Brazil Fiscal Target Met Only Through Legal Carve-Outs

The underlying deficit is double the 2025 level, even as the target is formally met.

The Brazil fiscal target for 2026 will be met on paper, but only through legal carve-outs. Underneath them, the country’s finances are getting worse, not better.

The IFI, a technical watchdog attached to the Federal Senate, puts the effective primary deficit at about 0.4 percent of GDP.

Brazil fiscal target for 2026 is set to be met, yet the numbers tell two very different stories. The IFI, or Instituição Fiscal Independente, is a non-partisan body attached to the Federal Senate that monitors public accounts.

According to its Fiscal Monitoring Report No. 115, the effective primary result. Revenue minus spending before interest, will be a deficit of about 0.4% of GDP.

In cash terms, that is a shortfall of R$52.0 billion (US$10.07 billion) for the year. Meanwhile, the result measured for Brazil fiscal target verification, after legal exclusions, should be a surplus of about 0.1% of GDP.

That is inside the tolerance band, so the target is formally met. The IFI published its Fiscal Monitoring Report No. 115 on Thursday 20 August 2026.

However, the report shows the effective deficit and the target-basis surplus coexist in the same year. Brazil’s central bank put the dollar at 5.1625 reais on 21 August 2026, its official selling rate.

At that rate, a shortfall of R$52.0 billion is about US$10.1 billion.

The primary result is the balance of federal revenue minus spending before interest payments on the public debt. A primary deficit means non-interest spending exceeded revenue, which affects the Brazil fiscal target.

However, Brazil’s law distinguishes the ‘effective’ primary result from the result ‘for the purposes of verifying the target. ‘ The former counts everything and drives the debt path.

As a result, the two numbers for 2026 run in opposite directions: a deficit on the underlying measure. A surplus on the target-verification measure.

The effective primary result drives the debt path, while the target-basis measure is used for legal compliance. Meanwhile, the law allows certain items to be excluded from the latter calculation.

The IFI is not part of the government. Instead, it is a technical body attached to the Federal Senate, the upper house of Congress.

Its projections are its own estimates, not official government figures. In its report, the IFI stresses that the effective deficit of about 0.4% of GDP is what matters for the debt trajectory.

The target-basis surplus is a separate, legally defined measure. The IFI’s criticism is that formal compliance with the primary result target ‘coexists with the realisation of effective primary deficits.

The IFI’s projections are its own estimates, not official government figures. Still, its analysis highlights the gap between formal compliance and the underlying fiscal reality.

The 2026 target is set by the LDO, or Lei de Diretrizes Orçamentárias, the Budget Guidelines Law passed by Congress. The centre of the target is a primary surplus of 0.25% of GDP, or R$34.3 billion (US$6.64 billion).

The target carries a tolerance band of 0.25 percentage point of GDP either side. That gives an upper limit of about R$68.5 billion (US$13.27 billion) and a lower limit of R$0, zero deficit still counts as compliance.

Therefore, the projected target-basis surplus of about 0.1% of GDP falls within the band, so the target is met. The lower limit of the tolerance band is zero deficit, so any surplus counts as compliance.

Consequently, the projected surplus of 0.1% of GDP meets the target.

The main carve-out identified by name is precatórios, court-ordered payment orders issued when a final judgment goes against the state. These are legal obligations the government must pay, but they sit outside the primary target arithmetic.

The 2026 budget guidelines annex allows R$55.1 billion (US$10.67 billion). Equal to 0.40% of GDP, to be compensated out of the target calculation.

In execution, the government reports R$55.7 billion (US$10.79 billion) of precatórios spending is not counted, citing a constitutional provision. In short, compliance arrives after legal deductions and use of the tolerance band.

Those deductions come to R$62.8 billion (US$12.16 billion) on the government’s figures and R$69.8 billion (US$13.52 billion) on the IFI’s. Only precatórios are identified by name in the official documents as a deduction.

However, the total deductions include other items not itemised in the sources consulted.

The IFI estimates a structural primary deficit of 1.4% of potential GDP in the four quarters to June 2026. That is double the 0.7% recorded in the same period of 2025.

This suggests the effective deficit is a trend, not a one-off. The IFI says the better target-basis result ‘mostly reflects downward revisions in projections of mandatory spending’.

In short, the legal carve-outs mask a deteriorating fiscal picture. The structural deficit doubled from 0.7% to 1.4% of potential GDP in a year.

As a result, the effective fiscal position is deteriorating despite the target being met.

Moreover, the government’s own Primary Revenue and Expenditure Assessment Report, released in July. Raised the target-basis primary result from a projected surplus of R$4.1 billion (US$794.2 million) to R$10.8 billion (US$2.09 billion).

This came with no need for a spending freeze, known as contingenciamento. However, the IFI attributes this improvement to revisions in mandatory spending projections, not to a real improvement in the effective result.

Still, the government’s numbers show formal compliance is within reach without additional measures. The government’s July report raised the target-basis surplus to R$10.8 billion (US$2.09 billion).

Nevertheless, the IFI says this reflects lower mandatory spending projections, not a structural improvement.

Separately, investor sentiment has soured. An XP survey tracked macro hedge-fund managers.

Those with a negative view of the economy rose from 40% in June to 54% in August. The positive view fell from 24% to 8%.

This survey, taken before a Copom meeting, reflects the mood of 23 fund managers, not business confidence broadly. Even so, the pessimism aligns with the IFI’s concerns about the effective deficit.

The survey of 23 macro hedge-fund managers showed pessimism rising sharply. Meanwhile, the positive outlook fell from 24% to 8%, reflecting investor concerns.

In conclusion, Brazil’s fiscal target for 2026 will be met on paper, but the underlying reality is a growing deficit. The IFI’s projections highlight the gap between legal compliance and economic substance.

The use of carve-outs like precatórios is legal, but it raises questions about the credibility of the target. Investors seem to be taking note, as sentiment has turned negative.