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The introduction in 1997 of a temporary tax based on financial transactions as a form of social contribution the CPMF was an interesting attempt to draw resources from the
formal economy in order to finance social spending targeted at the poorest segments of the population. Most of the revenue from the CPMF was used to finance non-contributory
programmes.
The relative weight of social contributions in public finances is also apparent in other developing countries. In Latin America, Chile, Colombia, Costa Rica, Mexico and
Uruguay head the list of countries where social security contributions make up a substantial proportion of public finance and social investment for development. In Africa,
Tunisia is another example, where social security contributions stand at around 5.6 per cent of GDP and contribute about 30 per cent of total tax revenues.
This is very important for understanding the role of social security institutions in the creation of fiscal space, even in developing countries.
In countries with a lower level of development, as is the case of most African economies, social insurance is still at an embryonic stage and, if this situation does not change, their
social protection systems will continue to rely heavily on non-contributory financing – and,
in some African countries, perhaps also on direct foreign aid. However, this is no reason to renounce efforts to establish social protection systems financed by social contributions. On
the contrary, it should serve as an encouragement to continue developing social protection in the long term, with the idea of combining a capacity to create fiscal space based on
social insurance systems with general taxation to finance non-contributory programmes. Given the experience of Brazil and other middle-income economies, one focus of the
discussion on creating fiscal space in low-income economies should be on innovative ways of collecting public resources so as to generate some degree of income redistribution.
5.4.3. Rural pensions
Rural pensions are just such an innovative tool for extending coverage to rural populations in Brazil. The countrys social assistance scheme was set up in 1971, when it was known as
FUNRURAL. The 1988 Constitution subsequently changed the method of financing and administering the programme. By means of this innovation, Brazil had by 2007 managed
to incorporate it into the special insurance scheme Segurado especial aimed at small rural producers and over 80 per cent of rural employees,
18
a remarkable social security indicator for Latin America.
Since 1991 producers, partners, sharecroppers, tenants and fishermen working for family businesses with no permanent employees contribute to social security at a rate of 2.1 per
cent on the gross income earned from marketing their products. Under this scheme retirement pensions equal to the minimum wage are paid from the age of 60 for men and
55 for women. The benefit is conditional on having engaged in a rural activity for at least 15 years. In 2008 the scheme was the subject of special legislation.
Between 1992 and 1994, Brazils rural social insurance legislation had a great impact on the expansion of the countrys fiscal space and social insurance coverage IPEA, 2007.
The special insurance scheme established under the legislation receives a very substantial volume of state subsidies, estimated at about 85 per cent of total expenditure; the benefits
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Cited in Cabanas, 2008.
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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
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and played an important role in financing several major components of social protection
19
The CPMF in fact existed previously under a different name.
