The ongoing conflict in the Middle East might initially lead to positive surprises for Brazil’s federal revenue. However, uncertainties about long-term effects and the rapid increase in mandatory spending suggest the need for a more cautious fiscal approach at the beginning of the year, according to members of the federal government’s economic team.
One option being discussed behind the scenes is implementing stricter spending limits in the Revenue and Primary Expenditure Assessment Report (RARDP), the government’s bimonthly fiscal report, set for release on March 24. The primary balance target for this year is a surplus of 0.25% of gross domestic product (GDP), or R$34.3 billion.
Official discussions about the report have not started yet, and the first round is expected to happen this Monday (9). The Federal Revenue Service has also not yet consolidated tax collection data.
Regarding the Middle East conflict, in the short term, rising oil prices benefit public finances. Brazil’s 2026 annual budget assumes an average Brent price of $64.93 per barrel—currently it is above $80. Higher oil prices boost government revenue from oil exploration.
Additionally, slightly higher inflation usually increases tax revenue. However, the appreciation of the real could offset some of these gains: the exchange rate is currently at R$5.26 per dollar, which is below the average projection of R$5.76 used in the budget.
Still, depending on how the war develops, increased risk aversion in global markets could prompt investors to move toward safer assets, putting renewed pressure on the exchange rate.
There are also other unresolved revenue-related issues that must be addressed when preparing the bimonthly report. One example is the Special Tax Regime for Data Centers (Redata), which offers tax exemptions totaling R$5.2 billion this year. The provisional presidential decree that established the program, however, expired without being approved by Congress.
The government also needs to find a legal way to restore the program, since the 2026 Budget Guidelines Act (LDO) prohibits new tax incentives or the extension of certain existing ones this year. One option being considered is sending a complementary bill to reinstate the program—but this has not yet been submitted to Congress. In other words, if no solution is found, R$5.2 billion that was not previously expected could end up flowing into federal coffers.
Another unresolved issue is the new income tax exemption rule for those earning up to R$5,000 per month, along with increased taxes on higher-income taxpayers to balance the measure. In the coming months, it will be important to watch whether the policy’s adjustment will truly lead to fiscal neutrality, create an additional revenue “cushion,” or fall short of offsetting the tax break.
The challenge is figuring out how to include all these variables into revenue forecasts that span the whole year. While the current outlook indicates stronger tax collection, there’s no guarantee this will continue throughout the year.
In the bimonthly report, two types of spending controls can be used: contingency measures if revenue and expenditure projections show a potential breach of the annual fiscal target, and spending blocks if expenditures are at risk of exceeding the limit set by the fiscal framework.
Some technical staff believe it is still too early to discuss spending freeze measures, especially given the uncertainties surrounding revenue that could still yield positive surprises. Conversely, the more immediate challenge will be managing spending cuts amid pressure from mandatory expenditures.
The backlog of claims at the National Social Security Institute (INSS) is a concern. Since it involves a politically sensitive issue during an election year, efforts will probably be made to reduce it.
In February, the INSS issued an ordinance that centralizes the queue of benefit requests to increase service capacity. Under the new system, the agency will prioritize reviewing older pension claims and benefits with higher demand, such as the Continued Cash Benefit (BPC) and disability benefits. According to technical staff, these changes could increase pressure on mandatory spending.
In this election year especially, the challenge of limiting spending might be lessened by the fact that at least 20 of the 38 ministries will experience leadership changes. Cabinet ministers with stronger political influence will resign, while executive secretaries—usually more technical figures—will take their place.
On the other hand, the electoral calendar will pressure spending in the first half of the year because the transfer of new resources to states and municipalities will be prohibited starting in July. Additionally, this year’s Budget Guidelines Act requires that 65% of parliamentary budget allocations be paid by June.
The government has already implemented an early-year spending limit through the annual budget and financial planning decree published in January. The decree announced the withholding of R$43.4 billion in spending from March to November, effectively creating a ‘reserve” that could be used for cost-saving measures or a spending freeze later in the year.
If revenues exceed expectations or expenses come in lower than projected, the reserve could be released to strengthen the primary balance. Government officials see this measure as a sign of their commitment to fiscal targets by tightening budget management, even during an election year—an effort to address skepticism in parts of the financial market, which fears that spending may increase depending on election poll developments.
In such a situation where uncertainties persist, the typical approach is to enforce stricter spending controls early in the year and gradually release funds as events develop, said a source in the federal government.
Former Treasury Secretary Jeferson Bittencourt, now head of macroeconomics at ASA, said there are several uncertainties surrounding the first two months of the year. In addition to the performance of revenue from the minimum income tax rate and the instability caused by the war, he points to a recent ruling by Brazil’s public spending watchdog (TCU) that imposed limits on tax settlement agreements through which the government expects to raise R$20 billion.
Recognizing potential losses now might be premature. Waiting to acknowledge them later could result in higher taxes or cost-cutting measures closer to the election,” the economist said.
Jeferson Bittencourt — Foto: Leo Martins/Divulgação
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