What Each Candidate Is Proposing for Public Spending
Two opposing views on the speed and method of budget control. According to a report by InfoMoney, Senator Flávio Bolsonaro is proposing an aggressive fiscal adjustment of 1.5% of Gross Domestic Product (GDP) over an 18-month horizon, accompanied by the creation of a new fiscal rule to limit expenses. On the other side, President Luiz Inácio Lula da Silva advocates for a gradual trajectory of reducing the public deficit, maintaining the structure of the current fiscal framework, while admitting potential targeted changes to spending limits to accommodate public policies.
This discussion is neither theoretical nor limited to the realm of electoral rhetoric. The chosen path for government accounts directly determines the pricing of financial assets in Brazil. When the financial market assesses the solvency risk of public debt, the speed at which the state closes its primary deficit dictates the slope of the yield curve, the exchange rate of the dollar, and, consequently, the real return on your investments.
Promises to contract expenditures by 1.5% of GDP in a short timeframe and wants to repeal the current rule to put a new fiscal cap in place.
Maintains the logic of the fiscal framework, focusing on a gradual adjustment of the deficit while studying how to calibrate existing spending limits.
Why Does Expense Control Move Interest Rates and Currencies?
The risk premium demanded by the market varies according to the credibility of fiscal rules. When the government continuously spends more than it collects, the National Treasury must issue more bonds to finance the public debt. If institutional and foreign investors doubt the country's ability to stabilize this debt-to-GDP ratio, they demand higher interest rates to agree to hold these securities over time.
As highlighted by InfoMoney's coverage, the economic policy guidelines put on the table by the candidates generate divergent expectations. A promise of rapid cuts attempts to anchor inflation projections and force long-term future interest rates down through immediate austerity. Meanwhile, the gradual adjustment route tries to balance fiscal containment without halting public investments and social programs, but it frequently deals with agents' skepticism regarding compliance with deficit-reduction deadlines.
If implemented with congressional support, it eases the yield curve and cools the exchange rate, but imposes heavy constraints on state programs and investments.
Preserves the current spending budget, but keeps the yield curve under continuous stress if primary targets are delayed.
What Are the Practical Differences Between the Two Approaches?
The central point of friction lies in whether to maintain or reformulate the current fiscal framework. Flávio Bolsonaro's promise is based on replacing the current framework with a new fiscal rule, signaling that the spending growth limits established by the framework would not be enough to guarantee the consolidation of accounts within a satisfactory timeframe. However, approving a shock of this magnitude requires heavy political negotiation with a fragmented Congress.
On the other hand, Lula's position relies on the institutional predictability of keeping current legislation in place, avoiding abrupt disruptions to the rules. The risk pointed out by analysts in this model is the permanent pressure for changes to the framework's spending limits to protect constitutional floors for healthcare, education, and social security, which could dilute the effective pace of closing the fiscal deficit over the years.
If fiscal rules lose traction and limits are loosened, the Selic Treasury bond and post-fixed securities benefit from high interest rates for longer, while fixed-rate bonds and long-term IPCA+ bonds suffer depreciation in mark-to-market valuations. Conversely, a clear signal of lasting fiscal containment unlocks rapid asset appreciation in long-term bonds and real estate funds most sensitive to credit.
What Retail Investors Should Monitor Moving Forward
More than campaign promises, the market will monitor the practical viability of the proposals. Economic plans released during electoral periods function as a thermometer for intentions, but price reactions depend on the ability to translate these ideas into viable bills in Parliament. The volatility of future interest rate contracts on B3 usually reflects this reading even before any government takes office.
Details of spending cuts — evaluate whether the 1.5% GDP cut specifies which ministries and benefits will be affected or if it relies on uncertain revenues.
Signs of changes to the framework — monitor statements from Lula's economic team regarding flexibilizations in current spending limits or linked spending floors.
Future yield curve (long DIs) — observe the pricing of 2029 and 2031 maturities as an immediate reflection of the fiscal risk perceived by major institutional managers.
Pay attention to mark-to-market accounting: Treasury IPCA+ government bonds with maturities exceeding five years experience volatile swings with every shift in perception regarding public spending control. Do not make early redemption decisions before maturity based solely on short-term electoral noise.
