Considerations regarding the creation of fiscal space

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5. Brazil: Increasing fiscal space through social contributions

5.1. Country profile

With a population of 190 million inhabitants and a territory of more than 8.5 million square kilometres, the Federative Republic of Brazil is the largest country in Latin America; in fact, Brazil is the fifth most populous country in the world. Administratively, it is organized into a Federal District, 26 federal states and more than 5,500 municipalities. A large proportion of its territory 40 per cent consists of Amazonian rain forest, and for this reason the country boasts the greatest animal bio-diversity on the planet. The Brazilian population is concentrated in large cities along the coast, contrasting with large uninhabited territories in the interior. Brazil is the only Portuguese-speaking nation in the Americas. In the UNDPs Human Development Index HDI, Brazil is in the high human development category of countries. According to UNDP data for 2000-2006 Brazil ranks 75th in the global HDI with 0.813 points, its populations life expectancy is around 73 years, the infant mortality rate is 22 per thousand and an estimated 21.5 per cent of its population lives below the national poverty line. The estimated GDP per capita in 2008 was US 10,296 PPP, one of the highest in Latin America and in 70th position worldwide. According to the World Bank 2010, Brazils economy is the second largest in the Americas, after the United States. Its exports are very significant globally. The countrys main economic activities are agriculture, livestock, industry, mining, oil exploitation and tourism. During the last decade Brazil was able to achieve a solid macroeconomic position, which helped to improve its resistance to the global economic crisis. These results were largely attributable to the fiscal discipline applied by the country, and generally correspond to the orientation of its economic policy. This does not mean that the situation is optimal or that reforms are not required, but at the regional level Brazils macroeconomic performance is enviable. According to data from the IMF and the WB, Brazil has witnessed a decline in its public debt-to-GDP ratio and a growth in its foreign currency reserves. This has increased its resilience to economic shocks and allowed for an improvement in the country’s economic conditions, particularly when compared with the previous decade. After the 2002 crisis economic reforms were aimed at improving incomes, employment, public debt, foreign currency reserves and the de-dollarization of domestic debt. Another of the highlights of Brazils economic policy is the significant expansion of domestic demand; according to Brazilian authorities, this achievement is explained largely by the favourable development of social investment. An equally important factor in Brazils policy of seeking macroeconomic stability and maintaining the countrys international competitiveness has been the modification in its exchange rate policy toward a floating rate, as the dollar indexation policy pursued in the 1980s and 1990s had generated great instability and exchange vulnerability. More recently, as a result of the international economic crisis, the Brazilian economy contracted temporarily in 2009, but it subsequently recovered its growth towards 2010. 58 ESS-33 During the current economic crisis household consumption was supported by social programmes, which have been vigorously promoted in recent years. This growth in consumer spending reflects an increase in consumer confidence in relation to their current and future income. Another element that seems to be contributing to sustainable economic growth is the favourable performance of investment, thanks to a positive investment climate and good business expectations.

5.2. Social investment

Social investment plays an important role in public finances in Brazil. The social protection programmes health, social insurance and social assistance programmes form the largest component of social spending in Brazil, of which they account for 70 per cent. The importance of social protection in terms of its financing, coverage and protective action reflects the States clear focus on social policy as a means of guaranteeing the peoples social security rights, firmly established in the new Constitution of 1988. Over the past 15 years Brazils social spending 16 has grown steadily, rising from 20.3 to 26.1 per cent of GDP between 1995 and 2008, an impressive gain of 5.7 percentage points figure 26. Figure 26. Brazil: Evolution of social expenditure as a percentage of GDP Source: Ministry of Finance and National Treasury, 2010; International Monetary Fund, 2010b. 16 For the purposes of this analysis the definition of social spending follows that of the Economic Commission for Latin America and the Caribbean ECLAC; its more significant components are education, health, social insurance, social assistance and housing. ESS-33 59 As discussed in the next section, contributory social security accounts for a large part of the expansion of social spending in Brazil in terms of creating fiscal space and expenditures.

5.3. Overview of the Brazilian social protection system

The Brazilian social protection system is one of the most highly developed in Latin America. It is organized on the basis of four main pillars: social insurance Previdência social, which manages the cash benefits; the unified health system Sistema universal de saúde, SUS; the social assistance programmes; and the complementary programmes. The social insurance programmes and the SUS are the most important components of the system in terms of the resources mobilized and the size of the population covered.

5.3.1. Social insurance programmes

Social insurance in Brazil combines programmes under the general scheme Regime Geral and programmes for public servants. Administration of the general scheme is the responsibility of the Ministry of Social Security and the National Social Insurance Institute INSS, while the programmes for public servants are administered directly by social insurance bodies at the federal and local level. The protective action of social insurance programmes includes all the typical benefits of social insurance referred to in the ILO Social Security Minimum Standards Convention, 1952 No. 102, except for health which is covered by the SUS. Social insurance covers all categories of workers: salaried employees and independent workers. There is also extensive coverage of groups not traditionally protected in other countries, such as domestic servants and rural workers. Figure 27. Brazil: Insured contributors to the pension system as a percentage of EAP Source: Ministry of Finance and National Treasury, 2010; International Monetary Fund, 2010b.