Reforma Tribut

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Brazilian (Low) Public Investment

• ______________________________
• José Roberto R. Afonso,
• Geraldo Biasoto e Ana Carolina Freire
• CEPAL, 31/01/2007
• 19ª Seminário Regional Política Fiscal

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Index

• Brazilian experience an interesting case study
• International comparison
• Evolution of investment in Brazil
• Reflections
• Different types of investment projects
• Alternatives

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The Brazillian problem low growth
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Brazilian Experience an Interesting Case Study

• One of the highest tax burden of the world (about
  40 of GDP in 2006)
• All fiscal targets set by the IMF have been
  systematically met
• Nevertheless, the public sectors debt pile
  continues fairly high compared to that of
  similarly sized emerging economies (about 49 of
  GDP)

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Brazilian Experience an Interesting Case Study

• In the new century, the public sector has been
  registering a historic low in investment, even
  lower than the average levels seen elsewhere in
  Latin America
• An increasing, and already the major part of
  expenditure on capital formation by public sector
  authorities, has become decentralized
• Consequence a low in public investment in
  infraestructures.

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Low public investment international comparison
See Afonso, Schuknecth e Tanzi, (2003) e (2006).
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Low public investment international comparison
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Low public investment international comparison
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National Investment Tax of GDP
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Real Investment Rate - Gross Fixed Capital
Formation as percent of GDP 1995/2003(at
constant prices)
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Public Sector Borrowing Requirement 1995/2003
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Public Administration Borrowing Requirement
1995/2003
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Public Administration in Gross Fixed Capital
Formation (1901-2003) Low during the last
fifteen years
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Decentralization of Public Administration Gross
Fixed Capital Formation (1947/2003)
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Public Administration Low in the Share of
National Capital Stock (1950/2003)
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Low in Public Sector Gross Fixed Capital
Formation in Infraestructure (estimated)
1995/2003 (as percent of GDP at constant prices)
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Public Sector Gross Fixed Capital Formation in
Infrastructure (estimated) 1995/2003As percent
of Total GFCF
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Public Sector Gross Fixed Capital Formation in
Infrastructure 1995/2003
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Reflections

• Management of fiscal crises
• Fiscal adjustments combining strong tax burden
  increases and intense low in public investments
• Restrictions to public debt for all purposes
  (capital os current expenses)
• Privatization restricted to some sectors

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Reflections

• The management with foreign capital flows needs a
  government intervention that implies in fiscal
  costs to Treasury
• The efforts to decrease the internal debt-GDP are
  sterilized by the level of interest rate
• Demand restricted by tax and low real expenses
  (high level of interest payments)
• Private investment decisions against low public
  investment in infrastructure

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Reflections

• The adjustment shape lead us to a trap its
  impossible to enlarge the public investment tax
  with out a decrease in primary surplus or a new
  fiscal configuration
• The relation between the public and the private
  sectors in Brazil are complex there are not easy
  solutions
• The Brazilian case is hard to compare to other
  international experiences state presence at the
  birth of most sectors, regulation questions,
  federative issues

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Opening a Fiscal Space to the Investment in
Infrastructure

• Brazil the public financing profile is still a
  problem.
• Inefficiency of government efforts on
  partnerships (PPP) or project exclusions from
  fiscal targets (PPI)
• Need to carry on profitable projects and those
  with positive externalities

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The questions

• How increase public investment with out
  deterioration in private expectations on public
  deficit?
• Is there a manner to increase the allocation
  efficiency instead a high level of public
  investment?

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Different types of investment projects

• Three types could be treated differently
• The 1st type would be the project with an
  adequate internal rate of return, as compared to
  the placement of notes in the market
• The 2nd type would be that which has, in its
  initial stages, an internal rate of return
  inferior to the cost of raising funds in the
  market, but that IIR reaches a normal rate during
  the operation period
• The 3rd type would be that project which really
  could not be expected to provide an internal rate
  of return demanded by the market over the course
  of its lifetime, but there are positive
  externalities (in social or economic sense)

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Different types of investment projects

• In all cases private management and resources
  borrowed from market (specific bonds for each
  project)
• In 2nd and 3rd cases the gap against the IRR
  would be consider a disbursement the Treasury
  would response by the equalization (accounting
  like deficit)
• The deviation of projects from the parameters
  initially drawn up would be treated specifically
  increase deficit, annually added to PSBR

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Different types of investment projects

• Enforcement on the administration by goals
• More transparency in fundamental projects
• Examination by financial market
• Credibility in public accounting measures
• Rebuild the public debt in other foundation

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Different types of investment projects

• One is not looking to merely mobilize resources
  for investment - the idea is also to develop
  actions that are managerially efficient and
  worthy of financing for the market
• The differential should not however be given by
  the governmental structure but rather by the
  market
• The financing of such projects should involve
  specific resources, raised directly from the
  market

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Alternatives

• a) division line in the balance sheets current x
  investments
• b) OECD proposals to deduce investment
  expenditures related to capital depreciation
• c) anti-ciclical fiscal policy
• monitoring exceeding resources destined to public
  investment.
• Risk of a anti-cyclical fiscal policy lack of
  public investments during the cycles ascension
  can not be on to the responsibility of the
  private sector.
• d) separating public spending between public
  enterprises and public administration

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Alternatives

• Exclusion of public enterprises from the PSBR and
  NPSD
• PSBR and NPSD concepts
• Revenue earmarking for investments
• Tax treatment of capital goods.