President Luiz Inácio Lula da Silva’s administration has decided to include projected revenue from the new Contribution on Goods and Services (CBS) and Selective Tax (IS) in the 2027 budget proposal (PLOA). The taxes, created by the tax reform approved by Congress, will replace PIS, Cofins and a large share of IPI. The IS is designed to discourage consumption of goods and services deemed harmful to society, with rates varying by product.
Political Calculations
Although the government was initially uncertain whether to use the projected CBS and IS revenue or rely on existing taxes in the PLOA, it chose to showcase the reform’s expected income. Officials cited operational reasons and a desire to reinforce the tax reform agenda, which faces criticism from candidates such as Flávio Bolsonaro (PL) and Ronaldo Caiado (PSD).
The Selective Tax still requires a provisional measure (MP) to define its alíquotas and a 90‑day vacância period before it can take effect. The administration is debating whether to send the MP together with the budget or a few days later so the IS could start in early 2027. Negotiations with sector representatives—particularly from automobiles, tobacco and beverages—are ongoing; while talks are described as advanced, no definitive agreement has been reached. If no accord is made before the elections, the government may postpone the MP until after the vote, which would forfeit at least two months of IS revenue in 2027.
Fiscal Framework
Beyond the tax revenue question, the 2027 budget proposal will feature a less strained trajectory for mandatory spending. Lower precatório volumes and a recent congressional rule that ties expense growth to the fiscal ceiling (2.5% plus inflation) in case of a primary deficit are expected to curb outlays by roughly R$10 billion (approximately USD 2 billion at recent rates) next year. This effect is bolstered by some advance spending for 2026 and a more predictable judicial sentencing environment.
With these adjustments, discretionary spending is projected to rise by about 10% for the coming year, although figures are still being refined. The administration’s primary surplus target for 2027 is set at 0.5% of GDP, equivalent to roughly R$73 billion (approximately USD 14.6 billion). The government could offset certain expenses against this target and still draw on the tolerance band of 0.25% of GDP, though the budget submission does not plan to use that buffer.
Officially, the executive must submit an alíquota proposal to the Tribunal de Contas da União (TCU) by 15 September for analysis. Some officials argue that only the parameters should be forwarded, leaving the TCU to calculate the final revenue figures by the end of October, after the elections.