FILE PHOTO: A drone view shows the Banco de Brasilia (BRB) headquarters building in Brasilia, Brazil, April 1, 2025. REUTERS/Adriano Machado/File Photo

By Marcela Ayres

BRASILIA (Reuters) -Brazil's 2026 annual budget bill, submitted to Congress on Friday, projects a primary surplus of 34.5 billion reais ($6.36 billion) for the central government, equivalent to 0.25% of the country's gross domestic product.

The forecast meets the 0.25% of GDP primary surplus target for next year proposed by President Luiz Inacio Lula da Silva's government in April, still pending congressional approval.

The calculation, however, excludes 57.8 billion reais in expenses not counted toward the fiscal target, notably linked to court-ordered payments. Without this adjustment, the projection would show a primary deficit of 23.3 billion reais, equivalent to a 0.17% of GDP shortfall.

Many economists have criticized the exclusion of large expenditures from Brazil's calculation of its primary balance, saying it masks the true fiscal picture even though the practice is legal. While the government may hit its targets on paper, the exemptions still drive spending and add to the hefty debt of Latin America's largest economy.

The Treasury estimated in July that gross debt as a share of GDP - a key fiscal indicator - will have risen more than 10 percentage points under Lula, who took office in 2023.

The leftist leader introduced a new fiscal framework with a more flexible spending-growth rule alongside primary budget targets. Initially, his economic team projected a primary surplus equivalent to 0.5% of GDP for this year, followed by 1% of GDP surplus by the end of his mandate in 2026.

However, the fast-growing cost of pensions and social benefits, reluctance to pursue deeper spending cuts and challenges in raising new revenue led the government to abandon its original plan last year in favor of a more gradual fiscal adjustment.

($1 = 5.42 reais)

(Reporting by Marcela Ayres; Editing by Leslie Adler and Diane Craft)