State Equalization Transfers to Municipalities in Brazil

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
Earmarking Revenue Mechanism for Funding of Basic
EducationWithin-state redistribution of resources

• 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.

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.