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Brazil: restoring fiscal austerity while preserving public services

Restoring fiscal austerity in Brazil is not an easy task since the government faces both exerts from privileged groups and constraints establishing minimum public expenditures on some bills. It could however be done without penalizing public services if their efficiency is improved.
By Cristina Terra
 Post, September 7, 2016

Restoring fiscal austerity in Brazil is not an easy task, even for a government who believes in it. The Brazilian governments have a long history of conceding privileges to specific groups, in the form of subsidized loans, tax incentives or protectionist policies among others. This practice has been intensified over the past years, particularly in Dilma Rousseff’s government. Clearly, those who benefit from them exert political pressure for their preservation. The interest groups that are thus formed create a stronger barrier to changes, which, in a democratic society, needs the approval of Congress.

To make the problem harder to solve, the Brazilian law establishes minimum public expenditures on some bills, such as health and education. A least 15% of government’s net revenue must be spent on health, according to a new amendment on the country’s constitution,[1] and a law from 2014 requires that spending on education, at 6.6% of GDP in 2012, should achieve 10% of GDP by 2024. This makes it even more difficult for the government to ‘grow out of’ the fiscal deficit. Basically, 90% of the government budget corresponds to mandatory expenses, which leaves very little scope for fiscal adjustment. Hence, to get out of this gridlock, the government must change the law, as the new government is proposing.

One major problem in the Brazilian public budget is its pension system. According to OECD (2015b), Brazil’s spending in pension benefits amounted to 7.4% of GDP in 2014. For OECD countries, this share is 7.9% on average, although their share of older population is two times greater than Brazil. At least two measures are essential for the system not to become unsustainable. First, the length of contribution must be increased, to rise the average retirement age currently at 55 years old. Second, the indexation mechanism of the minimum benefit must be revised, which is presently indexed to the minimum wage. The increase in minimum wage in real terms over the past years implied large increases in pension benefits, contributing to the rise in spending on pensions, which increased by 120% from 2001 to 2014.

Table 1 - Pensions in Brazil: Key indicators in 2014
Source: OECD, Pensions at a Glance 2015: OECD and G20 indicators (2015b, p.222).

Also, fiscal adjustment in Brazil does not necessarily mean lower welfare or lesser public services. The Brazilian government is quite inefficient. According to the Global Competitiveness Index, computed by the World Economic Forum, Brazil ranks 136, out of 140 countries, in public-sector performance. In wastefulness of government spending, it ranks 133. Not only the Brazilian government is inefficient, but also it has a very complex tax system, imposing high costs on businesses just for complying with it. Brazilian firms spend on average 2 600 hours per year to prepare and pay taxes, according to the Doing Business statistics, from the World Bank. The averages for Latin America & Caribbean and for OECD high income countries are 361 and 177 hours per year, respectively. When Brazilian firms spend so many hours with their taxes, they are devoting efforts and resources to an activity that generates no output. It is simply a waste of resources. The set of economic policies put in place by Dilma Rousseff’s government added even more noise to the already complex maze of tax regulations and incentives, instead of simplifying them. It went in the wrong direction. Clearly, government spending does not need to increase in order for the population to benefit from more and better-quality public services. Important gains could be achieved by changing regulations and by increasing the efficiency in government provision of public goods.

One important example is education. Education has always been a major weakness of the country. According to Barro and Lee (2013), Brazilian adults (above 25 years-old) had an average of only 3.8 years of schooling in 1990, compared to 7.9 years in Argentina, 5.8 in Paraguay and 5.5 in Mexico. In 2012, this number had almost doubled in Brazil to 7.2 years of education, on average. Despite this impressive increase in school attendance, its quality is very poor. International Student Assessment (PISA) survey from OECD ranks Brazil second to last in the three skills surveyed: reading, mathematics and science. Almost 67.1% of Brazilian students surveyed had a score of 1 or below in mathematics, out of the maximum score of 6. Brazil is in 132th place, out of 140, in quality of primary education.

Brazil spends a lot in education, but this spending does not seem to be very efficient. Compared to other countries, Brazil has the highest expenditure per student in tertiary education compared with spending at primary level: in 2012, the annual spending per student in tertiary education in Brazil was 3.8 times higher than the spending per student in primary education (OECD, 2016). For the OECD countries, this number was 1.8, on average.

The Greater Brazil Plan, launched by Dilma Rousseff in 2011,comprises an educational policy based on three federal programs focused on technical education and stimulus to engineering: the National Program for Access to Technical Schools, the National Plan Pro-Engineering, and the Science Without Borders Program. The latter gives scholarships for Brazilian students in hard sciences to study abroad both at graduate and undergraduate levels, significantly increasing the existing scholarship program. The focus on higher education seems misplaced, given the strong deficiencies in primary education. Moreover, students in higher education in Brazil typically come from more prosperous families, so this type of educational policy reinforces inequality. Public money would be spent more efficiently and in a more egalitarian fashion in primary and secondary education, where lies our largest deficiency.
This post is an excerpt from “Brazil: self-inflicted pain”, Panorama du CEPII, C. Terra, No. 2016-03, July 2016 and « La crise made in Brazil », L’économie mondiale 2017 (chapitre VII), Ed. La Découverte, coll. Repères, Sept. 2016.


OECD (2015a), OECD Economic Surveys: Brazil 2015, OECD Publishing, Paris. doi: 10.1787/eco_surveys-bra-2015-en.

OECD (2015b), Education at a Glance 2015: OECD Indicators, OECD Publishing, Paris. http://dx.doi.org/10.1787/eag-2015-en.

OECD (2015b), Pensions at a Glance 2015: OECD and G20 indicators, OECD Publishing, Paris.

OECD (2016), Science performance (PISA) (indicator). doi: 10.1787/91952204-en.

[1] The constitution amendment is from 2000, but the law regulating it was enacted by Dilma Rousseff in 2012.
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