The global crisis and Brazilian federalism: effects and perspectives

José Roberto Afonso and Luiz de Mello

Chapter 12 in The Future of Federalism, 2017, pp 291-313 from Edward Elgar Publishing

Abstract: The global crisis had a milder adverse effect on Brazilian subnational budgets than in most OECD countries, essentially on account of a less severe deceleration in economic activity – at least until a sharper deceleration since 2011. Counter-cyclical responses were predominantly of a quasi-fiscal nature in the form of capital injections by the National Treasury in government-owned financial institutions, but also included some targeted tax cuts at the central and state levels. Since then, and despite a pick-up in activity, budget outcomes have deteriorated at the central and subnational levels, with gradually falling primary budget balances and an increase in gross indebtedness for the general government. Also, a ratcheting-up of current expenditure is constraining the ability of the states and municipalities to invest, despite rising borrowing after the crisis. Moreover, a number of structural challenges will need to be addressed to put the subnational finances on a sounder footing and in support of stronger long-term growth. They include a reform of the state-level VAT, a rationalization of expenditure to deal with the emerging pressures associated with population ageing and to enhance cost-effectiveness of subnational programmes, efforts to reduce budgetary rigidities due to widespread revenue earmarking and mandated spending, and further institutional improvements to foster coordination among the different layers of government.

Keywords: Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2017
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