Brazil & Southern Cone - July 2026

The last time that President Luiz Inácio Lula da Silva opened the public purse strings to boost the electoral chances of his ruling Partido dos Trabalhadores (PT), the economy grew by a whopping 7.5%. That was 2010 and the economic stimulus helped elect his protégé, Dilma Rousseff (2011-2016). In this election year, the former labour leader is again pushing a plethora of costly growth measures, this time to get himself reelected.

The massive cash injection is boosting growth projections and may just create enough of a feel-good effect to help the Lula win a fourth mandate in the October election. The economic backdrop to his reelection bid was beginning to look better in the first quarter of this year, with GDP picking up speed on the back of a strong agriculture and household demand. But then the US war against Iran started, driving up fuel prices and inflation, and thereby undermining purchasing power and consumer demand.

That triggered a massive response by Lula, who launched a series of measures, such as energy subsidies and cheap credit for consumers and businesses which come on top of tax breaks for the middle class. Together they amount to an estimated R$215bn (US$41.3bn), one of the largest fiscal stimulus packages in recent years.  

With the departure in late March of Finance Minister Fernando Haddad (2023-2026), regarded as one of the main champions for fiscal discipline in the Lula administration, investors had already feared that the president’s political instinct to unleash public spending might go unchecked.

Indeed, Lula even joked in public how Haddad’s successor, Dario Durigan, was easier to convince to open government coffers. “It seems [Durigan] loosened his purse strings, so he is no longer as problematic in freeing up a bit of cash,” Lula said at an event in Brasília on 11 June. The day before, the president had mocked financial market concerns over Brazil’s budget deficit, saying they were doomsday forecasters.

Big spend

One focus of the government spending spree is to keep energy cheap. Since the outbreak of the conflict in the Middle East, the government rolled out tax cuts and subsidies on fuels. Lula implemented measures in March and April to slash taxes on biodiesel and aviation fuel and subsidised cooking gas and power for low-income families, while also allowing airlines to tap credit from a national aviation fund.

The single biggest growth stimulus measure announced in recent months was a R$30bn credit line launched in May that offers subsidised loans for drivers of taxis and ride-hailing services to buy new vehicles. The government also made available over R$21bn in low-interest loans for the acquisition of trucks and buses. These measures to support drivers come as this segment of the electorate, comprising nearly 2m voters, have increasingly been drifting towards supporting the far right.

Then there is government’s ‘Desenrola’ household debt renegotiation programme, a new iteration of which was launched in May, and the expansion in April of the long-running low-cost housing programme ‘Minha Casa, Minha Vida’. A novel programme launched in May called ‘Constrói Mais Brasil’ aims to industrialise the construction industry by promoting the use of prefabricated, standardised modules to be assembled onsite. The idea is to reduce costs, increase quality, and speed up the time of delivery.

The reason Lula announced so many projects in June is that he was scrambling to meet the legal deadline on 4 July that restricts government spending three months before an election. Not only is the federal government banned from making new disbursements of funds to local authorities during this period (unless for emergencies), but officials running in elections are not allowed to attend the inauguration events of public works and the websites of government ministries and other public institutions cannot publicise their actions and achievements.

Many economists agree so much cash will inevitably lead to more activity. BBVA, the Spanish bank, released a report in June which put Brazil’s 2026 growth forecast at 2.1%, up from its previous forecast of 1.7%, citing factors such as resilient economic activity and the pre-election fiscal stimuli.

Legal loopholes

Keenly aware that the opposition would blast a spending plan of such magnitude in an election year, the Lula administration went out of its way to make the huge stimulus package compatible with the country’s ‘arcabouço fiscal’ (fiscal framework), the spending-cap law adopted in 2023. In late May the government even froze R$23.7bn of discretionary spending across the federal budget, having previously frozen R$1.6bn of the annual budget in March.

Essentially, the government took advantage of all the legal loopholes and exemptions to the arcabouço fiscal. Of the R$215bn stimulus spending, 94% is not covered by the law, according to Marcos Mendes, a former finance ministry official and researcher at the São Paulo-based business school Insper.  Subsidised credits, for example, are not considered spending but financial expenses. Tax breaks, in turn, are considered foregone revenue.

Other measures are financed by public funds and not through the budget. Some of the workarounds include tapping state-owned banks such as BNDES, Caixa Econômica Federal, and Banco do Brasil. “The government established a rule and then found ways to circumvent it,” Mendes told O Globo newspaper in reference to the arcabouço fiscal.

Brazil’s treasury said on 30 June that the country will not be able to meet its fiscal targets from 2028 without new measures to deal with mandatory spending, such as pensions, which is rising faster than the fiscal framework allows. Fiscal stimuli could also undermine the central bank’s efforts to contain inflation and will likely force it to stop easing monetary policy earlier than planned, thereby foregoing potential savings on debt servicing costs. Annual inflation in May stood at 4.72%, breaching the upper limit of the official inflation target range of 3.0% +/-1.5 for the first time since October last year.

The result is that Lula may well have to oversee a painful credit rating downgrade or resort to unpopular austerity measures to pay the cost of his current spending spree, should he win the October election. Whether the octogenarian leader will win his seventh presidential campaign is unclear. Even if Lula does win, it is unclear what political capital he will have to lead the nation of over 210m inhabitants. Already the Lula administration faces mounting challenges in advancing its legislative agenda amid a fragmented and often hostile congress, not to mention concerns over his advanced age.

Q1 growth

According to the national statistics institute (Ibge), Brazil’s GDP in Q1 this year grew by 1.1% compared to the previous quarter and by 1.8% compared to Q1 2025. The quarterly growth rate was higher than the 1.0% media estimate of analysts surveyed by Bloomberg. Meanwhile, Brazil’s annual growth rate for the four quarters through Q1 2026 stood at 2.0%. Quarterly growth in Q1 was mainly driven by agriculture, which grew by 2.0% on the previous quarter. The industrial sector grew by 1.0%, while services posted a growth rate of only 0.5%.