Fiscal federalism in Brazil : historical trends, present controversies and future challenges

Abstract

A pendulum movement marks the history of fiscal federalism in Brazil, where periods of concentration of tax revenues and responsibilities on the federal government were followed by periods of decentralization of revenues and responsibilities to the sub national (states and municipalities) level.

The last of these pendulum cycles occurred in the last 15 years, following the voting of a new federal constitution, on 1988. At first, the new constitution implemented a significant decentralization, increasing the amount of tax revenues to be transferred to states and municipalities, as well as increasing the revenue from State and local taxes. In the following years, the federal government recovered most of its initial share of the total tax revenues, by increasing the total tax burden (from 25% to 35% of GDP) and ensuring that the additional revenues were not shared with the other levels of government.

The present paper examines the historical trends of the brazilian federalism, its present controversies and future challenges, what is especially important when the national congress will be voting, this year, a new Tax System Reform.

The paper contests the notion, widely spreaded, that the sub national governments are inefficient and not committed to fiscal discipline. It also emphasizes the fact that the production and delivering of public services are increasingly being made through the sub national governments, although the excessive decentralization can lead to duplication of services, waste of scarce financial resources and lack of coordination of the national priorities. It also shows that much of the budget surpluses that the federal government obtained in the previous years, through tax burden increase and revenue concentration is being used to interest payments.

Thus, to reconcile the goals of effective and responsive use of public resources through decentralization with the need for central coordination of national priorities and the commitment with fiscal discipline is, more than ever, the challenge of the brazilian fiscal federalism, today and in the years to come.