Deficits Through the Looking Glass

BRAZIL ECONOMICS - Report 09 Feb 2026 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

In 2025, the public sector nominal deficit reached BRL 1.06 trillion (8.3% of GDP), the second highest ever. Although this figure raises concern, it is not the best indicator of debt dynamics. The evolution of the debt-to-GDP ratio depends on the operational result, defined as the primary deficit plus the real interest on the debt, that is, net of the effect of inflation. After adjusting the interest account for the effects of FX swaps and for inflation erosion, it is observed that the real cost of the debt reached around 4.5% of GDP in the 12 months through September 2025, close to the historical peak. Between 2023 and 2025, high operational deficits explain the increase in debt, whereas in 2021–22, even with nominal deficits, operational surpluses allowed it to decline. It is concluded that stabilizing debt requires primary surpluses sufficient to offset persistently high real iterest rates.

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