Brazil's dilemma: to cut or not to cut public spending

As part of discussions over the 2025 federal budget, the Brazilian government will consider new measures to curb public spending amid pressure from the market and congress.

The move comes as Brazilian share prices and currency depreciated after President Luiz Inácio Lula da Silva's administration signaled it would contain the growing fiscal deficit by increasing taxes rather than cutting spending. A group of senators also criticized the plan.

“We started to discuss the 2025 spending agenda. We will maintain a more intense pace of work this month because, in July, the budget proposal begins to be developed and, in August, it will be sent to congress," finance minister  Fernando Haddad told reporters in an effort to contain the fallout. 

"We're carrying out a broad, general and unrestricted review of what can be done to accommodate the various legitimate intentions of congress and the government, but above all, to ensure that we have peace of mind next year." 

Haddad, a member of the ruling leftist workers' party (PT), is in favor of reining in public spending and his view has the backing of VP Geraldo Alckmin and planning minister Simone Tebet, who are not from the PT and joined Lula's coalition during the 2022 election campaign.

On the other hand, PT insiders led by chief of staff Rui Costa are against any measure to cut spending. Lula himself leans toward increasing public spending, believing the government has a crucial role in fueling economic activity.

The political cost of budget cuts, of course, also factors into the equation. 

"The spending cut, if it really happens, is likely to affect all areas of the administration but especially health and education, which rely more on public funding. These sectors are very sensitive for Lula's political base and could affect approval ratings," André Pereira César, a political analyst at Hold Consultoria, tells BNamericas. 

The internal split in the administration fueled speculation in recent days that Haddad would be fired and replaced by Aloizio Mercadante, who currently leads development bank BNDES. "If that really happened, it would have a strong negative impact on investors' perception, as Mercadante is a firm and open supporter of increased public spending," adds César.

Sensing fear among the investor class, Lula has publicly backed his finance minister.  

"He's an extraordinary minister. I don't know why this pressure on Haddad. Every finance minister, as long as I can remember, becomes the center of debates when things go well [or] when things don't work out," the president told reporters.