Fiscal Policy and Development in Brazil:
A Policy-Oriented Approach
Pedro Jucá Maciel
Brazilian National Treasury – Ministry of Finance Visiting Scholar at Stanford Center for Latin American Studies
November, 17th 2009 The opinions expressed and arguments employed herein
do not necessarily reflect the official views of the Brazilian National Treasury – Ministry of Finance
Agenda
1.
New perspectives for the Brazilian Economy
2.
The challenges that Brazil faces
3.
The role of the Brazilian State in the Development
4.
Political Economy in Brazil
5.
Defining a Research Agenda
3
Good times are here again!
Dynamic of Inflation and Interest Rate in Brazil
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% jan/ 95 jul/9 5 jan/ 96 jul/9 6 jan/ 97 jul/9 7 jan/ 98 jul/9 8 jan/ 99 jul/9 9 jan/ 00 jul/0 0 jan/ 01 jul/0 1 jan/ 02 jul/0 2 jan/ 03 jul/0 3 jan/ 04 jul/0 4 jan/ 05 jul/0 5 jan/ 06 jul/0 6 jan/ 07 jul/0 7 jan/ 08 jul/0 8 jan/ 09 jul/0 9
SELIC Interest Rate (a.a) IPCA Inflation Rate (Acum 12 months) Brazilian GDP per Capita
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 1900 1906 1912 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 T h o u s a n d s o f 2 0 0 8 U S D $
4
5
* *
Trends of the Brazilian Economy during recent crises
6
Trends of the Brazilian Economy during recent crises
World’s Auto Vehicles Sales
(% change 2008/2009, number of sales in millions of units
Source: Jato Dynamics do Brasil and Fenabrave Prepared by the Ministry of Finance
7
Trends of the Brazilian Economy during the recent crisis
Cost of Countercyclical Policies was Lower than in
Other Countries
(Fiscal Results % GDP) – IMF Forecasts
Source: IMF
World’s Gini Coefficients:
Source: World Human Development Report 2007-2008
9
However, we still have a lot to do… (Inequality)
GDP per Capita among Brazilian States in R$
1000 (2006)
Gini Index – Brazilian States (2007)
Brazilian Index Average (2007): 0.52
GDP per Capita in Brazil 2006 (R$ 1000)
Gini Index in Brazil (2007)
Source: IpeaData
10
However, we still have a lot to do… (Poverty)
Combination among Poorest States: Low Income + high
inequality
= High Rate of Poverty!
Poverty in Brazil and LAC:
Poverty Rate in LAC (% population living on less than $1.25) 2008 Human Development Report
Brazilian Poverty Average Rate ($ 1.25) = 7.8%
Brazilian Line of Poverty (2007)
Based on the cost of the Brazilian basic consumption bundle
Source: IpeaData
11
However, we still have a lot to do… (Health)
• Brazil presents a lower life expectancy than most LAC.
• Nicaragua has 1/4 of Brazilian GDP per capita and shows a better indicator.
• Between Brazilian States (2000):
MA: 63.9 yrs (white) and 61 yrs (black) SP: 72.3 yrs (white) and 69 yrs (black)
Life Expectation vs GDP per Capita in LA (2007)
COS CHI HND BOL GUY SUR GTM SAL PAR NIC BRA COL PER VEN ECU BLZ ARG MEX PANURU 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 0 2000 4000 6000 8000 10000 12000 14000 16000 USD $ PPP Y e a rs
Sanitation Facilities vs GDP per Capita in LA (2006) CHL URU COS ARG MEX SUR SAL ECU PAR GUA GUY BRA COL PER HON PAN NIC BOL 50 60 70 80 90 100 0 2000 4000 6000 8000 10000 12000 14000 USD $ PPP % U rb a n P o p .
• Brazil has a lower percentage of urban population with access to sanitation
facilities than most LAC.
• Between Brazilian States (2006): AL: 28%!!!
SP: 91%
Source: World Bank
Source: World Bank
Expectancy .
12
However, we still have a lot to do… (Education)
Average Years of Schooling in Brazil - Population Age: 25 yrs or more (2007)
Source: Barro-Lee Data
Average Years of Schooling vs GDP per Capita in LA (2000) URU CHL COS ARG SAL GUA MEX PAR ECU GUY BRA COL PER HON PAN NIC BOL 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 1500 2500 3500 4500 5500 6500 7500 8500 9500 USD $ PPP Y e a rs o f S c h o o li n g Source: IpeaData
• Brazilian Educational Sector presents the worst comparative indicators to LAC.
• Average years of Schooling
differences between Brazilian states are also huge:
Alagoas presents 50% of the years of education of Federal District.
Educational Attainment comparative: Brazil and LAC
13
However, we still have a lot to do… (Education)
Source: PISA 2006 (OECD)
14
However, we still have a lot to do… (Education)
Source: OECD Latin America Outlook 2009
15
However, we still have a lot to do… (Violence)
Violence: Murder Rate per 100,000 inhabitants (2008)
16
However, we still have a lot to do… (Environment)
Source: Food and Agriculture Organization of the U.N.
Annual Change in Forest Area (2000-2005) (The State of World's Forest 2009)
-31,000 -26,000 -21,000 -16,000 -11,000 -6,000 -1,000 Bra zil Indo nesi a Sud an Mya nm ar Zam bia Tanz ania Nig eria Con go Zim babw e Ven ezue la Bol ivia Mex ico Cam eroo n Cam bodi a Ecu ador Aus tralia Par agua y S q K m / Y r
17
The Brazilian State and its role in the development
Brazilian Public Sector plays a significant role in the economy:
– Government Share is approaching 40% of GDP.
Musgrave (1989) define 3 roles of the government:
– Stabilization: macroeconomics policies
Full Employment
Stable prices
– Allocation: how the economy allocates its resources
Directly: buying goods and services (education, defense, etc). Indirectly: through taxes and subsides.
– Distribution: how the goods and services produced by the society is distributed among its members.
Equity
Additionally, Regulation is another instrument that government can use to
18
The Brazilian State and its role in the development
(Distribution)
Income Inequality and Fiscal Distribution
19
Tax Revenues are characterized by [World Bank (2004)]:
– Complex: creates incentives for informality
– Dependence upon Indirect Taxation: has a regressive impact over the income distribution.
Why are Direct Taxation revenues lower in Brazil and LA [OECD
(2009)]?
– Small base for taxation: (i) Share of labor income in the generation distribution is lower and (ii) High level of income concentration (87.4% of the Brazilians belong to the exemption level of taxation).
The Brazilian State and its role in the development
(Distribution)
Source: World Bank 2004 Brazilian Tax System:
20
Public Expenditures: In total, it presents a regressive impact too! [World
Bank (2004)]
Concentration Curves of Income per Capita and Public Social Expenditure (1997)
Source: World Bank 2004
Progressive Programs:
Concentration Curves of Income per Capita and Public Social Expenditure (1997)
Regressive Programs:
The Brazilian State and its role in the development
(Distribution)
21
Brazilian Political Economy: Facts and Trends
There is a consensus between the government, economists and society that tax burden is
in its maximum level.
Although recent government’s marginal cuts, public revenues has increased caused by the
upward movement in economic formalization and revenue’s system efficiency.
Tax Burden (Countries)
2009 Index of Econom ic Freedom
y = 0.0006x + 15.493 R2 = 0.4485 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00 0 10000 20000 30000 40000 50000
Per Capita GDP (USD PPP)
% G D P BRA LAC average: 23% GDP 7.50 12.50 17.50 22.50 27.50 32.50 37.50 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
22
Tax reform proposal by the Government sent to the Congress in February
2008 still has not been passed. This proposal mostly deal with how to reduce complexity of the tax system (not the level of taxation)
It doesn’t seem that Brazil will engage in any significant tax cut reforms: both
most likely presidential candidates (Jose Serra and Dilma Russef ) haven’t commented or announced any issue about this matter.
Expenditure pressure will limit tax cuts at least in medium run justified by
legal entitlements (Budgetary rigidities) and recent commitments assumed by Brazilian Government:
23
Brazilian public expenditures (allocation): what is going on?
Development policies of Federal Government is pressuring public expenses:
1. Legal rule for the (real) increase in the minimal wage (pressuring social security and social assistance programs).
2. Increase trends in both remuneration and quantitative of Federal Government employees (payroll).
E V O L U Ç Ã O D E P E S S O A L E E N C A R G O S S O C I A I S T O T A L (C O N C E I T O C O M P E T Ê N C I A ) E X C L U S I V E C P S S - % d o P I B 5 ,2 2 4 ,6 9 4 ,6 0 4 ,7 7 4 ,6 9 4 ,9 3 4 ,5 1 4 ,3 8 4 ,5 6 4 ,6 6 4 ,8 0 4 ,8 9 4 ,3 9 4 ,5 4 5 ,0 9 5 ,1 1 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 R e p r o g 2 0 0 9 P L O A 2 0 1 0 Federal Government Payroll (% GDP) S o c i a l S e c u t i t y P r o g r a m ( % G D P ) 5 . 0 % 5 . 2 % 5 . 4 % 5 . 6 % 5 . 8 % 6 . 0 % 6 . 2 % 6 . 4 % 6 . 6 % 6 . 8 % 7 . 0 % 7 . 2 % 1997 1998 1 99 9 2000 2001 2002 2003 2 00 4 2005 2006 200 7 2008
Source: Brazilian Federal Government Budgetary Proposal
2010
Source: Brazilian Department of the Treasury
3. Legal requirement for real increase in Health Expenditures (almost 50% of Federal current expenditures) and Education.
Health: Constitutional Amendment n. 29 establishes a minimum amount
to be allocated in health must increase proportional to the nominal variation of GDP.
Education: (i) Federal Law establishes a minimum application of 18% of
the tax revenues from the Government (ii) New programs (such as FUNDEB) expand coverage of public educational network.
4. Important governmental programs keep discretionary expenditures under pressure: (i) PAC (priority investment projects), (ii) Bolsa Familia, (iii) World Cup (2014) and (iv) Olympics Games (2016).
Federal Government Budgetary Proposal for 2010
Total Cash Withdraws:
Despesas Discricionárias 9,97% Obrigações 90,03% Mandatory Discretionary
Federal Government Budgetary Proposal for 2010
Federal Discretionary Expenditures: Current (non-payroll) and
Capital):
PAC 14,1% Demais 35,9% Bolsa Família 7,9% Educação 12,7% Saúde 29,4% Health Education Bolsa Familia Priority Investments Others5.289,0 6.386,2 7.638,0 8.755,5 11.434,2 13.110,0 10.522,1 6.682,8 8.700,5 10.965,8 11.100,0 11.100,0 11.101,8 12.700,0 2004 2005 2006 2007 2008 2009 2010
R$ Milhões Milhares de Famílias
Bolsa Familia Program: Expenditures and Coverage
Source: Brazilian Federal Government Budgetary Proposal 2010
Public Investment:
Source: Brazilian Federal Government Budgetary Proposal 2010
Federal Government Budgetary Proposal for 2010
32,8 39,8 53,5 79,7 94,4 49,3 69,5 84,1 117,6 140,4 37,9 46,0 30,6 29,7 16,5 2006 2007 2008 Disponível 2009 PLOA 2010
Federal Government Budgetary Proposal for 2010
Total Cash Withdraws:
Demais Despesas Financeiras 3,95% Transferências a Estados e Municípios 8,15% Pessoal e Encargos Sociais 9,74% Benef. Previd. e Assist. 17,13% Desp Discricionárias - Todos Poderes 9,97% Demais Despesas Obrigatórias 1,08% Reserva de Contingência Primária 0,27% Juros e Encargos da Dívida 6,35% Amortização da Dívida 43,55% 3 Debt Payments Other Financial. Expend.
Transf. Local Govern.
Payroll
Social Security
Other Mandatory Exp. Discretionary
Emergency Reserves Debt Interest Payments
30
Public Expenditure: Defining the Scope of This Research
Who can Public Sector Respond?
Reallocation: Comparative
allocations between countries data. Development indicators, we can address which areas Brazil under and overinvests in.
Effectiveness: Focus on
achievements of public goals. International experience can provide good insights for programs reforms.
Efficiency: Designing
mechanisms (correct incentives) for public sector’s costs
reduction or enhancing output performance. International good practices can provide insights.
Brazilian Public Sector Expenditure (By Sectors)
Social Security, 30.9% Education, 14.3% Health, 14.0% Administrative, 6.4% Judiciary, 4.9% Public Security, 4.0% Transportation, 3.9% Social Assistance, 3.7% Urbanism, 3.4% Labor/Work, 2.4% Defense, 2.2% Others, 8.7% Fiscal Policy Macro Scenario:
Taxation: Constant Level (there is no space for reduction or increase).
Spending: Legal commitments and discretionary expenditure will keep it under
31
What is the Policy Oriented Approach?
The Importance of the Sector Economic
Growth Other Sectors
Income
Distribution Public Finance
Market Structure (Who?)
Public • Federal • State • Municipalities Private • Market Concentration • Subsidies • Loans
Problems / Symptoms (What?)
• Beneficiaries •Sector Indicators • International Comparisons • Public goals • Effectiveness • Efficiency • Budgetary Endowments • Main Programs and its design • Medium-Term trend and its fiscal
sustainability
• Earmarking revenues / Funds. • Federalism relationships •Reallocation intra- and inter- sectorial
Fiscal Analysis (How?)
Policy Recommendations
Legislative Requirement
• Size of the reform • Hierarchy of legislation
Political Will
• Second Best Solutions
Decision M o ti v a ti o n A n a ly s is R e c o m . P o lit ic a l D e c is .
Primary and Secondary Public Investment per Student.
International Evidence [OECD (2009)]:
Source: OECD (2009)
33
Tertiary Public Investment per Student.
International Evidence [OECD (2009)]:
It seems that Brazil under invests in primary and secondary education relative to
tertiary education.
Tertiary Education is biased in favor of upper income classes and private sector
has interest in it.
Reallocation to expand/improve pre-school, primary and secondary education
can be funded from tertiary system.
Source: OECD (2009)
34
Case Study: Effectiveness
Abono Salarial vs. Bolsa Familia
Abono Salarial: financial aid that Brazilian Government pays annually one
minimum wage to every employee who
– Has a average salary less than 2 Minimum Wages (≈U$ 500/month) – Worked at least 30 days in the reference year.
– Worked at the Formal Sector.
Bolsa Familia: created in 2003, this program provides a financial aid to poor
or indigent families on condition that their children attend to school and are vaccinated.
– Selection of families were decentralized to the municipalities.
– Families receives their money directly by “citizen cards” avoiding decentralization's corruption.
Coverage and Costs of both programs in 2008:
– Abono Salarial: 15.5 millions of employees and R$ 6.4 billions – Bolsa Familia: 11.1 millions of families and R$ 10.5 billions
35
Case Study: Effectiveness
Abono Salarial
Which program promotes better benefits over the poverty reduction? Público do abono salarial, segundo décimos da renda per capita
0 2 4 6 8 10 12 14 16 18 1 2 3 4 5 6 7 8 9 10
Décimos da renda per capita
% d a p o p u la ç ã o o u p ú b li c o d o p ro g ra m a População Abono 2SM Source: Paiva 2007
36
Case Study: Effectiveness
Bolsa Familia
Which program promotes better benefits over the reduction?
Source: Soares, Ribas e Soares (2009)
37
Case Study: Effectiveness
Abono Salarial vs. Bolsa Familia
Considering the objective of reducing poverty, Bolsa Familia is
more effective than Abono Salarial.
Most part of the Brazilian poverty is in the informal sector of the
economy.
As a Constitutional Amendment, this Abono Salarial is
politically very difficult to be reformed:
–
Possible Reforms:
Move resources from Abono to Bolsa Familia or Basic
Education.
Change the eligibility criteria of the program to
Case Study: Efficiency
Brazilian Defense: Payroll, Retirement and Pension
Ministry of Defense Payroll 2008 represents 75% of the total expenditure. Ministry of Defense has valuable immovable properties.
Need of equipment modernization.
Expenditure Ministry of Defense Budgetary Proposal 2010
75% 12%
12% 1%
Payroll
Other Current Expend. Investment
Case Study: Efficiency
Defense: The Germany Experience [OECD (2005)]
Germany sought to improve operational efficiency within the
defense budget by ensuring that all savings were reinvested in the
portfolio.
Under this program military personnel was reduced from
340,000 to 255,000 troops. There were also saving efforts over
information technology, clothing, fleet and real estate
management.
Savings were invested in the modernization of the armed forces
and their equipment (incentives).
Since 2002, Germany Army raised up to EUR 600 million only
Thank you!
Contact:
42
However, we still have a lot to do… (Education)
Source: OECD
43
Source: OECD 2009
The Brazilian State and its role in the
development (Distribution)
45
Public Transfers in Latin America: Goni et al (2008)
46
Public Transfers in Latin America: Goni et al (2008)
Federal Government Budgetary Proposal for 2010
Detailing Discretionary Expenditures:
R$ milhões
Ensino Superior 3.098,4 Educação Básica 2.435,7 Merenda Escolar 2.137,0 Dinheiro Direto na Escola 1.402,3 Bolsas CAPES 1.390,5
REUNI 1.370,4
Educação Profissional 1.304,1 Livro Didático 982,9 Educação de Jovens e Adultos 615,6 Hospitais de Ensino 598,3 Transporte Escolar 570,0 Demais 5.163,6 Total 21.069,0 * Despesas Discricionárias Item* PLOA 2010 Education Health R$ milhões MAC - SUS 23.896,7 Incentivos Financeiros do SUS 11.807,0 Medicamentos 3.724,7 Saneamento 1.100,0 Estruturação de Unidades de Saúde 1.071,3 Hospitais Próprios 973,8 Imunobiológicos e Vacinas 972,8 Farmácia Popular 603,2 SAMU 592,0 Demais 5.046,8 Total 49.788,4 Item* PLOA 2010 * Despesas Discricionárias R$ milhões Aeronáutica 4.921,3 Exército 2.864,1 Marinha 4.490,1 Demais 1.311,7 Total 13.587,2 Item* PLOA 2010 * Despesas Discricionárias Defense
48
Federal Public Expenditure: Which sectors we should
focus on?
Defining priorities for the analysis:
AGGREGATES TOTAL 2008
(R$ Billions) Share
Payroll 141.91 29.5%
Other Current Expenditures 312.66 65.0%
Investments 26.09 5.4% Others 0.36 0.1% Total 481.03 100% Source: SIAFI SECTORS TOTAL 2008 (R$ Billions) Share Social Security 241.15 50.1% Health 47.72 9.9% Social Assistance 28.59 5.9% Education 26.99 5.6% Employment/Labor 22.19 4.6% Defense 20.65 4.3% Judiciary 18.68 3.9% Administration 14.08 2.9% Agricult ure 9.73 2.0% Transportation 9.44 2.0% Public Security 6.00 1.2% Legislative 4.90 1.0%
Science and Tecnology 4.87 1.0%
Judiciary I I 4.52 0.9%
Urbanism 3.45 0.7%
Rural Reform 3.39 0.7%
Environmental Management 2.38 0.5% Comerce and Services 2.27 0.5%
Others 10.03 2.1%
Total 481.03 100%
Source: SIAFI
1) Relative Importance (share) of the total expenditure.
2) Programs related to specific
development areas (indicators) in which Government should be treated as a
priority.
Keep in mind! The importance of
improving (enlarging) “government
fiscal space” [OECD (2009)] in order to accommodate future expansions
49
Public Expenditure: Which sectors we should focus on?
Federal Expenditure (By Sectors)
Social Security, 51.1% Health, 9.8% Social Assistance, 5.7% Education, 5.0% Labor/Work, 4.5% Defense, 4.4% Judiciary, 4.1% Administrative, 2.6% Transportation, 2.6% Others, 9.1%
Municipals Expenditure (By Sectors)
Educat ion, 26%
Healt h, 23%
Administ rat ive, 13% Urbanism, 13% Social Security, 6% Transport at ion, 3% Social A ssistance, 3% Sanit at ion, 3% Legislative, 3% Ot hers, 6%
States Expenditure (By Sectors)
Educat ion, 22%
Social Security, 15%
Healt h, 15% Public Securit y, 11%
Administ rat ive, 8% Judiciary, 9%
Transport at ion, 6% Legislat ive, 3%
