For over a decade, Brazil has been a model of fiscal responsibility. Brazil’s success makes it easy to forget that it once suffered from one of the worst fiscal performances in Latin America, complicated by hyperinflation, short-lived currencies, and massive debt-to-GDP ratios. Today’s economic stability also makes it easy to assume that Brazil’s fiscal house is in order. But while chronic public profligacy—driving inflation and currency overvaluation—may be ancient history, the need for fiscal reform remains pressing.
In his compelling book, Reforma fiscal e equidade social (Fiscal Reform and Social Equity)—the third in his trilogy of scholarly works on Brazil’s economy—Fernando Rezende, an economist and professor at Fundação Getúlio Vargas, makes a strong case for such reform.
Rezende provides a compelling overview of the steps Brazil took to achieve its economic turnaround, capped by a 2000 law that set strict limits on debt levels for both states and the federal government, and mandated fiscal surpluses that successive presidential administrations have almost religiously followed.
However, as Rezende notes, the nation is still plagued by excessive corporate tax burdens, high payroll taxes, and the lack of coordination among all levels of government on collection and expenditures—just to name a few areas where fiscal reform is sorely needed. While these factors have long been recognized, Rezende adds a convincing additional incentive: Brazil’s income inequality. Without comprehensive reform, he writes, “it won’t be possible to correct the enormous social injustice that has been accumulating over time.”
Brazil’s skewed income distribution is no secret. While improving, Brazil’s Gini coefficient is one of the worst in a notoriously unequal region. The debate revolves around how to address it. Brazil’s Bolsa Familia conditional cash transfer program, created in 2003, is now a worldwide model for reducing poverty and inequality. But Rezende believes more can be done, and advocates more efficient spending rather than additional spending on the poor.
Perhaps more important, he argues that incremental changes won’t be effective. Instead, he writes, Brazil needs broad, sweeping fiscal reform that deals with the tax system, the budget, social guarantees, and improved resource sharing among states. That includes raising the quality of public spending, which he says involves maintaining a balanced fiscal budget, protecting the neediest citizens, improving cooperation between federal entities, and increasing transparency so that citizens know how their taxes are being spent. He notes that Brazil’s level of budgetary transparency falls below that of Costa Rica, Peru and Panama.1
In short, he writes, money should go where the problems are. For example, Brazil needs to modernize its red-tape-clogged tax system, which has fostered the notorious “Custo Brasil”—the catchphrase describing the high costs of doing business in Brazil. Policymakers could also find better ways of allocating tax revenues among strong and weak tax bases. He makes the logical argument that “the larger the interregional gap, the larger the imbalances in the distribution of tax bases will be, creating the need to design a system of transfers that will correct these fiscal imbalances.”
Rezende also argues for an ambitious look at the limitations imposed by Brazil’s 1988 Constitution, implemented at the end of Brazil’s military regime. The constitution mandated fiscal decentralization, but without a corresponding transfer of responsibility—leading to a situation in which state and municipal governments enriched themselves at the expense of federal coffers. While the 2000 Fiscal Responsibility Law partially addressed the situation by setting strict debt limits for all levels of government, the budget is still rigid. The result, concludes Rezende, leaves “the future […] tied to the past.”
Rezende directly addresses the most important question surrounding the fiscal reform debate: is it possible? Surprisingly, perhaps, public support for fiscal reform has been strong in Brazil since the early 1990s, with over 60 fiscal reform proposals circulated in Congress in the 1990s alone. Rezende correctly points out that comprehensive reform reduces uncertainty over its impact on public revenue, as it creates automatic systems of compensation. Rezende acknowledges that while “the mere mention of sweeping fiscal reform is met with skepticism,” the nature of all-embracing reform is indeed possible, as it mitigates some resistance by limiting specific winners and losers.
But on the larger point of whether broad reform is possible—or likely—the answer may not be as clear as Rezende hopes. Efforts to deal with the budget, taxation, transfers, and welfare programs have been stymied by the country’s reluctance to change a system that actually works in meeting fiscal targets. Brazil’s tax system may be inefficient and regressive, but it brings in massive amounts of income (thanks in part to strict enforcement). It is also important to remember that Brazil’s three major reforms in fiscal governance were prompted by crises.2 The current economic environment, while not perfect, can hardly qualify as a crisis.
President Dilma Rousseff remains among the most popular leaders in the world, with approval ratings surpassing 75 percent, until the protests in June. Adjusting the tax system now— in the absence of a crisis demanding it—could be deemed political suicide. While high, Brazil’s level of income inequality improved over the past decade. For these reasons alone, without even addressing Brazil’s unwieldy political system, all-encompassing fiscal reform is unlikely in the near future.
All the same, Rezende’s detailed analysis makes Reforma fiscal e equidade social a mandatory read for practitioners and students interested in the fiscal performance of Brazil. And his proposal that the Rousseff administration should abandon the current path of partial reform in favor of a new course of more embracing reform deserves attention.
This is especially true, given recent signs of “fiscal slippage.” The Rousseff administration recently admitted that it would meet its 2013 primary fiscal surplus only by using creative accounting and by tapping the sovereign wealth fund established in 2008. Congress is also debating ways to loosen the Fiscal Responsibility Law of 2000, to allow the federal government to cut taxes without having to specify—as it currently must—how it will pay for it. While a strong case can be made that such changes would enable Brazil to cut its overbearing tax burden after two years of slow economic growth, they could also signify a slow creep toward higher inflation and fiscal looseness, making Rezende’s book and prescription all the more relevant and pressing.