Gross tax burden: The role of social contributions

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, 72 ESS-33 and this has undoubtedly played a key role in supporting the countrys economic growth policies and in financing social security and social spending. However, while Brazils macroeconomic indicators over the last decade speak well of the responsible management of the tax issue, this is no reason to disregard opportunities to revise the tax system, as has been suggested by various experts and institutions.

5.8. Lessons learnt

Lesson 1 Innovation aimed at expanding fiscal space through increases in contributions can generate very significant returns . Brazils innovations comprise both fiscal instruments and social policy. From the standpoint of the social protection system, the most important innovations include: the introduction of the rural pension scheme; the use of taxes on financial transactions to generate funding from the formal economy, mainly to support the extension of social protection; improvements in the administrative and institutional framework of the collection system; measures to facilitate and increase tax coverage and social protection coverage in micro and small enterprises. Lesson 2 Efficiency of social expenditure management does matter . It is possible to create fiscal space through the review of programmes and of institutional and administrative mechanisms. Reforms in the organization of social transfer programmes, in terms both of their structure and of the tools and criteria for the allocation of resources to generate some selectivity and progressive incentives such as the renovation of educational programmes and the Bolsa Família, can be an effective means of creating fiscal space. In Brazil these reforms were very important for extending the coverage of the universal health scheme and, at the same time, ensuring more effective social investment. The Brazilian experiences in integrated universal health care, in its education system indicators and in its social assistance coverage, are significant in terms of their impact on poverty reduction and capital accumulation. Lesson 3 Fiscal and macroeconomic discipline does matter. Brazil has been able to achieve a great degree of macroeconomic stability, which relies heavily on the effect of social programmes on the demand for domestic consumption. However, these achievements are to a very large extent attributable to the Governments responsible management of its monetary and fiscal affairs. The management of the countrys external debt and of the external sector of the economy has been a key element in the creation of fiscal space – so much so that the Brazilian economy has become a foreign creditor. Lesson 4 Social protection can leverage the formalization of the economy while at the same time generating fiscal space for growth . The classic idea that social security contributions generate distortions in the labour market and increase informality is not borne out by the experience of Brazil. In Brazil much of the increase in state revenues is attributable to increases in social security contributions, which explains the remarkable expansion observed in contributory social insurance coverage in recent years. More specifically, the strong positive development of social security registration rates is a clear reflection of a process of labour formalization. Of course, this mechanism does not operate alone; it requires instrumental and administrative reforms as well, to encourage and even oblige enterprises to adhere to the social insurance scheme while at the same time making it easier for them to do so. In terms of growth and macroeconomic stabilization, the overall