Fiscal crisis could become political if government does not change course, says FGV researcher

Economist Fabio Giambiagi, an associate researcher at the Getulio Vargas Foundation (FGV), told Bloomberg Linea that the worrying path taken by the Lula government's economic policy could culminate in a political crisis in the coming years. It would be similar to the one in 2015 during the Dilma Rousseff government. He points out that there is a very serious risk that the fiscal crisis will worsen.

Whoever assumes the presidency in 2027, whether Lula or someone from the opposition, will face a challenging scenario: unbalanced public accounts and debt on an upward trajectory. If Lula is reelected in 2026, he will have to deal with his own fiscal legacy.

Since the beginning of the current government in 2023, public debt, measured by the general government gross debt (GGGD), has increased from 71.4% to 75.9% of GDP. In the first 27 months of its term, the government recorded a primary deficit in 22 of them.

If the current scenario continues, the financial market projects that public debt will reach 94% of GDP in 2034, according to a survey by the Central Bank with financial institutions.

Fiscal crisis is "shared irresponsibility" of the three powers

Giambiagi characterizes the fiscal problem as a "shared irresponsibility", not limited only to the Executive. He criticizes the PT government, but also points out the shared responsibility of Congress and the Judiciary, which frequently make decisions without due fiscal concern.

According to him, the lack of leadership and the need for a clear change of direction make it difficult to be optimistic about economic policies for the period 2026-2030.

The economist's main concern is the accelerated growth of mandatory spending, which has exceeded the limit established by the fiscal framework. These expenses - which include social security, health and education - are progressively reducing the space for discretionary spending, such as investments in infrastructure and maintenance of the public sector. "The current growth dynamics of these expenses are unsustainable without reforms," ​​says Giambiagi.

The researcher states, with "100% certainty", that the fiscal framework will need to be revised by 2027. One factor that reinforces this need is the return of the full accounting of court orders (judicial debts of the Union) in the fiscal target from that year onwards, due to the end of a deadline defined by the STF.

The way this review and the challenge of court orders are managed will determine whether the perception of fiscal risk in the country will improve or worsen. To avoid a government "blackout", the solutions he suggests inevitably include:

• Review of rules for health and education expenditure, which currently increase automatically with revenue
• Reassessment of the minimum wage adjustment policy and its link to pensions and benefits

The economist points out that a long-term real interest rate of 8% per year is not normal and, if this is the price of current fiscal policy, then this policy needs to be questioned.