ESS-33
67
paid under it can therefore be said to be semi-contributory in nature. Such an innovation in the method of financing must be looked at carefully from the standpoint of its capacity to
create fiscal space, contrasting as it does with the situation in most developing countries where benefits aimed at the rural population, if they exist, are funded under a non-
contributory system. In Brazil, the collection of contributions based on the sales value of production allows the State to finance a portion of the cost of the social protection. This
mechanism is also very attractive to economists who are opposed to social contributions based on earnings, since the tax base here is the value of sales of agricultural products.
However, the scheme can also be criticized, on the grounds that this kind of direct taxation implies a significant degree of regression.
5.5. Temporary tax on financial transactions
The CPMF tax was levied in Brazil from 1997 to 2007, when it was repealed in a heated political controversy. The contribution took the form of deductions from accounts held by
financial institutions.
The maximum value of the CPMF quota reached 0.38 per cent of the value of financial transactions. For accounting purposes and because the CPMF was designed mainly to
finance social protection expenditure, the mechanism was classified as a social contribution.
Figure 31. Brazil: CPMF as a percentage of social protection expenditure and GDP
Source: Ministry of Finance and National Treasury, 2010; International Monetary Fund, 2010b.
Although many were opposed to the scheme, the CPMF managed to survive for ten years
19
and played an important role in financing several major components of social protection
19
The CPMF in fact existed previously under a different name.
68
ESS-33
expenditure. During the period in which the tax was applied, 42 per cent of the revenue collected was used for the public unified health system SUS, 21 per cent for social
insurance, 21 per cent for the Bolsa Família and 16 per cent for other social purposes.
By 2007 the total revenue of the CPMF was the equivalent of 1.4 per cent of GDP figure 31, enough to cover the total cost of Bolsa Família and other non-contributory social
protection programmes. In terms of social protection expenditure, between 2000 and 2005 the CPMF came to account for more than 8 per cent of total expenditure on social
protection, which shows just how important it was in financing social protection.
Where it is not possible to increase direct or indirect tax revenue sufficiently to generate necessary fiscal space, a tax on financial transactions has several advantages. In the first
place, it is relatively easy to implement and monitor because it works within regulated and supervised institutions, which is the case of most developing countries. Secondly, it covers
everyone, even agents who are able to pay and who thus evade payroll contributions. Thirdly, it is a fiscal control instrument that allows cross-checks to be made with
information on financial transactions throughout the economy. Fourthly, it allows resources to be channelled directly from the formal economy, with a high progressive
component. This is especially important considering that most developing countries have a highly regressive tax structure which relies primarily on indirect taxes. Under these
circumstances, the introduction of a tax on financial transactions to finance pro-poor social spending is an interesting innovation.
The main argument raised against the CPMF by its opponents is that it introduces a distortion into the financial market and discourages the development of banking, and that it
can thus have a negative impact on the efficiency and growth of the economy. There is, however, no empirical evidence to support this claim.
In January 2008 two measures were announced to neutralize in part the loss of tax revenue caused by the disappearance of the CPMF. First, the rate of the social contribution on net
income CSLL paid by financial institutions was increased from 9 per cent to 15 per cent. Secondly, a tax increase was decreed on credit operations and on currency transactions and
insurance. The increase in revenue from these measures was estimated at US10 billion Banco Central do Brasil, 2008.
5.6. Fiscal space, economic growth and development
With the Brazilian currency crisis of the late 1990s, domestic shocks coming from the power rationing crisis of 2001 and uncertainty as to the future economic policy of the
newly elected President Lula in 2002, the Brazilian risk premium rose above the average on the Emerging Markets Bond Index.
20
That scenario was offset by the fiscal adjustment policies initiated during the period, which resulted in a reduction in the country´s risk indicators and in an improvement in its public
debt situation and fiscal position.
The main instrument employed in Brazil to generate primary surpluses was the increment of the tax burden. During the 1970s and 1990s the tax burden remained around 25 per cent
20
The Emerging Markets Bond Index EMBI is a country risk indicator based on the behaviour of the foreign debt incurred by each country. As the certainty of compliance with sovereign debt
obligations increases, so does the EMBI rate.
ESS-33
69
of GDP, but after 1994, with the implementation of the Plano Real,
21
the tax burden on goods and services increased.
Brazils favourable macroeconomic and fiscal situation, supported by the good performance of exports, allowed it to accumulate a significant amount of international
monetary reserves and ultimately, in terms of its fiscal burden, to reduce the external public debt. As a percentage of GDP, Brazils foreign debt turned negative from 2006
onwards, making the country a net external creditor for the first time in many years.
In terms of the countrys fiscal position, the current surplus on general government account general revenue less expenses reached 2.9 per cent of GDP in 2008, its highest value in
Brazils recent economic history.
Government policy with regard to the increased funding capacity of public expenditure can be assessed in the light of the concept of fiscal space. Under the traditional definition of
fiscal space, the significant increase in tax revenue experienced by Brazil, including social security contributions is regarded as a genuine creation of fiscal space only if it does not
jeopardize fiscal sustainability and macroeconomic stability.
A fundamental question here is the time horizon within which the impact of fiscal expansion at the macroeconomic level is evaluated, particularly with respect to the
potential for sustained economic growth.
In the case of Brazil, government reports and the IMF have highlighted the countrys prosperous fiscal and macroeconomic situation, even in the context of a global financial
crisis. In 2008, at the most critical point of the international economic crisis, the Brazilian economy grew by over 5 per cent in real terms, positioning itself as one of the few
economies in the world with a high growth rate. More recently, after a decline in growth in 2009, the projections of the Government and of some international organizations ECLAC
and the IMF, for instance point to a significant recovery of economic growth from 2010 onwards.
During the recent international financial crisis, the Brazilian monetary authority documented the fact that private consumption and investment had contributed substantially
to GDP growth in 2009 – 2.4 and 1.9 percentage points, respectively. They argued from
this conclusion that the favourable trend in private household consumption was supported by the expenditure of social assistance programmes, as well as by the relative stability of
the labour market. For its part, investment became a key factor in sustaining the process of economic growth.
No doubt the economy of Brazil has revealed strengths in important areas to economic growth, and these were put very much to the test during the global economic turmoil of
recent years.
One might question, however, whether one of the Brazils greatest strengths – namely, its
tax collection capacity, which allows the country to impose a tax burden comparable to the average in OECD countries
– might not in the medium and long term prove to be too heavy a burden on economic agents and an obstacle to growth. This issue is part of an
ongoing debate, often marked by ideological convictions, that has so far led to no clear conclusions. That said, the Brazilian authorities and specialists in the field of taxation have
21
The Plano Real was a package of economic measures aimed at stabilizing the Brazilian economy in early 1994.
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
