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Brazil Pressures on Public-Sector Expenditures in the 1980s
Despite the popular image of Brazil's public sector as a profligate
spender and intense consumer of resources, public expenditures as
a share of national product remained relatively stable until the
mid-1980s. The containment of public spending under the government
of President João Batista de Oliveira Figueiredo (1979-85)
at the federal level included limitations on hiring and expenditures
on goods and services as well as cuts in public investment. Spending
by state and local governments was limited by reductions in the
revenues transferred to them by the federal government.
Total spending for public-sector wages and salaries, which had
actually declined as a share of national product between the early
1970s and 1984, only began to increase when the government of President
José Sarney (1985-90) took over, reaching almost 10 percent
of GDP in 1989. Public-sector spending on goods and services as
a share of GDP also increased under President Sarney. A fall in
net subsidies to the private sector and a stable level of social
security spending were not sufficient to offset a sharp rise in
government spending on wages and salaries. The expansion of public
spending after 1985 occurred at all levels of government. At the
federal level, it was partly caused by the efforts of President
Sarney to secure a full five-year mandate, reinforced by the
misperception that Brazil's budget deficit would be negligible if
the effects of inflation on it were discounted. At the state and
local levels, greater revenues were available as a result of changes
in federal transfers after 1985, a trend reinforced by the 1988
constitution. Much of this spending went for current expenses, primarily
personnel, rather than investment in infrastructure. Even with this
expansion in state and local spending, however, the federal government
remained responsible for about two-thirds of total expenditures.
State spending was primarily for education and health, and local
government expenditures were devoted principally to housing and
urban development. At all levels of government, however, much of
this spending, whatever the announced function, was for personnel
and administrative costs.
The worsening of Brazil's public-sector finances in the 1980s was
in part the consequence of the political and administrative decentralization
that took place following the return to civilian rule in 1985. In
1988 the new constitution made this decentralization explicit, transferring
to state and local governments a substantial part of the revenues
that were formerly received by the federal government. There was
not, however, a parallel decentralization of expenditure responsibilities.
The federal government retained most of its functional responsibilities,
while losing a significant part of its revenues.
Trends in tax revenues after 1983 further aggravated Brazil's public-sector
finances. Tax receipts as a share of GDP fell sharply after 1983,
having averaged about 25 percent in the preceding decade. With the
exception of the atypical year of 1986 (the Cruzado Plan), they
did not regain such levels until the first years of the Collor
de Mello government, when increases in income taxes and social
security contributions, as well as taxes on manufactured goods and
financial operations, slowed the decline in revenues.
Although the federal government in the early 1990s made determined
efforts to maintain its income by enforcing tax collection, these
efforts met with limited success. Public cynicism about the government's
use of tax revenues, fed in part by the corruption scandal that
forced Collor de Mello from office in September 1992, led to increased
tax avoidance and in many cases to outright tax evasion. Although
little firm evidence is available to quantify tax evasion, considerable
anecdotal and fragmentary evidence suggests that it rose significantly
in the 1980s and early 1990s. With the increased financial opening
of the economy, many Brazilians sought to shelter income derived
from financial assets by placing them outside Brazil, even when
before-tax returns in Brazil were substantially higher. Capital
flight from Brazil, which had not been as serious a problem as it
had been for a number of other Latin American nations in the 1970s
and early 1980s, accelerated significantly in the late 1980s. Other
ways in which Brazilians evaded taxes included substantial understatement
of income from professional and service activities and the widespread
practice of making transactions without documentation for tax purposes.
The adoption of the new constitution in 1988 had a significant
impact on public-sector finances. Many Brazilians viewed it as the
vehicle through which to redress what they regarded as excessive
concentration of powers at the federal level. Consequently, strong
support existed for decentralizing government and shifting power
from the presidency to the Congress. Many Brazilians also saw the
new constitution as a way not only to guarantee civil rights but
also to secure specific economic rights in the areas of health,
education, employment
guarantees, and social security.
The result was a document that is far more specific and lengthier
than those of most other nations. Some advances were made in the
arrangement of public finances, among them restrictions on off-budget
spending by the executive and better defined procedures for the
preparation and passage of an annual budget. In a larger sense,
however, the 1988 constitution made the potential for fiscal deterioration
more likely, especially at the federal level. It not only reduced
the revenues that went to the federal government by transferring
them to states and municipalities but also linked many revenue sources
to specific objectives, further restricting the federal government's
ability to allocate expenditures. In addition, the new charter actually
expanded some federal responsibilities in a number of areas, among
them law enforcement, education, and cultural affairs. Another provision
granted tenure to public employees after two years. The constitution
strengthened employment and pension guarantees and the explicitly
maintained pension and retirement rights based on length of service--thirty-five
years for men and thirty years for women--without regard to age
at retirement. Together, these provisions made fiscal equilibrium,
especially at the federal level, even more difficult to attain than
it had been before 1988.
A number of Brazilian economists and policy makers soon recognized
the budgetary implications of the new constitution. The stabilization
program of the new Collor de Mello government in 1990 temporarily
halted the decline in federal government revenue through its price
and wage freezes, but this was done at a very high cost. The dramatic
freezing of most Brazilians' financial wealth under the first Collor
de Mello plan raised basic legal and constitutional questions about
the fiscal rights and responsibilities of the government. A number
of Brazilian legal scholars questioned the right of the government
to impose what they argued was a tax, not allowed for in the constitution,
through the freezing of assets whose full real value would not be
repaid to their holders.
By the early 1990s, a consensus had emerged that successful economic
and price stabilization would require profound changes in Brazil's
fiscal system and, if necessary, amendments to the 1988 constitution.
Although such views were rejected vigorously if suggested by others,
such as the IMF or foreign lenders, many Brazilians recognized that
the 1988 constitution had created a number of fiscal problems. In
October 1991, the Collor de Mello government submitted to Congress
a series of proposals aimed at reducing the fiscal pressures at
the federal level. Among the proposed changes were modifications
of the constitutional obstacles to administrative reform, limitations
on the constitutional guarantees for social security, and authority
to create new sources of federal tax revenue. With the erosion of
support for the Collor de Mello government during 1992, the proposals
had little chance of passage, and the fundamental fiscal disequilibrium
continued under the administration of Itamar
Franco (1992-95), Collor de Mello's successor.
Data as of April 1997
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