Financing state and local government in Brazil: Recent trends and issues

Brazil's system of intergovernmental fiscal relations has, with some minor exceptions, remained unchanged for almost two decades. Economic, social and political conditions in the country, however, have undergone profound transformations during the same period. This paper investigates whether the mechanisms, established during the 1960s, for financing state and local governments are still adequate in the environment of the 1980s. The main conclusion is that they are not, and that certain fiscal adjustments are called for in order to bring resource availability at the subnational level more into line with functional responsibilities. Given the extreme intra- and interregional economic disparities prevailing in Brazil, special attention is given to the fiscal problems of governments in poorer regions. The methodology used in this report focuses attention on the extent to which the intergovernmental fiscal system has achieved and maintained vertical balance, the balance between resource availability and functional responsibilities at each of the various levels of government, and horizontal balance, the balance between resources and responsibilities at given levels of government in different parts of the country.