Selic Drag Compounds Brazil’s Tax Weakness

Brazil’s September 2025 federal tax data underscores persistent structural fragilities in revenue generation, despite a nominal growth trajectory that masks deeper macro-fiscal imbalances. Gross revenue for the first three quarters reached BRL 1.80 trillion, marking a real increase of 2.7% year-on-year, down from 4.5% over the same period in 2024. The deceleration reflects not only cyclical moderation but also underlying tax base rigidity, weakening the credibility of Brazil’s fiscal anchor just six months into the new framework’s implementation.

Revenue from corporate profit taxes (IRPJ and CSLL) rose by only 1.9% in real terms, undercut by declining margins across energy, industrials, and primary goods exporters. Sectoral pressure coincides with an average quarterly depreciation of 3.6% in the BRL=X and global commodity softness, compressing dollar-denominated earnings repatriated to local books. Indirect taxes such as IPI and import duties also contracted, highlighting suppressed consumption and capital goods demand. Import volumes were flat in Q3, with port throughput data showing negative momentum, while higher average funding costs — tracking Selic at 10.75% — constrained trade credit access.

Despite a tight labor market — unemployment remained at 7.5% in August — payroll-linked revenue was flat, hinting at wage compression and increased informality. Broader inflation trends further eroded real revenue yields. CPI inflation stood at 4.3% year-on-year in September, while nominal GDP growth is estimated at 5.8% for Q3, rendering the revenue-to-GDP ratio effectively static. With structural expenditures locked by constitutional mandates and indexation, the lack of elasticity in revenue performance raises pressure on the expenditure side of the fiscal rule.

The fiscal framework legislated in early 2025 ties primary spending growth to 70% of real revenue increases and mandates zero primary deficit by 2026. However, underperforming tax intake has exposed its vulnerability to revenue shortfalls, triggering concerns over forced compression in public investment and social transfers. Brazil’s gross public debt stood at 77.2% of GDP in September, rising 1.6 percentage points since January. Net interest payments climbed to 6.5% of GDP on a 12-month rolling basis, driven by the cost of rolling over domestic debt at high real yields.

Bond market signals mirror this fragility. The 10-year benchmark bond yield (TNF=F) remains above 11.4%, maintaining a 580 basis point spread over comparable US Treasuries. Credit risk has priced in the fiscal underperformance: Brazil’s 5-year CDS spread rose 25bps since July to 220bps, reflecting investor skepticism over medium-term consolidation targets. Rating agencies have maintained a stable outlook, but analysts now flag fiscal rule credibility — not just headline numbers — as central to forward-looking risk assessments.

By comparison, Mexico recorded real revenue growth of 5.2% y/y in Q3, aided by consumption tax dynamics and energy-linked receipts, while Chile’s collections rose 4.6% y/y. Brazil’s revenue structure, still heavily reliant on corporate profitability and indirect taxes, remains more pro-cyclical and less diversified, a vulnerability magnified in the current macro backdrop.

Three indicators will determine Brazil’s fiscal credibility heading into 2026. First, real revenue must accelerate above 3.5% by Q2 to meet zero-deficit thresholds without cutting primary capital expenditure. Second, gross debt must remain capped below 78% of GDP by June 2026 to avoid rating action triggers. Third, the Treasury must sustain market confidence to maintain refinancing spreads under 600bps and limit duration risk in rollover auctions. Deviations from these benchmarks would likely prompt capital flight, BRL depreciation, and renewed upward pressure on Selic.

The September data confirms that Brazil’s fiscal trajectory is entering a more constrained phase, where credibility depends less on top-line numbers and more on structural resilience. Absent productivity gains or tax base reform, the margin for fiscal manoeuvre will continue to narrow, with consequences for macro stability and market pricing.