The Central Bank of Uruguay (BCU) updated its projections in the latest Monetary Policy Report. The Gross Domestic Product will grow on average only 1.3% throughout 2026. This figure is below the Executive Power's estimate in the Accountability Report, which pointed to 1.6%. At the same time, inflation would close the year at 5%, above the point target of 4.5% (although within the tolerance range of 3% to 6%), converging towards that objective only by mid-2027.
Official data from the first quarter of 2026 already show clear signs of moderation: GDP expanded 0.9% year-on-year and 0.8% in seasonally adjusted terms compared to the previous quarter. Private consumption led the recovery, driven by the evolution of employment and real wages. In contrast, investment remained lagging, and exporting sectors recorded less dynamism.
Public spending as a structural factor
In 2025, the primary expenditures of the Central Government plus the Social Security Bank reached 29.1% of GDP, an increase of 1.1 percentage points compared to the previous year. The overall fiscal result of the CG-BPS closed at -3.7% of GDP. Excluding revenues to the Social Security Trust II and the advance of pensions, the deficit stood at -4.1% of GDP. The structural fiscal result was -3.9% of GDP.
The main components of primary spending in 2025 were:
Pensions: 10.0% of GDP
Transfers: 8.7% of GDP
Remunerations: 5.0% of GDP
Non-personal expenses: 3.9% of GDP
Investments of the Central Government: 1.5% of GDP
The interest on the debt of the CG-BPS represented 2.4% of GDP. The net debt of the Central Government closed at 56.5% of GDP.
These levels of spending are not new. Between 2005 and 2025, the primary spending of the CG-BPS increased from 21.3% to 28.9% of GDP, while the tax burden rose from 23.8% to 27.1% of GDP. The State now absorbs almost one-third of the wealth generated each year.
How the size of the State affects growth
When the public sector maintains primary spending close to 30% of GDP and a persistent structural deficit around 4%, the resources available for the private sector are reduced. Investment, which the BCU points out as lagging, is the first link affected. Entrepreneurs and households face a higher tax burden and expectations of future taxes to finance the accumulated deficit.
In the first quarter of 2026, contraction was observed in the agricultural sector (lower production of rice, soybeans, and cattle) and in construction (lower execution of infrastructure works). These sectors, sensitive to net profitability after taxes and regulations, respond with less dynamism when the State retains an increasing share of resources.
The potential growth of the Uruguayan economy is limited. The BCU projects that activity will expand around its trend pace, but that pace is low because resource allocation is distorted: a significant part of national savings is channeled towards financing the deficit instead of towards private productive projects.
Inflation as an additional consequence
The inflation projection of 5% by the end of 2026 is mainly due to supply factors (rising fuel prices and international energy shock). However, the fiscal context is not neutral. A persistent deficit generates pressures on expectations and may require monetary policy to accommodate public spending to a greater extent.
Inflation in 2025 closed at 3.6%, the lowest record in over two decades. In May 2026, it was at 3.8% and in June at 4.25%. The projected rebound by the end of the year erodes the purchasing power of wages and savings, especially for those dependent on fixed incomes. It acts as a hidden tax that does not require parliamentary approval and distorts relative prices, making business planning more difficult.
What is seen and what is not seen
Public jobs, transfers, and works financed with state spending are observed. The resources that reach certain sectors are visible. What is not seen is the production that is not generated because those same resources were extracted from the private sector via taxes or debt. The postponed investments, the projects that are not launched, and the lower growth of quality private employment are not visible.
It is also not immediately apparent how the accumulated deficit raises future debt and the interest that will have to be paid (which already represents 2.4% of GDP). Each additional percentage point of primary spending that is not financed with genuine income shifts the cost to subsequent years, whether through more taxes, more inflation, or less room to reduce the tax burden.
The way forward
The BCU's projections confirm that Uruguay is navigating a scenario of relative macroeconomic stability, with anchored inflation expectations and still expansive monetary policy (TPM at 5.75%). However, that stability coexists with moderate growth and transitory inflationary pressures that the State itself contributes to generate and sustain through its size.
Official data from the MEF and the BCU are consistent: a State that spends nearly 30% of GDP in primary terms, with structural deficits close to 4% and net debt exceeding 56% of GDP, limits the dynamism of the private sector and generates side effects on prices and activity.
Reducing the size of the State, containing the growth of primary spending below the growth of the economy, and improving the quality of spending are not ideological options. They are necessary conditions for growth to consistently exceed 2% annually in a sustainable manner and for inflation to remain anchored to the target without the need for permanent favorable external shocks.
The numbers from the first half of 2026 and the BCU's projections for the rest of the year clearly show the consequences of maintaining a State of these dimensions in an open and medium-sized economy like Uruguay's.
