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State Equalization Transfers to Municipalities in Brazil

State Equalization Transfers to Municipalities in Brazil. Fernando Blanco Cossio World Bank – Brazil Country Management Unit. Outline. Brazilian Intergovernmental Transfers System State Equalization transfers to municipalities. State VAT Transfers to Municipalities

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State Equalization Transfers to Municipalities in Brazil

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  1. State Equalization Transfers to Municipalities in Brazil Fernando Blanco Cossio World Bank – Brazil Country Management Unit

  2. Outline • Brazilian Intergovernmental Transfers System • State Equalization transfers to municipalities. • State VAT Transfers to Municipalities • FUNDEF Basic Education Fund • Conclusions

  3. Brazilian Intergovernmental Transfer System • Mechanisms established in the constitution of 1946 and expanded in the 1967 and 1988 constitutions. • Earmarking of tax revenues distributed by automatic formulas. • Federal transfers to state and municipalities have regional equalization objectives: FPE and FPM and Regional Funds. • State transfers to municipalities: earmarked tax revenues and distribution based on origin and demand driven.

  4. State VAT Transfer to Municipalities • State VAT is the most important tax in Brazil – (10% of GDP). • 25% of state VAT collection should be distributed to municipalities • 20% according to origin basis • 5% according to re-distribution formulas that can vary among states: • per capita income, HDI, proportion of poor, etc

  5. State VAT transfer mechanism is equalizing? • Given the low weight of the redistribution component this transfer is regressive. • Reasons: Concentration of revenue collection on state capitals and industrial cities. • Also, problems with the lack of updated socioeconomic information creates difficulties for redistribution objective.

  6. FUNDEF – Basic Education Fund • Objectives: • Guarantee Financing for Basic Education. • Demand driven mechanism that promote equalization of basic education expenditure per student within the state. • Alleviate regional disparities in education expenditure per student

  7. Fund is financed by 15% of: State Participation Fund Municipal Participation Fund State VAT Other state revenues Federal contribution if needed Resources are distributed according to: Number of students in basic education in each municipality. The state level per student is: FUNDEF resources / number of students in the state. Earmarking Revenue Mechanism for Funding of Basic EducationWithin-state redistribution of resources

  8. Other aspects: • Federal government defines a national minimum levels of expenditure per student. • If state Fund does not achieve this minimum level, federal government complement the resources to achieve the national minimum level. • Thus, regional differences are partially alleviated. • State governments also have basic schools, thus they receive resources from the state Fund. • There is different minimum values according to the grade of students. • Conditionalities in the use of Fundef resources.

  9. Results: • Basic objective was achieved: equalization of basic education expenditure per student. • Strong increase of enrollment rates. • Increase of teacher salaries. • Weak results in terms of improvement in quality of education? • Competition among municipalities and between state and municipalities. • In some states it generated decentralization of education. • State governments are complaining for resources losses. Problems to finance secondary education. • Large disparities among states subsist.

  10. Conclusions and Policy Implications • Regional redistribution mechanism to be efficient should be based on demand driven. • Conditional transfers are more efficient than unconditional. • Are the transfers going to the right places • Is there a trade-off between reducing regional inequalities and improving aggregate welfare? • Economies of scale – Population - Social indicators

  11. Population, poverty and geography Poverty Rate (Poor/Population)

  12. Population, poverty and geography Poverty Density (Poor/km2)

  13. Poverty rate and density by municipality, NE - Brazil Poverty Density Poverty Rate

  14. Expenditure/eligible population

  15. Population with no access to improved water

  16. Policy Implications (cont) • Geography and returns to investments – economies of scale. • Population, poverty and geography. • Poverty rate vs poverty density • Need for flexibility- different redistribution mechanisms.

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