A recent wave of political and fiscal turbulence in Brazil has intensified following Congress’s repeal of a presidential decree that raised the IOF tax, marking a rare and historic defeat for the Lula administration. The revocation is expected to cause a significant revenue shortfall, potentially reaching R$15 billion in 2025, and has exacerbated tensions between the Executive and Legislature. As Congress continues to push measures that expand spending and block cost-cutting initiatives, the federal government is pivoting its messaging toward taxing the wealthy and challenging elite privileges. Meanwhile, Congress has also approved an increase in the number of federal deputies, raising concerns about political optics despite claims of no added expenses.
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Repeal of Decree
The National Congress’s decision to revoke the government decree that raised the IOF tax has aggravated the fiscal crisis and escalated political tensions between the Executive and Parliament, with some congressional leaders even suggesting a formal rupture with the Planalto Palace. This move marked a historic defeat for the Lula administration, as Congress had not overturned a presidential decree since 1992. The Ministry of Finance had projected revenue gains of R$10 billion this year from the measure and an estimated R$20 billion in 2026.
New Blockages
Congress’s revocation of the decree altering IOF collection rules is expected to force the government to implement additional budget freezes and contingency measures in the 2025 federal budget. Ministry of Finance officials estimate the revenue loss at approximately R$10 billion for this year, although former São Paulo Finance Secretary and Warren Investimentos chief economist Felipe Salto forecasts an even higher shortfall—at least R$15 billion.
Impact of R$100 Billion
The ongoing tug-of-war between Congress and the Executive—culminating last week with the repeal of the presidential decree that increased the rate of the Tax on Financial Transactions (IOF)—is deepening the country’s fiscal imbalance. While the federal government has largely pursued fiscal adjustment measures based on revenue increases, Congress has simultaneously introduced initiatives that either increased public expenditures or blocked cost-cutting proposals from the Executive. According to a survey by Tendências Consultoria, recent legislative measures have generated a fiscal impact exceeding R$100 billion in 2025 alone. These include actions that expanded public spending, obstructed reductions in expenditures, or rejected efforts to cap tax exemptions.
New Focus
Facing congressional pressure and a decline in public approval, the federal government is preparing to shift its messaging focus. It intends to promote policies such as taxing the wealthy, increasing the income tax exemption threshold, ending the “6 x 1” workweek, and cracking down on excessive public-sector wages. These initiatives are being framed as part of a broader strategy to recast President Lula’s administration with a more anti-elite, reformist tone that could yield electoral gains. Within the government, there is a growing belief that Bolsonarism has shifted the defense of democratic institutions to the political left, a burden that has gained weight since the failed coup attempt on 8 January 2023. Government insiders argue that rhetoric centered on institutional preservation lacks the mobilizing power to energize voters and that a more combative stance against privilege may be more effective politically.
Increase in Deputies
On Wednesday (25/06), the National Congress passed a complementary bill increasing the number of federal representatives from 513 to 531. The vote took place in the Chamber of Deputies on the same day the Senate approved the proposal with amendments intended to mitigate potential political backlash. As part of the revisions, Senate rapporteur Marcelo Castro (MDB) inserted a provision into the final text explicitly stating that “no increase in expenses” would result from the creation of the 18 new seats. The final version of the bill will now be sent to President Lula (PT) for enactment.
Analysis:
The recent revocation of the IOF tax decree by Brazil’s National Congress represents not only a major fiscal setback but also a serious political blow to President Lula’s administration. For the first time in over three decades, Congress has overturned a presidential decree, signaling a shift in institutional dynamics and underscoring the growing assertiveness of the Legislature. This rare legislative move reflects a deeper crisis of coordination between the Executive and Parliament, particularly as congressional leaders openly consider severing ties with the Planalto Palace.
Beyond the immediate financial implications, the repeal exposes a broader structural impasse: while the federal government has relied on increasing revenue through tax reforms, Congress has actively pursued measures that either expand public spending or obstruct austerity efforts.
In response, the Lula administration appears to be recalibrating its political strategy, aiming to shift public discourse toward issues of social justice and economic inequality. By emphasizing initiatives such as taxing the wealthy, increasing the income tax exemption threshold, and eliminating privileges in the public sector, the government is attempting to reclaim a reformist and anti-elite narrative. Lula is seeking to revive the political energy of his earlier terms by aligning with popular demands for fairness and accountability.
Sources: A Folha de SP [1], [2]; O Globo [1], [2], [3], [4]; G1.