Why developmental constraints require Brazil, Global South to regain sovereign control over fiscal policy
Starting in the 1990s, a new form of development was imposed on Latin American countries. In Brazil, the model of industrialization based on developmentalism, which had marked the country's economic trajectory between 1930 and 1980, was left behind. Since then, the guidelines for economic growth, the role of the state, and the management of public finances followed a liberal-inspired logic.
A key milestone in this transition was the so-called Washington Consensus, held in 1989 at the US capital. This meeting brought together economists and development experts linked to the US government, as well as representatives of multilateral institutions such as the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB).
During this conference, the principles that would guide the economic and development strategies of Latin American countries were established. With regard to fiscal policy, to ensure macroeconomic stability, austere budget management was recommended.
It was on the basis of the Washington Consensus that economic policies in Brazil were guided, especially from the first Fernando Henrique Cardoso administration (1995-1998), adopting an approach focused on fiscal adjustment, even though the government was initially unsuccessful in controlling public spending.
This orientation, however, was not limited to the adoption of short-term economic measures, but was incorporated more deeply by being institutionalized in the country's legal system through laws and regulatory frameworks that consolidated the principles of fiscal discipline as permanent foundations of public management.
One of the main instruments of this institutionalization was the Fiscal Responsibility Law (LRF). Passed in 2000, it imposes limits on personnel expenditures, requires annual fiscal targets, and prohibits the creation of permanent expenditures without corresponding revenue projections. In addition, this law even criminalizes some violations of its rules, which may result in administrative sanctions, such as restrictions on voluntary transfers between entities of the Federation, in addition to political and criminal liability, based on other legislation, for conduct such as ordering unauthorized expenses or assuming obligations without financial backing.
The approval of the LRF institutionally consolidated guidelines that had already been adopted in the conduct of fiscal policy, such as the implementation of the primary surplus target policy initiated in 1999 during Fernando Henrique Cardoso's second term (1999-2002). The LRF, therefore, provided legal and permanent support for this model of fiscal discipline centered on strict control of public accounts.
The institutionalization of public account control and its elevation to a central priority of fiscal policy was maintained continuously by all subsequent governments, without exception—including the terms of Lula (2003-2010) and Dilma Rousseff (2011-2016)—which, despite their progressive orientation and despite expanding the share of public investment in the economy, maintained their commitment to fiscal responsibility.
The peak of fiscal rigidity manifested itself with the approval, in 2016, of Constitutional Amendment 95, the Public Spending Cap Law, shortly after the legal-parliamentary coup against then-President Dilma. This policy was approved during Michel Temer's administration and continued during Jair Bolsonaro's administration. It instituted an extreme model of fiscal restraint by freezing the federal government's total primary expenditures for 20 years, allowing them to be adjusted only for the previous year's inflation. It was a policy unparalleled in other economies around the world, both in terms of its duration and the rigidity of its criteria, disregarding population growth, changes in social demands, and the dynamism of the economy itself. Some mandatory expenditures, such as social security, tend to grow above inflation, but this limitation imposes significant cuts in discretionary spending, directly affecting investments in essential areas such as health, education, and infrastructure. In more drastic cases, it has resulted in the complete paralysis of public policies, such as the Minha Casa Minha Vida housing program in 2017, highlighting the profound social impacts of adopting such a restrictive fiscal regime.
If maintaining fiscal policy rigidity does not meet the needs of our people, how is it legitimized in society and what is its role? Fiscal policy rigidity is based on economic theories that argue that balanced public accounts are an essential condition for investment and attracting foreign capital, elements that would drive economic growth. This argument gains strength in society because it is similar to the logic of household finances, according to which one should not spend more than one earns and one must save in order to invest in the future—a comparison that is quite intuitive and easily understandable to the population. However, this analogy oversimplifies reality, as the public economy operates differently from the household economy. When well planned, government investments—such as income transfer policies or infrastructure projects—can boost the economy, create jobs, and increase tax revenues in the medium term, contributing precisely to the fiscal balance that we seek to preserve.
Beyond its legitimacy, it is important to note the role that fiscal policy rigidity plays. It acts to limit public spending and constantly seeks to generate primary surpluses—that is, positive balances between revenue and expenditure, disregarding financial items. In practice, this surplus is primarily directed toward serving the interests of interest-bearing capital, as it is used to pay interest and amortize public debt. It is, therefore, a mechanism that guarantees the continuous remuneration of the state's creditors, concentrating resources that could be allocated to public policies and social investments.
In addition, fiscal rigidity plays a role of social control by restricting the state's ability to expand the provision of public services and enforce social rights, such as health, education, social security, and social assistance. Strictly following fiscal rules not only prevents progress in these areas, but can also mean significant setbacks. A clear example occurred in 2023, during Lula's third term in office (2023-2026), when, under pressure to maintain fiscal balance, the government set a limit of 2.5 percent on the real increase in the minimum wage, regardless of GDP growth—a measure that, in practice, slows down the appreciation of labor and the expansion of income for the poorest. This measure affected other social rights, as the minimum wage is the benchmark for pensions and retirement benefits, as well as benefits such as the Continuous Cash Benefit (BPC), received by low-income people over 65 who are not entitled to retirement benefits and by people with disabilities.
This was the government's solution to comply with the rules of the New Fiscal Framework (NAF), approved in 2023, which, although it represents a softening of the extreme rigidity of the Public Spending Cap, still imposes significant limitations on fiscal policy. The NAF replaces the spending freeze with a rule of growth linked to tax revenue, allowing primary expenditures to grow up to 70 percent of the increase in primary revenue from the previous year. However, this growth is limited to a real ceiling of 2.5 percent per year, even if tax revenue grows above that. In addition, the new regime maintains very austere primary surplus targets.
Finally, this fiscal policy rigidity, which has accompanied the country since the early 1990s, acts as a structural obstacle to the country's autonomous development by hindering the implementation of robust public investment policies in strategic areas such as infrastructure, science and technology, and reindustrialization programs. This reinforces a model of economic and technological dependence, in which the country remains subordinate to external dynamics and without sufficient instruments to build a sovereign development project.
Given this scenario, in order to conceive an effective development project for Brazil and for most countries in the Global South, it is essential to regain sovereign control over fiscal policy, so that it ceases to be an instrument of submission to the interests of financial capital and begins to directly serve the well-being of the population. This means loosening the constraints that currently limit public investment and reestablishing fiscal policy as a strategic tool for promoting social justice, reducing inequalities, and building more resilient economies focused on the real needs of their peoples.
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This article was produced by Globetrotter. Marcelo Depieri is an economist, holds a master's degree in Political Economy and a PhD in Social Sciences, is a researcher at the Tricontinental Institute for Social Research, and a professor of Economics at Universidade Paulista (Unip). He is the author of the books Understanding the Brazilian Economy: Issues in Their Proper Place (2024) and Pandemics, Crisis, and Capitalism (2021), both published by Editora Expressão Popular
This article was produced by Globetrotter. Marcelo Depieri is an economist, holds a master's degree in Political Economy and a PhD in Social Sciences, is a researcher at the Tricontinental Institute for Social Research, and a professor of Economics at Universidade Paulista (Unip). He is the author of the books Understanding the Brazilian Economy: Issues in Their Proper Place (2024) and Pandemics, Crisis, and Capitalism (2021), both published by Editora Expressão Popular
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