Lula's Credit Stimulus Worsens the Fiscal Crisis It Claims to Fix

Brazil's fiscal trajectory has now crossed a threshold that should concentrate every serious mind in Brasília — and it deserves to be named plainly, without the softening language that has become the default register of official communication.

Gross general government debt reached R$10.809 trillion in June, equivalent to 81.9% of GDP — the highest level since April 2021. The consolidated public sector recorded a primary deficit of R$55.3 billion in that single month, up 17.4% over twelve months. The nominal deficit accumulated over twelve months hit R$1.318 trillion, or 9.99% of GDP, also the worst reading since 2021, with interest payments alone consuming R$110.7 billion in June. These are not projections from opposition economists or alarmist think tanks. They are Central Bank data. And they arrive precisely as the Lula government's response — a provisional measure expanding credit and contributing up to R$2.75 billion to guarantor funds — moves in the opposite direction from what the numbers demand.

The government's stimulus measure is not, in isolation, an act of malice. It reflects a recognizable political logic: an administration in its final stretch, facing an economy where business confidence fell 1.4 points in July to 91.3, where industry is rattled by US tariffs and services are signaling weakening demand, reaches for the instrument it knows best. The problem is not the intent. The problem is that this particular instrument, deployed against this particular fiscal backdrop, operates as an accelerant rather than a corrective. When interest payments alone are running at over R$110 billion per month, adding contingent liabilities to state-backed credit funds does not stimulate the economy out of its bind — it deepens the bind that keeps the Selic elevated in the first place. The market has begun to acknowledge a Selic cut, trimming year-end projections from 14% to 13.75%, but Bahia Asset's caution that the easing cycle will only consolidate in 2027 is the more sobering read. The fiscal position is what is keeping rates high, and the provisional measure does nothing to address that position.

What makes this moment genuinely dangerous is not the deficit in isolation but its structural character. Congressional earmarks, pension expenditures, and subsidized credit — all cited by analysts as drivers of the deteriorating dynamic — are not cyclical phenomena that will self-correct when commodity prices recover or geopolitical tensions ease. They are embedded commitments, politically fortified, that accumulate interest charges at a rate the nominal economy cannot grow fast enough to offset. Analysts and financial markets have already reached the conclusion that the next elected president will need to negotiate adjustment measures before the end of 2026 for implementation in early 2027. That the adjustment is being outsourced to a successor rather than initiated now is itself a governance failure — a deferral dressed as prudence.

I will state clearly what the centrist, institutionalist instinct sometimes obscures: the Lula government has not been uniquely irresponsible by the standards of Brazilian fiscal history. Several of the structural pressures it faces — indexed pension benefits, constitutionally mandated earmarks, the interest cost of a debt inherited at elevated levels — predate this administration and constrain every administration. The tax reform now entering its operational phase, despite the implementation friction it is generating, is a legitimate institutional achievement that should improve resource allocation over the medium term. These nuances matter. But nuance cannot become an alibi. The provisional measure announced this weekend is a choice, not an inheritance. Expanding credit guarantees when the fiscal accounts are producing records in deficit is a choice that aggravates the very conditions it claims to address. The IMF's governing doctrine on this — that fiscal space, once spent, cannot be recreated by the mechanism that spent it — exists because history has demonstrated it, repeatedly, in economies less resilient than Brazil.

The institutionalist argument is not austerity for its own sake. It is sequencing and credibility. Predictable governance means that when the data show a deteriorating fiscal position, the policy response is legible, measured, and consistent with the direction the data demand — not a provisional measure pointing the other way. Brazil's credit trajectory, its interest burden, and its capacity to attract the investment that would actually generate the growth the government wants all depend on whether the markets and multilateral institutions watching this moment conclude that the fiscal framework is real or decorative. The numbers published by the Central Bank this week make that question urgent. The government's response, so far, does not answer it.