Brazilian economist says lower rates require tying spending growth to economic growth — Fundação Getulio Vargas – Brezilya Ekonomi Enstitüsü (FGV IBRE)

The North façade of the White House with its fountain — The White House, north façade, Washington (July 2007)Photo: Nishkid64 / Wikimedia Commons · Public domain · Source

Institution: Fundação Getulio Vargas – Brezilya Ekonomi Enstitüsü (FGV IBRE)
Author: Samuel Pessoa
Country · language: Brazil · Portuguese
Affiliation: Private university economics institute

Summary

In a piece dated 4 November, FGV IBRE researcher Samuel Pessoa attributes Brazil's high interest rates to the budget rather than monetary policy. In his view, when non-interest spending grows faster than the economy, demand pushes up prices and the central bank is forced to keep rates high. What he proposes is not an absolute spending cut but real non-interest spending growing at the same pace as the economy. That, he argues, would allow real rates to fall. The piece continues the institute's debate on high interest rates on the same blog.

On the spending side there are 9 proposals. The annual cap on real spending growth in the fiscal framework should fall from 2.5% to 1.5%, and real increases in the minimum wage should be limited to 0.5% a year. The health floor should be tied to the fiscal framework's index and education spending to the IPCA inflation index. The author notes that because student numbers are falling for demographic reasons, spending per student could still rise. Rural pension rules, eligibility for the BPC continuous cash benefit, parliamentary allowances and military pensions are also on the list.

On the revenue side there are 3 proposals: taxing tax-exempt government bonds, reducing tax expenditures and taxing dividends. As an example, the author writes that the income tax deduction for health and education expenses costs 40 billion reais a year. On dividend taxation he focuses on the Simples Nacional small business regime and the presumed profit regime. He argues these 2 regimes are the main source of tax avoidance for the top 1% income bracket. The piece does not quantify the measures' contribution to the primary surplus.

Blind spot

The piece treats the budget as the sole determinant of interest rates and never mentions external conditions, namely US rates, oil prices and capital flows. Because it does not measure the 12 proposals' contribution to the primary surplus, it remains unclear which would lower rates and by how much. It does not discuss the chances of proposals such as the minimum wage and rural pension changes passing Congress after the election. It assumes the proposals have zero effect on growth.

Talay assessment

Bottom line

This reading from one of Brazil's leading economics institutes locates the constraint behind high real rates in the budget, not monetary policy. Unless the spending growth cap falls from 2.5% to 1.5%, the central bank gains no room. The proposals are technically coherent but politically costly, since the minimum wage and pension items touch voters directly. The most likely path is that some revenue-side items advance while the spending cap is left in place.

Likely effects

Brazil's rate pathNegative1–6 months
If the spending cap stays at 2.5%, the author's mechanism implies continued demand pressure, and the central bank postpones rate cuts.
Tax and dividendsUncertain1–6 months
If taxes on exempt bonds and dividends advance, the tax burden rises for the top income bracket and for companies in the small business regimes.
Social spendingNegative6 months+
Limiting real minimum wage increases to 0.5% and tightening benefit eligibility would slow income growth for low-income households.
Emerging market debt marketsUncertain1–6 months
Brazil's debate over budget-driven high real rates offers a template for burden sharing between fiscal and monetary policy in countries facing a similar dilemma, such as Türkiye.

Possibilities, ranked

1
Revenue items advance, cap stays50%
Items such as taxes on exempt bonds and dividends advance while the spending growth cap stays at 2.5%; room for rate cuts opens only modestly.
Watch: A bill changing the cap in the fiscal framework and the congressional calendar for the dividend tax
2
A comprehensive package arrives30%
The government takes a package to Congress that lowers the cap and changes the minimum wage formula; markets pull down rate expectations.
Watch: A change to the minimum wage indexation formula and a formal proposal cutting the cap to 1.5%
3
Adjustment is postponed20%
The post-election political balance allows none of the proposals, spending grows at the top of the cap and high real rates persist.
Watch: Greater emphasis on fiscal risk in the central bank's rate decisions

Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.

Original publication: blogdoibre.fgv.br · 8 November 2026

This page summarises the institution's view and does not reflect the view of Talay Insight. No direct quotation is used.