The economic team of President Lula’s government presented a package of measures to balance public accounts and maintain the fiscal framework, with an expected savings of R$72 billion by 2026. The proposals include changes to the calculation of the minimum wage, new rules for military pensions, restrictions on the salary bonus and Bolsa Família program, budget cuts in education, regulation of excessive public servant salaries, and limits on the growth of parliamentary amendments. The package also includes expanding the income tax exemption for those earning up to R$5,000 per month, fulfilling a campaign promise by the president. The measures still depend on approval by the National Congress.
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Income Tax Exemption
As a counterbalance to the cuts, the government also proposed exempting those earning up to R$5,000 per month from income tax — a campaign promise by President Lula. Currently, the exemption threshold is BRL 2,824 (equivalent to two minimum wages).
Objective
The government’s objective with these spending cut proposals is to sustain the fiscal framework, a set of rules for public accounts approved last year. Without credible guidelines for public finances, public debt would rise even further, leading to higher interest rates for consumption and investments, market instability, and increased pressure on the dollar.
Limit to Minimum Wage Increases
For the minimum wage, the government proposed changing the correction formula, limiting real increases in the coming years. Under the new formula, the minimum wage would rise above inflation based on the GDP growth from two years prior, capped at 2.5% annually. Therefore, the adjustment would include the previous year’s inflation (12-month period until November) plus GDP growth from two years earlier, but with a maximum increase of 2.5%. This measure would save the government about R$2 billion in pensions and social benefits in 2025.
Military Pensions
The proposal for military pensions includes several key changes aimed at reducing costs. One measure is the elimination of the so-called “fictitious death,” which will prevent relatives of expelled military personnel from receiving pensions. Additionally, the government plans to gradually introduce a minimum age for retirement and eliminate pension transfers. Another change involves implementing a 3.5% contribution on salaries for the health fund by January 2026. Despite these adjustments, as of August this year, the projected deficit for military retirement benefits remains significant, with R$33.28 billion expected in 2025 and R$34.87 billion in 2026. It is worth noting that no budget cuts were announced for the Ministry of Defense, which holds the fifth-largest allocation for 2025.
Bonus Salary
Another proposed measure is reducing the number of people eligible for the bonus salary. Currently, the annual benefit is available to workers earning up to two minimum wages per month (R$2,824). Under the new rules, the benefit will only apply to those earning up to R$2,640. This amount will be adjusted annually for inflation until it stabilizes at 1.5 minimum wages, a goal expected to be reached by 2035.
BPC
The government also proposed stricter rules for the Continuous Cash Benefit (BPC). The benefit will focus on individuals unable to live independently or work. Eligibility will require a per capita family income equal to or less than 1/4 of the minimum wage. Additionally, people with disabilities must undergo medical and social evaluations by the National Institute of Social Security (INSS). The recipient and their family must also be registered in the Unified Registry (Cadastro Único) before applying for the benefit, as it is a mandatory prerequisite for accessing the BPC.
Bolsa Família
Stricter controls will also be applied to the Bolsa Família program, a federal government cash transfer initiative. The proposed changes include imposing restrictions on cities where the percentage of single-person households exceeds the regulatory limit. Enrollment or updates for single-person households will need to be conducted in the city they live, and updates will be mandatory for records older than 24 months. Biometric data will also be required for registration and updates. Additionally, utility companies will be required to share their databases to enable cross-referencing of information.
Education Budget Cuts
The package also removes R$42.3 billion from the Ministry of Education’s budget over the next five years. This measure could particularly impact the expansion of full-time education. Consequently, full-time education would need to be entirely funded by the Basic Education Development Fund (Fundeb), primarily composed of resources from states, the Federal District, and cities.
Excessive Public Servant Salaries
The economic team also intends to regulate the law limiting excessive salaries of public servants in the Executive, Legislative, and Judiciary branches, preventing payments from exceeding the civil service salary cap. The current maximum is R$44,008.52 per month.
Parliamentary Amendments
According to the proposal, the total value of parliamentary amendments cannot increase by more than 2.5% above inflation, aligning with the fiscal framework. Under the new rules, 50% of commission amendments must be allocated to public healthcare. Additionally, amendments will be proportionally blocked alongside executive branch cuts, capped at 15% of the total amendments, or R$7.5 billion in 2025.
Impact on Public Accounts
The economic team expects the proposed measures, if approved by the legislature, to save R$72 billion in 2025 and 2026. Between 2025 and 2030, the accumulated savings are projected to reach R$327 billion.
Analysis:
The economic measures proposed by President Lula’s government reflect a pragmatic effort to balance fiscal discipline with the promises made during the campaign. By aiming to save R$72 billion by 2026, the government seeks to align public accounts with the fiscal framework and prevent further deterioration of Brazil’s debt situation. However, the proposed adjustments, such as changes to the minimum wage formula, military pensions, and social programs, present significant social and political challenges. While these measures could stabilize public finances, they risk alienating key sectors of society, such as low-income families and the working class, who were central to Lula’s electoral base.
The package also includes politically sensitive measures, such as regulating excessive public servant salaries and limiting the growth of parliamentary amendments. These changes aim to curtail fiscal inefficiencies but may provoke resistance in Congress, where amendments are a key tool for lawmakers to deliver resources to their voting bases. While the administration’s decision to avoid Defense budget cuts demonstrates caution toward the military sector, the broader package faces potential pushback from a fragmented legislature.
Ultimately, the government’s strategy hinges on its ability to navigate the complexities of Brazil’s political landscape. While the reforms aim to stabilize the fiscal framework and prevent further economic instability, their success will depend on Lula’s ability to forge alliances, manage opposition, and maintain credibility with both his base and Brazil’s broader electorate. The tension between fiscal responsibility and social commitments remains a defining challenge of his administration.
Sources: G1 [1], [2], [3], [4]; O Globo [1], [2]; A Folha de SP [1], [2].
