Urgency of Brazil’s Court-Ordered Debt Payments as 2027 Deadline Approaches

Brazil’s President Lula’s administration is under pressure to address court-ordered debt payments beginning in 2027, with discussions about potential legislative revisions starting prior to April 2026. The government must navigate rising expenses and seek extensions from the Supreme Court, acknowledging the significant fiscal implications of these debts on the federal budget.

In Brazil, the administration of President Lula is confronted with a pressing challenge as court-ordered government debt payments are set to begin in 2027. To address the potential fiscal impact, the economic team is actively deliberating on the need for legislative revisions, with discussions expected to intensify prior to the drafting of the budget guidelines by April 2026. There is uncertainty regarding whether this issue will be addressed before the upcoming elections, as some officials advocate earlier action.

Court-ordered debt payments determined by the judiciary by the end of March are to be included in the next fiscal year’s budget; however, payments issued after that date will affect the budget two years hence. Decisions made from April onward will significantly influence the budget for 2027 as fiscal regulations require complete accountability for these expenses.

A Supreme Court ruling in 2023 granted the Lula administration temporary relief by permitting the exclusion of nearly half of the court-ordered payments against the federal government from spending limits. This transitional policy was enacted after the court’s decision to invalidate a spending freeze imposed by former President Jair Bolsonaro, providing the government a breathing space until 2026 for accommodating these expenses within its budget.

Despite this temporary support, some factions within the administration believe that a Supreme Court extension or new constitutional amendments (PEC) are necessary to prolong the transition period, independent of election outcomes. This year’s budget allocated R$102.7 billion for court-ordered payments, surpassing market predictions, with R$44.1 billion already exempt from fiscal rules due to the Supreme Court’s earlier decision.

Data reveals a continuous increase in court-ordered payments against the federal government. Analysts, including investment firm Warren Rena, predict these expenses may rise to R$116.3 billion by 2027, raising alarms about fiscal stability. Felipe Salto, chief economist at Warren, emphasized the necessity for transitional rules or extensions of court decisions to address this troubling trend.

Efforts from the Finance and Planning ministries, along with the Attorney General’s Office (AGU), have intensified under Lula’s tenure, focusing on monitoring and managing fiscal judicial risks. Although these initiatives have curtailed some high-risk lawsuits, officials admit that the measures taken fall short of significantly alleviating primary fiscal pressures, with approximately 43% of the payments stemming from pension claims.

The AGU reported substantial prevention of potential losses amounting to R$1.9 trillion over two years via favorable court outcomes. Successful rulings regarding pension recalculations and adjustments to the Workers’ Severance Fund (FGTS) have helped avert a projected R$1 trillion in losses. However, the AGU under Attorney General Jorge Messias emphasized that resolving these issues will require time, as the average waiting period for such payments spans eight years.

Structural initiatives like Pacifica aim at facilitating settlements before court verdicts and minimizing fraud in litigations against the government. A focus remains on high-stakes lawsuits from the sugarcane and ethanol sectors, with projected liabilities of up to R$140 billion needing careful management in the federal budget.

Disagreements within the Finance and Planning ministries over how to classify court-ordered payments highlight the complexity of the issue. Finance Minister Fernando Haddad’s team proposed limiting the classification to primary expenditure, while Planning Minister Simone Tebet’s faction favored a broader classification but excluding it from the spending cap under the new fiscal framework.

Experts are advocating for a resolution by 2027, as the escalating trend in court-ordered payments presents a significant fiscal challenge. The prevailing sentiment suggests that either the Supreme Court will extend the deadline, or the government must revise its fiscal framework, acknowledging the limits of existing fiscal regulations.

Economist Sergio Vale has indicated that achieving integration of these payments into the budget is vital, proposing adjustments to constitutional spending limits for health and education. He stresses the urgency of handling these fiscal challenges to avoid a scenario reminiscent of the 2015 economic crisis, asserting that a substantial fiscal adjustment will be imperative for the next administration.

Financial challenges persist from the previous administration’s tenure, necessitating proactive measures to ensure fiscal stability.

In conclusion, Brazil’s imminent court-ordered debt payments pose significant fiscal challenges that the Lula administration must urgently address. With rising expenses projected for 2027, the government faces critical decisions regarding legislative amendments or extensions to alleviate fiscal pressure. The ongoing coordination among various ministries highlights the complexity and urgency of the issue, stressing the importance of finding viable solutions to mitigate the impact on public finances before the upcoming budget deadlines.

Original Source: valorinternational.globo.com