-open prison and eight years of electoral ineligibility due to charges of coercion during the process.

Regarding Brazil’s upcoming presidential election in October, Trump stated that Brazilians engage in fierce competition during elections. However, he emphasized that no one plays harder than Americans, asserting that their elections are entirely manipulated. This statement reiterated his belief that the 2020 election, which saw him lose to Democrat Joe Biden, was fraudulent.

In response, Lula addressed Trump's comments in his own press conference. He asserted that there is no country in the world with more peaceful, calm, and less turbulent elections than Brazil. Highlighting Brazil’s electronic voting system, Lula noted that results are known within two hours after the polls close. While acknowledging Trump's right to have personal preferences and ideological leanings, Lula urged the American leader not to interfere in Brazil’s elections, stating they are Brazil's concern just as American elections are America's.

The meeting between Lula and Trump took place at the White House earlier this May, but relations between the two leaders have since become strained again. The United States designated Brazilian criminal groups such as the Primeiro Comando da Capital (PCC) and Comando Vermelho (CV) as terrorist organizations, a move that the Brazilian government deemed disrespectful to national sovereignty.

Recent developments indicate that the Trump administration has signaled new tariffs on Brazilian products. The Office of the U.S. Trade Representative (USTR) proposed a 25% surcharge on Brazilian imports under the pretext of unfair trade practices, along with another 12.5% surcharge on Brazil and other 59 countries, citing failures in combating goods produced using forced labor and slavery.

Despite Trump suggesting he spent considerable time with Lula at the G7 summit, Lula claimed he did not request a bilateral meeting with Trump because negotiations between the two nations are ongoing. Lula criticized Trump's actions as inappropriate for Brazil, noting that Trump continues to act like an emperor.

Looking ahead, the financial challenges facing Brazil are significant. Regardless of who wins the 2026 presidential election, the incoming government will face the urgent task of balancing public accounts. Rapid growth in mandatory expenses, rising debt levels, and high interest rates create the primary challenge for the future administration. Investors are demanding higher returns to finance the Treasury, increasing long-term bond rates and raising concerns about the government's ability to stabilize its debt in the coming years.

Projections from the Ministry of Planning in 2025 indicated a risk of insufficient resources to cover government spending starting in 2027. This scenario reinforces the perception that the elected president will inherit a difficult equation requiring confrontation between campaign promises and reality.

While Lula maintains that the country is experiencing a cycle of growth with social inclusion and argues that the poor can fit into the budget, opposition warns of the danger of fiscal deterioration. His opponent in the electoral race, Senator Flávio Bolsonaro (PL-RJ), promises strict expenditure control if he assumes leadership of the presidency.

In recent years, federal expenditures have grown faster than revenue, despite successive records of collections. Social security, payroll, social benefits, and constitutional obligations consume an increasingly large portion of the budget, reducing investment margins. This creates a vicious circle where high spending raises doubts about the sustainability of public finances, pressures inflation, and makes it difficult to reduce interest rates. With high rates, the cost of financing debt increases, expanding the Union's financial expense and compressing fiscal space.

The Court of Auditors of the Federation (TCU) identified at least 10 measures taken by the government in 2025 that violated legal fiscal requirements. According to the court's assessment, mandatory expenses, revenue exemptions, and official programs were adopted without estimates or compensation. The rapporteur of the presidential accounts, Minister Benjamin Zymler, warned about mechanisms that shift expenses to parallel structures. Although recommending approval of the accounts with reservations, the TCU reinforced questions about transparency and the sustainability of fiscal policy.

Experts also highlight the importance of the new government taking tough measures. The challenge is not solely on the executive branch. Projects currently under consideration in Congress carry substantial budgetary impacts, including debt renegotiations, sectoral benefits, pension rules, and social programs. In many cases, these expenses lack permanent funding sources.

According to businessman and management advisor Ismar Becker, the current fiscal model created a dynamic of automatic spending growth that tends to absorb all revenue. He predicts a "correction brake" in the next federal administration to address the effects of the "framework fallacy."

Financial consultant Júlio Hegedus Neto evaluates that fiscal deterioration will continue to require high premiums for rolling over public debt. In his view, the president elected in 2026 will need to begin the term announcing adjustment measures capable of reversing expectations.

Recent government initiatives dubbed the "reelection kit" increase public spending by R$ 187.2 billion, but 94.4% of this amount is outside the rule limiting spending growth, according to research by the Poder360 portal. These measures use mechanisms that escape the fiscal framework, although they increase the country's public debt.

The trajectory of gross government debt ended the year 2025 at 78.6%, and the expectation is that it could reach nearly 88% by 2027. This trend increases the return required by investors to finance the Treasury, maintaining high interest rates.

The criteria used in the study are from economist Marcos Mendes, an associate researcher at Insper and former chief economic advisor to the Ministry of Finance between 2016 and 2018. Among the methods used to circumvent the spending growth limits established by the government itself in 2023 is the allocation of Treasury funds for opening credit by state banks, as occurs in the Move Applications program. Since these funds theoretically will be returned to the Treasury, they do not appear in the Budget and are classified as financial expenses.

Another way to bypass the rule limiting spending growth is through funds guaranteeing loans. This includes the Desenrola 2.0 and the expansion of the My Home, My Life program. The argument is that these funds hold money, even though previously the amounts were intended to pay public debt and now cannot be used for that purpose.

In other measures, the government gives up revenue collection, such as in the case of increased exemptions and discounts on income tax. Although there is no increase in spending, the change falls outside the rule on spending growth, but there is a fiscal impact.

Finally, there is the opening of extraordinary credit, money disbursed by the Treasury, but which remains outside the account of spending growth, although not the fiscal target. This is the case of the subsidy for gasoline.

During the G7 summit, Lula wore a shirt symbolizing national sovereignty, drawing applause from supporters. The contrast with the Bolsonaro camp, which displayed signs of nationalism, was evident. Despite the tensions, Lula managed to avoid direct conflict, focusing instead on defending Brazil against external pressures. The upcoming October election promises to be a significant contest, with both sides vying for national symbols and support.