The 1988 Constitution and fiscal space

70 ESS-33 referred to the need for a significant structural reform of the current tax model, regarding whose complexity and fragmentation there appears to be broad agreement. Aboal et al. 2009 refer to the importance of the composition and efficiency of public expenditure in creating fiscal space in Brazil, noting that the rules governing the operation of the pension scheme and the entitlement to benefits have given rise to a certain lack of flexibility in the structure of government spending, since total expenditure on pensions averaged about 11 per cent of GDP between 2000 and 2008 and 68 per cent of primary expenditure by the central Government; specifically, spending on INSS benefits grew to 7.26 per cent of GDP in 2007. For the authors of the research, the rigidity of these components of expenditure means that in the current institutional climate the ability to generate fiscal space for growth is quite small, and that the potential for improving Brazils fiscal situation lies in the modification of capital items, especially education and public investment. Aboal et al. 2009, in a comprehensive study of fiscal space in the Southern Cone Argentina, Brazil, Chile and Uruguay, concluded that in recent years there had been an expansion of fiscal space for policy-making and that the region was now in a relatively favourable situation. This in turn extends the planning horizon for policy design, by reducing the threat of unsustainable debt. The authors added, however, that the improvements observed did not result in an immediate extension of fiscal space for growth. It should be noted that, although Aboal et al. provide extensive evidence of fiscal developments in Brazil, their findings with respect to the creation of fiscal space are based on immediate results, rather than on the overall implications in the medium and long term. Thus, they argue that, so long as the tax pressure grew, it was possible for growth-related expenditure to increase only partially, owing to the rigidity of other components of expenditure that influenced the surplus and prevented it from rising automatically along with increased taxation. 5.7. What about creating fiscal space for development? Whether or not the increase in the tax burden and fiscal intervention in Brazil corresponds to a genuine expansion of fiscal space can be evaluated by the approach employed by the UNDP. According to the UNDP approach, the evaluation should consist more of an analysis of the impact of such measures in the medium and long term. Therefore, the main criteria to be applied would revolve around the appropriate balance between fiscal discipline and the effectiveness of expenditure in the accumulation of productive capacity, in terms of the stock both of physical and of human capital. By their very nature, the attainment of the MDGs and the establishment of a welfare society in general must be intrinsic goals of a sustainable development policy. That being so, we shall now analyse some of the variables related to development objectives. Investment in education has expanded significantly in Brazil over the past years, in both real and per capita terms. Between 2000 and 2008 real expenditure on education rose by 36 per cent, while in per capita terms the increase was 24 per cent. The expansion of investment in health was significantly greater, since during the same period real spending on health grew by 75 per cent, while per capita expenditure was up by 60 per cent. This investment has had a direct impact on the quantity and quality of available human resources. At the same time it has meant an increase in the countrys productive capacity, for three reasons: i the reduction in mortality and the growth of the economically active population; ii the increased productivity of labour thanks to improvements in health; and ESS-33 71 iii the increased productivity of labour resulting from improved training of the workforce, generated in turn by an increase in school attendance. The sum of these effects should be reflected in the medium and long term, perhaps over a time horizon of 15 years or so, by an increase in the aggregate income of households and, therefore, by an expansion of domestic demand for consumption and investment. While the repercussions of better health and education on families income levels have been extensively studied, their ultimate impact on economic growth has not. This is of course a highly complex quantitative issue, mainly because of the interrelationships between the variables concerned, which quantitative models are not able to capture with any degree of accuracy. Studies by Pochmann 2007, Lavinas 2007 and Soares et al 2006, together with data from household surveys conducted in 2004 and 2006, show that Brazils socioeconomic indicators improved and that progress was made in reducing absolute poverty and inequalities in income distribution. According to ECLAC the poverty rate in Brazil fell from 38 per cent of the population in 2002 to 28 per cent in 2007 UNDP, 2008. According to Paes de Sousa 2010, 19.4 million Brazilians have overcome extreme poverty in the last decade and in 2008 the extreme poverty rate was one-third that of 2001. The same report shows that Brazil was able to reach one of the MDGs a decade before the scheduled date and has established stricter targets for poverty reduction. In terms of reducing inequality between 2001 and 2008, 10 per cent of the low-income population increased their income by six times more than did the 10 per cent of those earning the highest incomes IPC-IG, 2008. The quality of social spending, in terms of its efficiency and effectiveness, is critical for creating fiscal space, and it serves as a useful criterion for analysing fiscal policy in Brazil over the two decades since the 1988 Constitution. The impact of social spending has been very noticeable in areas that are critical for the sustainability of economic growth. Besides the improvements in the countrys poverty indicators already referred to, there has been an increase in the coverage and performance of the educational system. The illiteracy rate among Brazilians aged between 15 to 17 years decreased from 8.2 per cent in 1992 to 1.7 per cent in 2007, and the average years of schooling for people aged 15 years and over increased from 5.2 to 7.3 years from 2.6 to 4.5 years in rural areas during the same period. Between 2000 and 2008 the size of the population benefiting from social insurance grew by 9 percentage points, a clear indication that workers are moving from the informal to the formal sector of the economy. Benefits paid under the social assistance system were extended to almost 50 million people, from an initial base of 2 million in 2000. However, despite the strong health system restructuring process experienced by the sector including the strengthening of health promotion and prevention programme s, as in the “Saúde da Família ” Programme and the universalization of health access through the SUS, private expenditure on health is still considerably high in Brazil. Some of the more recent measures adopted by the Government in response to the economic crisis which are expected to have a medium- to long-term social impact include substantial increases in the Continuous Cash Benefit Programme Benefício de Prestação Continuada, the maintenance of the investment schedule under the Growth Acceleration Programme Programa de Aceleração do Crescimento, which is seen as playing a key role in the creation of jobs in the formal sector, and the pursuit of social infrastructure projects in rural areas power supply, housing and sanitation that are recognized sources of growth for the economy. In conclusion, fiscal intervention supported by a significant increase in state funding seems so far to have been altogether compatible with Brazils goals of economic growth and development. Brazil is certainly one of the few countries in Latin America, and perhaps in the developing world, whose experience in increasing the tax burden has been successful,