Brazil's fiscal situation has worsened for the fourth consecutive year in 2025, with state governments reporting their worst fiscal results since 2014. The ongoing economic downturn has significantly impacted the primary revenue source for these entities, the ICMS (tax on goods and services), leading to a rise in expenses among the states. Many governments, having renegotiated their debts, found themselves with additional funds to invest, which they strategically allocated to spending initiatives as they approached the electoral year.

According to data from the Central Bank, state governments ended the year with a minuscule surplus of 0.04% of GDP, marking a stark contrast to previous years and underscoring the fiscal challenges ahead. Additionally, the Summary Report on the Budget Execution of states and the Federal District indicates that while expenditures surged by 5.7% taking inflation into account, the growth in revenue was much slower, at 3.4% in real terms over the past year. This disparity between rising expenses and sluggish income growth is indicative of a broader trend affecting state finances.

The continued deterioration of state fiscal conditions as highlighted by preliminary data from the Fiscal Bulletin of the States points to potential challenges for governance, especially in light of upcoming elections where financial stability may influence electoral outcomes. Stakeholders are now closely monitoring these developments to understand the implications for public services and state investments in the near future, signaling a critical juncture for fiscal policy in Brazil.