Brazil freezes nearly US$3bn in this year's budget

The administration of Brazilian President Luiz Inácio Lula da Silva will freeze 15 billion reais (US$2.7bn) in this year’s budget to help calm investors' nerves and demonstrate its commitment to fiscal consolidation, even though the move involves electoral risks.

"We will have to contain 15bn reais to maintain the pace of compliance with the fiscal framework," finance minister Fernando Haddad said during a televised interview.

A government source told BNamericas on condition of anonymity that the freeze may affect some infrastructure projects that have not yet started. However, details of the areas affected will be announced in the coming days.

The freeze was expected to be announced together with the publication of the government’s bimonthly revenues and expenses report in the next few days, but authorities saw a need to calm tensions in the capital markets.

The Brazilian real depreciated sharply versus the US dollar during Thursday’s session due to rising doubts among investors about the government's commitment to this year’s fiscal targets.

Shortly after Lula took office in January 2023, the government announced a fiscal framework with the target of eliminating the public deficit in 2024 and reaching a 0.5% surplus in 2025 and 1% in 2026. That surplus would result from higher revenues and lower expenses, excluding interest payments.

However, the government has sent mixed messages and suggested that spending may increase.

Earlier this month, the government announced a 25.9bn-real cut from the 2025 budget, also part of efforts to restore investors’ confidence. Most of these cuts will pertain to pensions for low-income earners.

"These budget-cutting measures tend to affect the electoral base that supports Lula the most, which are low-income families, and this could have a negative effect on the government's approval ratings," André Pereira César, a political analyst at Hold Consultoria, told BNamericas.

But César also said that Lula could backtrack. “If [ruling Workers' Party] candidates suffer lots of defeats in the October municipal elections, the chances of populist measures will increase greatly next year, with Lula preparing for re-election in 2026.”