Brazil

Abstract

The article provides an overview of Brazilian fiscal federalism, covering some of its basic aspects (and flaws) with regard to the structure of government and the distribution of resources and responsibilities between the three levels of government, the intergovernmental transfer system and the interaction between some aspects of Brazilian fiscal federalism and macroeconomic management. In the last section, we examine some of the challenges that must be faced to reach a broad understanding of the proposals for a new model of fiscal federalism, addressing issues such as the high degree of institutional rigidity and intra-federative conflicts that paralyze the reform of the Brazilian fiscal federalism. Instead of making a specific proposal at once, we suggest acting with caution and working toward establishing a federative dialogue, as a joint approach, with the participation of States and Municipalities, could facilitate the achievement of collective institutional action to overcome obstacles to approve a constitutional reform.

Respectively, Economist, Senior Researcher and Advisor on Public Finance, Federalism and Fiscal Policy; Fiscal Auditor Assistant of the Ceará State Finance Secretary; Economist and private consultant.

1 Introduction

The Federal Republic of Brazil has eight and a half million square kilometers—about half the total area of South America. Its population of 211 million inhabitants is unequally dispersed among twenty-six states a federal district and five thousand five hundred and seventy municipalities.

Brazil follows the global trend, with an average population life expectancy of 79 years projected for 2030 (United Nations, 2015). This increase in life expectancy at birth is caused jointly by a reduction in infant mortality and by greater survival at older ages. The year 2018, in Brazil, was considered the year of the end of the demographic bonus, in the sense that the population from 15 to 64 years of age in total started to fall after reaching 69.5% a year before. According to a recent work published by the UN,¹ the group aged 60 or over, which represented only 4.9% of the total population in 1950, increased its participation to 11.9% in 2015. The expected trend is that it continues to grow almost continuously until the end of this century, reaching 34.1% and 39.4%, respectively, in the years 2060 and 2100.

It is worth noting that Brazil has already undergone rapid urbanization during the second half of the last century when the share of the urban population went from 36% in 1950 to 87% today. The UN projects that in 2050, 92.4% of the Brazilian population will live in cities. In comparison with the rest of the continent, urbanization in Brazil was faster than in Latin America, since 1992.²

Most of the population is in the seven Southern states, where the demographic density reaches 79 inhabitants per square kilometer. Although the Center-West and the Amazon regions represent more than 60% of the territory, they account for only 16% of the population. Population density is also high in the nine poor coastline Northeast states where nearly 27% of the inhabitants reside in a 1.5 million square meters perimeter.

Concentration is even greater at the local level Over half of the Brazilian population (57.4% or 120.7 million inhabitants) is concentrated in only 5.8% of the municipalities (324 municipalities), which are those with more than 100 thousand inhabitants. The 48 municipalities with more than 500 thousand inhabitants concentrate almost 1/3 of the population (31.7%, or 66.5 million people). On the other hand, in most municipalities (68.2%, or 3,670 municipalities), with up to 20 thousand people, only 15.2% of the country's population live (32.0 million people). Of the 17 municipalities with a population of more than one million inhabitants, 14 are state capitals. These municipalities concentrate 21.9% of the country's population. The municipality of São Paulo remains the most populous in the country, with 12.25 million inhabitants, followed by Rio de Janeiro (6.72 million), Brasília (3.0 million) and Salvador (2.9 million).

Africans brought in during the slavery era and a large inflow of migrants from every corner of the world, especially in the late nineteen and early twenty centuries, contributed to the multiple faces that characterize the Brazilian population nowadays. Despite that, intermarriage and cultural assimilation produced a quite homogeneous society. The Portuguese official language is spoken by everybody everywhere and cultural values do not differ to a significant extent.

The demographic concentration mirrors the concentration of economic activity. The same seven Southern states account jointly for 70% of the Gross Domestic Product,³ which reached about 1.9 trillion US dollars in 2018 (3.4 trillion in purchase power parity), placing Brazil among the leading group of world countries in terms of economic size. A modern agribusiness and a growing service economy contribute to a well-balanced composition of the domestic output. Recent data (2019) point to an economic structure more akin to those of industrialized countries with the dominance of services (about 63% of the GDP) and a sizable manufacturing sector (about 18% of the GDP). A still important agriculture sector (4% of the GDP) reflects the recent expansion of highly productive farms that emerged out of the incorporation of modern technologies in rural areas.

From a regional standpoint, economic size does not translate directly into political influence on national policies, due to a bias in regional representation in the National Parliament in favor of the less developed North, Northeast and Center-West regions. As these regions have a higher number of sparsely populated states that are entitled to a minimum of eight representatives in the Lower House, while Southern highly populated states are subjected to a maximum of seventy, they exert strong influence on decision-making related to fiscal and intergovernmental relations issues.⁴ The political imbalance in the states’ representation in the Lower House is reinforced by an equal representation in the Federal Senate (three per state). Even though this is a common federal feature, the extended role of the Senate in the Brazilian federation—every legislation, not only those directly related to federal issues, must pass through both legislative houses before being sanctioned by the President—creates additional difficulties.⁵

Imbalances in political representation are the result of the dominance of the regional issue in the formation and consolidation of the Brazilian federation. The federal regime put into place by the first republican 1891 Constitution empowered the states with a substantial degree of autonomy and sowed the seeds for local government’s autonomy. Since then, subnational autonomy and regional balance became intertwined issues and have been emphasized as essential values to keep internal cohesion in a very economic and socially unequal society.⁶

Inequality is, therefore, one of the main features of the country. Part of the South and the Southeast—particularly the state of São Paulo—present indicators of economic development akin to those of the modern industrialized countries: a high level of per capita income, a high degree of urbanization, and diversification in industrial production.

At the same time, large portions of the country—especially in the North and Northeast—still shows the classical signs of underdevelopment: low per capita income, poor sanitary conditions, and widespread poverty. It is worth noting, however, that poverty is not associated only to regional imbalances in economic development, for the developed regions amasses a large number of people that live below the poverty line.

Regional economic disparities are also great among municipalities. According to a hierarchy of municipalities constructed by the National Bureau of Geography and Statistics, in general, the higher the hierarchy, the higher the GDP per capita. Metropolises, in 2017, had GDP per capita 2.15 times higher than local centers and, as well as regional capitals (R$34,190.09), metropolises (R$42,170.42) had a GDP per capita higher than the national (R$31,702.25). The other classes of the urban hierarchy had GDP per capita below the national average (Fig. 1).

Fig. 1

(Note 2017 average exchange rate: 1 US$ = R$3,19. Source Adapted from IBGE [2019b])

GDP per capita, by selected regions—US$ (2017)

Apart from intermittent periods of authoritarian rule, democracy evolved over time and achieved high standards after the middle eighties. A multi-party system allows for a fairly diversified composition with respect to the distribution of political power in the federation. Despite this, governability is achieved by means of coalitions that contribute to increasing the weight of small political parties in national politics, beyond their real size. The practice of forming coalitions contributed to the stability of Brazilian democracy, that passed two important tests: the impeachment of two presidents in the past three decades. One in 1989 and the other in 2016, following the rules established in the Constitution. Over time, however, as this process of partisan fragmentation kept growing it also raised problems for governance, since it demands complex negotiations to reach a national agreement on matters of national interest and takes time to be approved, especially in moments where agility is required, as in times of crisis.⁷

A stable democratic regime and sound institutional arrangements contributed to help the Brazilian economy muddle through the turbulences generated by a sequence of external financial crisis that hit emerging economies worldwide in the middle nineties. Yet, macroeconomic policies adopted to attenuate the impact of these turbulences severely hampered economic growth, and impinged on the subnational autonomy envisaged in 1988.⁸

Being a creature of the transition from authoritarianism to democracy, the 1988 Constitution reacted to two strong forces: demands for greater autonomy to subnational governments and calls from organized pressure groups for more and better access to a State-sponsored social protection. In so doing it installed a dual fiscal regimen. On one hand, states and municipalities acquired more powers to tax and got a higher share of traditional federal revenues. On the other, a distinct set of compulsory levies—the so-called social contributions—was assigned to the federal government to finance pensions and free access to health and social services to every Brazilian citizen regardless of previous contribution to a social security system. As the extended social rights had to rely on the federal ability to raise enough money to meet a steep rise in social spending, besides generating large surpluses in the public accounts to keep inflation at bay, recourse to social contributions fed a process that reversed the fiscal decentralization intended by the 1988 Constitution, despite pressures faced by states and municipalities to increase social spending, without room to improve their tax revenues.

Over time, equality, autonomy, efficiency and growth objectives collided. Increasing reliance on federal collected social contributions eroded subnational autonomy and aborted the intention to promote efficiency and accountability in public policies through decentralization, as earmarked grants from the federal government, supported by revenues from such contributions, became necessary to finance the provision of social services at the subnational level. At the same time, vertical and horizontal imbalances increased in so far as the basis of equalization funds lost importance over time. In addition, the economic inefficient social contributions created further obstacles to economic growth. Therefore, as we will argue in the concluding section of this chapter, an overhaul of the Brazilian fiscal federalism system is in desperate need.

2 The Structure of Government and the Assignment of Resources and Responsibilities

Brazil is a three-tier federation. According to the 1988 Constitution, states and municipalities are independent units of the Brazilian Federation. Both have explicitly tax powers and share with the federal government responsibilities concerning the role of the State in services provision and development policies. A growing direct relationship between the federal and local governments, mostly on social policies, is a source of intergovernmental conflicts and of increasing complexity in fiscal relation.

Through various legislations that impose unfunded mandates, the federal government added more financial problems that are a source of intergovernmental conflicts. There are many examples of legislation recently passed in the Brazilian Congress with those characteristics, including the national floor for the remuneration of teachers, and the obligations arising from the new legislation for the collection and treatment of waste, as well as obliging states and local governments to include payments to community health workers as personnel expenses to enforce the limit set in the Fiscal Responsibility Law for such expenses..

The formal assignment of expenditure responsibilities follows the subsidiary principle. Thus, the Constitution assigns the provision of basic urban and social services (urban roads, water supply and sewage, public transportation, street lightning, primary education and basic health and social assistance services) primarily to local governments, who shall count on technical and financial assistance from the federal and states governments to carry out these responsibilities on a proper basis. Following the usual pattern, the federal government is solely responsible for the armed forces, foreign relations, international trade and money control.⁹

For public service like education, health, social assistance and public safety, the Constitution envisages concurrent responsibilities. Due to this lack of clarity, in practice it is possible to see a trend toward the decentralization of public expenditures in education, health and public safety, the first two with more protagonism from local government and the latter mostly at the state level. Social assistance, however, is largely carried out by the federal government through income transfers to poor families the elderly and disabled citizens (Fig. 2).

Fig. 2

(Source Own elaboration. Primary source FINBRA/STN and SIGA BRASIL)

Non-financial expenses, by function and level of government—% (2017)

Sanitation is a case in point, since it has been decentralized to the Municipalities, where most of them do not have the resources to attend to the needs of their inhabitants, especially in poor neighborhoods of the big cities. Data from the National Sanitation Information System (SNIS)¹⁰ show that 35 million of Brazilians do not have access to treated water and about 100 million do not have a sewage collection service.¹¹

On the tax side, the federal government is solely responsible for applying taxes on income—corporate and personal—foreign trade, and rural property, as well as on payroll. The federal government can also make use of contributions intended to intervene in the economic domain and of any other potential tax source not explicitly attributed to the state or local governments by the constitution (residual powers).

But, the most important measure adopted by the federal government to occupy the tax basis originally reserved to states and municipalities was carried out through increases in revenues from contributions earmarked to social expenses (PIS/COFINS) by increasing the rates levied on the import and sale of gasoline, diesel oil, liquefied petroleum gas (LPG), aviation kerosene and alcohol, as well as on the provision of services. One important reason for that was the need to divert part of these revenues to meet the targets set for the primary results of the fiscal accounts.

In fact, there are two reasons why the Union has been making increasing use of contributions: (1) due to its non-submission to the revenue sharing system; and (2) due to the DRU¹² system, which makes it possible to distort the final character of the contribution.

Federal and state governments concur in the field of taxes applied on goods and services through a variety of regimes. The former is entitled to a tax on manufacturing goods and to the social contributions earmarked to finance pensions, health and social assistance. The latter is empowered to a kind of VAT, which, however, does not cover services, transportation and telecommunications excepted. General services are taxed by the local governments, who are also entitled to tax ownership and sales of urban property and apply user charges. An inheritance property tax and a motor vehicle tax are also under the states’ jurisdiction (Figs. 3 and 4).

Fig. 3

(F = Federal; S = State; L = Local; R = Regional. Primary sources Federal Constitution and Federal Revenue Service. 1/ amount chanelled into a regional development fund. 2/ Two thirds go to the states on a derivation basis. States and municipalities can have access to the other third on a project basis)

Tax assignment for various orders of government

Fig. 4

(Source Adapted from Afonso e Castro [2019] with update observations by the authors. 1/ 2019 average exchange rate: 1 US$ = R$3,95)

Government revenues by level—2019

Despite of the constitutional separation of tax powers, subnational governments do not dispose of total autonomy to apply their most important taxes. A complementary law to the Constitution set the basic rules to be followed by states and municipalities with regard to the state value-added tax—the ICMS—and the municipal services tax—the ISS. These laws narrow the scope of state and local governments` legislators with regard to the definition of the tax basis but do not interfere with rates. Rates of the states’ VAT are only constrained by a constitutional provision that prohibits internal transactions to be taxed at a rate lower than the smaller one applied to interstate sales.

Restrictions imposed on the subnational governments’ ability to implement their most important taxes do not mean that the tax system is harmonized. Residual legislative powers of the states` governments allow for great differences with regard to rates applied to each category of goods, ways to reduce the effective tax burden (reduction in the tax base, for instance), special regimes for small businesses, criteria adopted for the utilization of tax credits paid on inputs used to produce exempted exported goods, and preferred tax rates for food and other essential consumption items.

Another source of differences in tax burden imposed on the same goods across the federation arose out of demands from less developed states to apply a reduced rate on goods shipped from the more industrialized South and Southeast states to North, Northeast and Center-West regions to allow consumer states to reap part of the revenues from interstate sales. As a result, a 7% rate applies to shipments from South/SE to North/NE/Center-West regions, whereas a 12% rate applies to interstates sales flowing in the opposite direction. The same 12% rate applies to inter-regional transactions. This mixed origin-destination principle caused distortions in resource allocation and provided a strong incentive to tax evasion. It also led to the main weapon used in the so-called fiscal war in which Brazilian states have been engaged to attract investments and the location of new industries to their jurisdictions.¹³

Brazilian legislation on ICMS taxation has increased the degree of autonomy and heterogeneity of subnational governments. The circulation of goods and interstate and intercity transport and communication services means that the ICMS is levied at a rate set by each state, as shown in Fig. 5.

Fig. 5

(Source Conselho Nacional de Política Fazendária [CONFAZ] Constitutional Amendment 87/2015 and Federal Senate Resolution No. 13, OF 2012. https://bit.ly/2XVNPJU)

Inter-federative diagram of ICMS rates

Although it seems complex, understanding this ICMS table is simpler when we look at it by following only three steps:

• Step 1: see the location of the State of Origin in the vertical column.

• Step 2: find the destination (destino) state, on the horizontal line.

• Step 3: at the intersection of the two lines (State of origin x State of destination) you will obtain the rate applied in the operation. In the transversal line (colored highlight) it is possible to see the rate applied internally within each State. It is important to remember that this is the general rate, but it can be different depending on the product or service. In addition, it should be noted that the application of the interstate ICMS rate for imported products is 4% (according to Federal Resolution Nº 13/2012).

With respect to the municipal tax on services, a constitutional amendment¹⁴ exempted exports from this tax and allowed for the imposition of a ceiling and a floor on rates by a complementary law to avoid great variation and curb harmful competition in metropolitan areas. Even though, other less visible means to give fiscal benefits, such as reduction in tax base and better terms for payment may compensate for that.

Fiscal competition among the Brazilian states gained new impetus in the mid-nineties following a wave of foreign direct investments in the Brazilian automotive sector so as to avoid them being located within the old area polarized by the Sao Paulo metropolitan region. Due to the mixed origin-destination principle applied to the state VAT, neighboring states could shift the burden of the fiscal incentives offered to foreign investors to the state of Sao Paulo itself which houses the most important consumer market. In what came to be known as a fiscal war, Southern states (Parana, Rio de Janeiro and Rio Grande do Sul, mainly), succeeded in luring investors to locate new plants in their territories adding additional benefits, such as the provision of infrastructure and training programs for the labor force, to the more usual tax concessions.. Despite studies that pointed out the irrationality of the fiscal war to attract investments, politicians and public administrators alike deem it to be a good response to the absence of a federal policy to avert increases in an already high degree of concentration of manufacturing activities in the country.¹⁵

One must have in mind, however, that the state VAT, despite still being the tax that most collects tax revenue in the federation, is losing dynamism. Due to structural changes in the dynamic of the Brazilian, and global, economy the ICMS tax base is shrinking. Besides the non-application of this tax to the provision of services, it also faces a decreasing share of industry in the national output, and the erosion of its pillars—telecommunications, energy, and fuels—due to new technologies, foreign competition and the loss competitiveness of important sectors (Rezende, 2019).

Of course, the conflicts that arose out of the fiscal war made it very difficult to implement any proposal for harmonizing the tax system and propelling tax administrators to cooperate. Cooperation is also hampered by conflicts related to the taxation of natural resources—oil in particular. In oil, as well as in electricity generation, the 1988 Constitution adopted a destination principle for the states VAT to avoid producer states to reap all the revenues from these important tax bases. However, as revenues from oil and electricity came to represent a sizable portion of the taxes collected by the states’ treasuries, producer states claimed that this exception to the general rule do a lot of harm to their finances, not allowing them to implement adequate environmental protection policies to deal with the side effects of the natural resources exploration. Several attempts to negotiate a truce among the Brazilian states to put an end to the fiscal war never succeed and still is an important obstacle to be removed.

The absence of clear definitions relating to the functions of government to be performed by each federal order is a major source of renewable conflicts. that come up whenever measures adopted by the federal government reduce revenues from the income and manufacturing taxes that form the basis of the present revenue sharing system. Or when federal sponsored legislation interferes on subnational tax autonomy, as has been the case of the exemption granted to exports from the states value-added tax. In such cases, demand for financial compensation becomes a permanent focus of conflicts, as these compensations have to be negotiated annually during the regular budgetary process. On the expenditure side, changes in rules governing federal financial aid to social programs carried out at the subnational level are also a source of intermittent conflicts.

Conflicts among the states and their municipalities are also noteworthy. The possibility granted to state legislators by the 1988 Constitution to set the criteria for dividing one-fourth of the proceedings of the states’ VAT that belongs to their municipalities should be mentioned. Quite often, state legislators change the formula applied to establish the municipal quotas to benefit political allies or to introduce other variables that although justifiable (give a premium to environmental conscious local administrators) affect the distribution of resources and in so doing raise objections from losers.

A council formed by the states’ finance ministers created in the seventies is the sole attempt to have an institution in charge of mediating conflicts. Presided by the federal finance minister it worked properly during the authoritarian regimen for obvious reasons. After re-democratization, the federal government could no more impose rules that had to be obeyed by all and this council, albeit in formal existence, was deprived of any power to harmonize states’ tax policies and lost credibility, becoming unable to enforce legislation that prohibits special tax concessions by any state without unanimous approval of all the twenty-six states and the federal district.

A long tradition of applying symmetric arrangements to asymmetric situations makes it difficult to avoid conflicts or find proper solutions. In the fairly heterogeneous Brazilian federation, symmetric arrangements cannot lead to a proper equilibrium among subnational government units. Symmetry is reflected in equal powers being granted by the Constitution to every state or municipality whatever its size, region and economic and social realities. Well-developed industrialized states and frontier ones have to abide by the same rules with regard to administrative organization, tax powers and expenditure responsibilities.

What seems to be a contradiction is the result of adopting uniform rates for earmarking states and local government's revenues to health and education expenditures in a situation of huge horizontal fiscal disparities. Cialdini et al. (2014), in a seminal paper presented at the III Iberoamericanas Conference on Local Financing, demonstrated enormous asymmetry between Brazilian Municipalities, with a population above 80 thousand inhabitants.

The study identified municipalities with more than 80 thousand inhabitants with similar socioeconomic vulnerabilities, and concluded that, even being in the vicinity of developed regions or cities (that is, segregated within the same space), the low per capita income was a common feature.

The work raised 100 municipalities in a situation of great socioeconomic vulnerability. These municipalities were selected because their common characteristics were the low purchasing power of the population—88.5% of the population lived with a per capita household income of up to US$300. Associated with low per capita income, the poor indicators in education and health outcomes, the low coverage of sanitation services, endemic violence and, most importantly, the lack of money in the municipal coffers to face this precariousness.

The same goes for big metropolitan cities and small rural municipalities where differences are even greater. Both have similar organizational structures, a directly elected legislative body and direct access to federal funds.

Even though subnational governments enjoy a greater degree of constitutional autonomy, the amplitude of the legislative power of the federal government, both in fiscal and regulatory matters, means that their decision-making power has been curtailed. By means of complementary laws to the Constitution, the federal government defines the framework within which states and local governments can set norms for applying and collecting their own taxes. Federal legislation also establishes detailed provisions concerning the elaboration and execution of subnational budgets. As regards regulation, the detailed rules of the federal laws leave almost no room for the states in areas such as public utilities, environmental protection and the exploration of natural resources.

In fact, local governments have more autonomy than the states insofar as they are entitled to regulate the use of municipal land and the provision of urban services, impose user charges and to define their own norms for collecting the property taxes. In general, they also have a reasonable degree of autonomy over their budgets as, on average, about 40% of their revenues come from general-purpose grants.

It is worth noting that municipal autonomy can also be seen in the political arena, with an increased significance of municipal elections within the national context, at the expanse of state politics. Researches have shown that the Brazilian population not only cares more about municipal elections in comparison with state elections, but also favors mayors over governors when it comes to importance and political power (Arretche and Schlegel, 2014).

Through earmarked grants and control of the subnational debt the federal government increased its influence on subnational policies. It should be noted that the process of controlling the indebtedness of Brazilian states and municipalities has always been a concern reported in several studies. At the end of the 1980s, Rezende and Afonso (1988), carried out an analysis showing the need for broad institutional control, a well-defined public finance regulatory framework and the need to reformulate accounting and statistical procedures.

In the mid-90s the last century, the vast majority of states and large municipalities were insolvent, bowed down by excessive debt and the fact that the end of hyperinflation had exhausted the mechanism of corrosion of the real value of their expenses. This fact started to change with the intense renegotiation of the debt of the States and Municipalities, with the Union and the approval of the Fiscal Responsibility Law, which established fiscal rules for the Union, States and Municipalities, on the control of expenses and debt, among others aspects.

Coupled with hard budgetary constraints that were put into place to sustain macroeconomic stability, the degree of freedom of state governors to allocate budgetary resources had been reduced to very little. This is especially true for policies in the so-called “standardized policy system” part of the National Public Policy Systems, where the access to resources is subject to different types of conditions (Souza e Fontanelli, umplished, 2015). The situation is somewhat better at the local level, the big metropolitan cities aside, since the criteria applied to divide the municipal share on federal taxes is biased toward smaller municipalities and penalizes the states’ capital cities, that houses one-third of the GDP and one-fourth of the population but gets only 10% of this pie.

Conversely, subnational governments can interfere with national policies only by means of their representatives’ actions in the national Congress. That happens when proposals for federal regulation on the use of natural resources, the provision of public services or the exercise of tax powers at the subnational level affect states and local governments’ interests. However, due to the fragmentation of political parties and the nature of the electoral process, representatives from the states in the Lower House and in the Senate do not always act in accordance with states’ governors, weakening subnational influence on national politics.

3 Intergovernmental Transfers and Fiscal Disequilibria

Despite of the tax powers assigned to states and local governments by the Constitution, data on tax collections by each layer of the federation shows a remarkable degree of vertical imbalance. The federal government alone responds to a little more than 70% of all the money extracted from businesses and families through various taxes. The states collect about 22% of total tax revenues, the rest coming from the local governments’ own taxes (Fig. 6).

Fig. 6

(Primary source National Treasury Secretariat, Federal, Finance Minister. 1/ 2019 average exchange rate: US$1 = R$3,95. 2/ GDP = [US$ Millions] = 1.835.756. 3/ POP = 208.436.323. 4/ Own Revenue plus current and capital transfers)

Provincial government constitutional transfers to local governments—2019

Three distinct regimes attempt to address the vertical disequilibria: (a) a conventional revenue sharing system; (b) a separate set of rules concerning the share of states and local governments in revenues from specific taxes; (c) conditional transfers.

The pillar of the revenue sharing system is the participation of states and local governments in the proceedings of the federal income and manufacturing taxes.

According to the 1988 Constitution, 21.5% of federal revenues from these taxes go to the states and 24.5% to the municipalities.¹⁶ Nevertheless, the erosion of the basis of the revenue sharing had a strong impact on horizontal fiscal disparities. When these percentages were adopted these taxes represented 50.8% of total revenues of the federal government, but over time they shrank to less than 33.6% due to the growing importance of social contributions earmarked to pension, health and social assistance in federal tax collections that are not shared in the federation.

Therefore, the revision of the apportionment formula faced strong opposition from states and municipal governments as the erosion of the basis for the equalization funds blocked any attempt to do. Consequently, a provisory arrangement negotiated in 1989 that set up in the quotas of each state and municipality in these funds were frozen since then on the basis of the coefficients prevailing at the time the Constitution was promulgated¹⁷ and the previous practice of making adjustments in light of updated income and population estimates was abandoned.

Another important component of the revenue sharing system, the 25% share of local governments in their states’ VAT collections, suffered the same setback. According to rules inserted in the Constitution, sthree-fourths of the municipal share is distributed according to the value-added in each local jurisdiction and the rest follow rules set by the respective states’ legislators. Municipalities with a strong economic basis benefit from the first criteria, whereas the formulas adopted by the states tend to favor political allies and are subjected to frequent changes.

Outside the realm of the equalization transfers it is worth noting that local governments also gets 50% of revenues from the rural property tax collected by the federal government and from the motor vehicle tax applied by the states.

The Rural Property Tax (ITR) is charged to the owners of rural property and the collection is equally divided between the Union and the municipality where the property is located. However, it is also possible for the tax to be monitored and collected by the municipalities, by means of an agreement with the Union, in which case the total collection will remain with the municipality, which will nevertheless bear the costs of administration and tax collection.¹⁸ The Motor Vehicle Property Tax (IPVA) is incumbent upon and collected by Brazilian states, which transfer 50% of the amount collected to Municipalities, where vehicles are licensed.

Royalties from the exploration of natural resources should also be mentioned. Federal legislation establishes the rules for compensating states and municipalities from the extraction of oil, mining and loss of land due to inundation provoked by hydroelectric dams. Municipal governments are the main beneficiaries of royalties that in some cases enrich the local purse beyond reasonable levels. The current laws regarding the distribution of oil royalties reflect political arrangements made throughout the second half of the last century and are based mostly on geographical criteria (Serra, 2005). The legislation in place, known as Oil Law,¹⁹ provides that the resources of the oil exploration be divided between central, state and local governments by a criterion that largely benefits the states and municipalities where the production takes place, with only a small amount being destinated to other federative units via the Special Petroleum Fund.²⁰

The combination of the erosion of the revenue sharing basis with the freezing or the quotas attributed to each federal/entity plus the proliferation of other transfers led to the absence of any criteria guiding the intergovernmental flow of resources in the federation. As a result, the share of the federal government in total disposable revenues remained more or less where it was in the late eighties, whereas the municipalities got a bigger slice of the pie at the expense of the states (Fig. 7).

Fig. 7

(Source Own elaboration. Original source Afonso e Castro [2019] with update observations by the authors)

Federative Division of Available Revenue—% of Total (1988–2018)

One undesirable consequence of expanding transfers to municipalities without a concomitant revision to the distribution formula was the proliferation of small new units. More than one thousand municipalities were created after 1988, since the distribution formula rewarded districts that decided to “emancipate” themselves, either because they were home to major industries, in which case they would receive a high quota of the state ICMS, or because they had few people, in which case they would benefit from the apportionment under the FPM.

Worse still is the outcome regarding the horizontal distribution of fiscal resources. Of the total amount collected by the states, nearly three-fourths belong to the seven states that comprise the South and Southeast region. Among the municipalities, the twenty-six more important metropolitan cities raise more than 60% of total local governments’ own revenues. Moreover, as each specific transfer follows its own logic to distribute the money across the twenty-six states, the federal district and near five thousand and five hundred municipalities, an enormous horizontal disparity in the distribution of fiscal resources across the federation surface.²¹

Data on states and municipalities per capita revenues illustrate the size of these imbalances. Current budgetary per capita revenues can be as much as 20 to 30 times greater in small municipalities located in thinly populated regions, compared to the figures recorded in the more populous municipalities. Among states, disparities are less severe but still significant. In this case, the low population density of some states in the Amazon and Center-West regions means that per capita revenues of these states are more than three times higher than the national average. More densely populated states in the Northeast, with the single exception of little Sergipe, are among those with the lowest per capita revenues (Fig. 8).

Fig. 8

(Notes 2018 average exchange rate: 1 US$ = R$3,65. Revenue from taxes, fees and improvement contributions, minus contributions to Fundeb and other deductions, and, in the case of states, constitutional transfers to municipalities. Source Authors elaboration. Primary source FINBRA/STN and IBGE)

Tax Revenue Per Capita, by state and municipal governments—US$ (2018)

Horizontal inequalities are particularly severe in metropolitan areas and other big urban agglomerations where the outcome is determined by the manner in which economic activity and population are distributed geographically. In general, municipalities with an important manufacturing sector and a small population have per capita budgets several times higher than the regional average, due to their share in states’ tax collections. At the other extreme, municipalities with a very large population and a fragile economy, usually functioning as a dormitory city in these areas, are severely under-financed, having per capita budgets well below the regional average.

Among the conditional transfers, the more important are those that are meant to complement the parcel of states and local government’s revenues earmarked for health activities. According to the rules, states must allocate 12% of their budgetary revenues to health and 25% to education, whereas municipalities must spend the same amount on education and 15% to health. But in both cases a uniform rate applied to a very large horizontal fiscal disparities enlarge, instead of reducing, disparities among resources and needs at the state and local levels. To the rules of the same sector enshrined in the Constitution establish that the federal government has to transfer 15% of the net primary revenues to health and 18% to education.²²

However, the lack of uniformity in the interpretations and transparency in the calculation of the indicators, caused a proliferation of creative accounting practices due to the uneven interpretations of the 34 Courts of Accounts existing in Brazil. Almost all of these practices also generated discomfort with the current fiscal rule—the LRF, causing the loss of the effectiveness of the rules and preventing the accounts of governors and mayors from being rejected.

According to Vieira et al. (2019), in 2018 values, public spending on health in the Union went from R$60.3 billion in 1995 to R$116.7 billion in 2015, corresponding to a 94% growth in the period. Spending by states and the Federal District also increased significantly (257%), from R$19.8 billion to R$70.6 billion. However, the greatest fiscal effort was made by the group of municipalities, whose total expenditure totaled R$84.2 billion in 2015, representing an increase of 437% in relation to the R$15.7 billion allocated in 1995.

The lack of a well-designed institutional arrangement that could fulfill the role of introducing rationale in the system and mediate conflicts of interest is a big handicap for a better functioning intergovernmental fiscal relation. Brazil does not actually have a fiscal equalization transfer system, but rather a constitutionally mandated revenue sharing mechanism that delivers automatically a fixed proportion of income and manufacturing federal taxes’ revenues, plus other minor taxes, to states and local governments on the basis of predetermined fixed rates.²³ Coupled with the superimposition of specific purpose grants, the absence of an equalization thrust in the general-purpose transfers is responsible for a fairly high degree of horizontal disequilibria in the distribution of fiscal resources in the Brazilian federation and add to the difficulties faced to achieve cooperation in public policies.

4 Fiscal Federalism and Macroeconomic Management

The success of a monetary stabilization plan adopted in 1994 to close an era of high inflation had important consequences for the federal finances. For decades, inflation made it easy to curb budgetary deficits as tax revenues were fully indexed and most of the expenditure items were not. Thus, by postponing payments and adjusting nominal salaries and pensions only once a year, fiscal disequilibria were easily corrected.

A stable currency brought structural imbalances to light. Expenditure on personnel and social security benefits showed the real effect of a paternalistic approach to past policies concerning employment and pensions across the federation. At the same time, a tight monetary policy to protect the Brazilian economy from external shocks raised the amount of money required to serve the public debt.

In the beginning of this new era, price stability was anchored on the overvaluation of the new currency—the real—but the successive external financial crisis that hit emerging economies in the second half of the nineties—Mexico (1995), Southeast Asia (1997), Russia (1998) forced the Brazilian government to abandon its policy to control the exchange rate in 1999 and let the national currency float. Thus, monetary stability came to depend upon responsible management of the fiscal accounts and fiscal discipline took the place of the exchange rate as the anchor that should avert inflation to drift away.

The new inflation target regime, adopted in 2000, relies on a proper work of monetary and fiscal policies. The National Monetary Council formed by the Finance and Planning Ministers and the President of the Central Bank set targets for the inflation rate for two years in a row, as well as the interval within which the actual result may differ from the desired outcome. The Central Bank is in charge of bringing inflation as close to the mark as possible, making use of the interest rate to adjust expectations and force convergence toward the target. To that end, the Central Bank has enjoyed a fairly large degree of autonomy, even though it does not have formal independence from the national government.

In the fairly decentralized Brazilian federation, the enforcement of fiscal discipline required important institutional changes. A Fiscal Responsibility Law—FRL, inspired by the highly praised New Zealand experience was enacted in 2000. This law intends to enforce fiscal discipline at the federal, state and local governments, as well as, at all three branches of power, the executive, legislative and judiciary. The law works through the imposition of objective and clear rules to be observed in administering revenues and expenditure policies, the public debt and government assets. Among the norms set by the FRL, it is worth noting:

• (a) Limits for personnel spending—remuneration of public employees shall not exceed 50% of net current revenues at the federal level and 60% at the subnational level;

• (b) Indebtedness limits—outstanding debts cannot exceed two times current revenues for the states and 1.2 times for local governments. With regard to debt service, annual payments cannot surpass 11.5% of current revenues in both cases. In addition, resources from new loans cannot exceed 16% of current revenues in any fiscal year;

• (c) Provision for recurrent expenditures—public authorities cannot take actions that create future expenses lasting for more than two years without pointing to a source of financing or a compensating cut in other expenses.

• (d) Special provision for electoral years—the law prohibits outgoing governors and mayors (last year in office) to anticipate tax revenues through short-term loans, give wage increases and contract new public servants.

Failure to fulfill obligations imposed by the FRL was subjected to several administrative and more serious misbehaviors, including the loss of the mandate, incapability for having a job in the public service, fines and imprisonment. It is worth emphasizing that all levels of government, the federal one included, had to abide by the conditions established in the FRL.²⁴

To make feasible the adherence of states and big municipalities to the new rules concerning the public debt, previous debts with the federal government were refinanced in favorable terms for a period of thirty-five years, but, unlike previous bail-outs, the beneficiaries of such renegotiations became prohibited to issue new bonds and were required to transfer between 11 and 13% of their current revenues to the federal treasury on a monthly basis during the duration of these contracts. To assure enforcement, debt-refinancing contracts entitled the federal government to sequester states and local government’s revenues from federal transfers in case of failure to comply with the agreed rules.

In the beginning the hard budgetary constraints put into place by the Fiscal Responsibility Law together with the revenue sequestration mechanisms mentioned above, brought control to the public finances. Since its inception, the public sector as a whole spared a sizable amount of money to revert the ascending trajectory of the total public sector debt to the GDP ratio. Primary surplus, that is, the balance between total revenues and non-financial expenditures rose steadily in the 1999–2005 period, stabilizing up to 2008, with states and local governments contributing with approximately one-fourth of the overall result. In 2009 when it began to fall e returned to a primary deficit starting in 2014, the deterioration in fiscal results was more pronounced in the federal government.²⁵ Thus, after having reached 81% of the GDP in 2002, the general government gross debt fell up until 2014 when it reached 57%. However, with the political-economic crisis that took place, the debt-to-GDP rose quickly, closing 2019 at around 88%.²⁶

The outbreak of the 2008 financial crisis reached Brazil in an unfavorable fiscal condition. Stimulus to public spending aimed to counteract the impact on the economy brought a new wave of measures hoping that it would insulate the Brazilian economy from the winds that blew from the northern hemisphere. It worked for a time, but as expected did not last long. From 2008 to 2012 the average rate of growth was 3.7%, but since then it showed signals of fatigue. A renewed attempt to follow the same line did not achieve the same effects, leading to a deterioration of the primary balance in the fiscal accounts, as the general government’s primary result went from primary surplus of around 3.1% of GDP in 2012 to −0.5% in 2015,²⁷ thus restoring a scenario similar to the one that preceded the enactment of the Fiscal Responsibility Law. It was time to rein in the march of the carriage, but the federal authorities choose to do the opposite.

Therefore, in light of its poor handling of the 2008 financial crisis, since 2014, Brazil is facing the worst economic crisis of its history. Between 2014 and 2019, the country’s GPD has shrunk by 3.1%. As fiscal problems mounted, the commitment to fiscal responsibility lost political support and the disposition to apply the penalties put into place by the FRL for personnel and indebtedness ratios was relaxed, opening some holes in the measures adopted in 2000. Besides, the consequences for the federation were big, especially at the level of the states and bigger municipalities, due to the more room allowed to sustain expenses through an increase in the public debt and non-recurrent revenue, which amounted on average to 1% of the GDP between 2009 and 2013.

In addition, present concerns point to the consequences of a lengthy period of budgetary restrictions on economic growth and income inequality. As public investment plunged, notably at the federal level, road construction and maintenance suffered a severe setback and is now seen as an important handicap for keeping the pace of commodities’ exports. In the social area, difficulties to improve quality of education and health services increased problems low-income people face to access better-paid jobs and escape the poverty trap.

Coupled with high indebtedness ratios, the fall in public savings brought public investment along with it. The average rate of public investment evolved to around 3% of the GDP only in the early 2000 years, down from the already low 4.2% ratio registered in the second half of the nineties and shows no sign of having any condition to improve to a significant degree in the short run. As a matter of fact, since 2016 the net investment in non-financial assets, i.e. excluding capital depreciation, has been negative—minus 0.2% of the GDP in 2018. Contrasting with the situation that prevailed in the seventies, when the public sector accounted for a sizable part of total gross capital formation in the Brazilian economy, the present reality point to a State that now responds for less than 20% of the annual rate of capital accumulation in the country.

Concerns about the problems a low level of public investment generate for economic growth and inequalities in income distribution led to a search for alternative means of investment financing through the recourse to public and private partnerships for gathering resources to finance infrastructure projects, without bringing the expected results so far.

Whatever the possibility of exploring alternatives, the need to restore public investments is compelling. In less developed regions, privatization or partnerships will not attend to the needs of infrastructure modernization. In metropolitan areas, access for low-income families to basic urban services will be denied in the absence of public investments. All the same, health and education infrastructures deserve more attention, especially from state governments.

However, new measures intended to reverse the deterioration of the fiscal accounts did not have time to show significant improvements given the difficulties to restore conditions for recovering economic growth and the approaching of the calendar for a new round of general elections. The most significant fiscal measure was the approval of Constitutional Amendment nº 95 in December 2016, introducing the New Fiscal Regime, a fiscal rule that limits for twenty years the growth of federal primary expenditures to the rate of inflation from the previous year. Aside from attempts to alleviate the burden heavily indebted states faced to administer their precarious financial situation, there was no room to pay attention to the need to reform fiscal federalism in a time of increasing conflicts among states and municipalities over who was entitled to tax digital services.

Furthermore, In the midst of economic and political conflicts that dominate the electoral campaign any attempt to put a fiscal federalism reform on the national agenda failed… New proposals for reforming the tax system did not pay attention to it and therefore were doomed to fail, repeating what happened in the last three decades.

But it is not possible anymore to do it again Challenges the Brazilian fiscal federalism face with the impact of the digital revolution on the tax universe, can’t be ignored anymore.

5 Challenges to Fiscal Federalism: Institutional Rigidity, Conflicts and Impediments to Reform

A thorough reform of the Brazilian fiscal federalism model is long overdue, but far from being endorsed by public authorities and politicians. In the midst of strong antagonisms, every federal entity fears that a structural reform could run against their particular interests.

The challenges that have to be faced to achieve a broad understanding of proposals for a new fiscal federalism model are big. A new model will have to be able to reconcile tax harmonization, macroeconomic fiscal discipline, subnational autonomy, and governments that are efficient in the use of the fiscal resources and accountable to its citizens.

Even if an agreement can be achieved, a high degree of institutional rigidity makes it hard to find a way to set up a pathway to carry out the reform. Brazil has one of the more extensive constitutional chapters on the tax system and fiscal federalism in the world. Therefore, every minor change demands amendment to the Constitution, and complementary laws to set up new rules for intergovernmental transfers.

During the process of writing the 1988 Constitution several changes were adopted to increase the influence of less developed states in every matter related to their fiscal interests, namely:

• (a) States in the more developed regions were assigned maximum of 70 representatives in the lower house, whereas those in poorer regions were allowed to elect 8.²⁸

• (b) At the same time, the bicameral regimen that is a common feature of federal countries was tweaked so that every change in the rules that deal with federal issues have to pass through both houses;

• (c) New states were created at that time in the North and Center-West regions, leading to a situation in which representatives of the North, Northeast and Center-West regions had a qualified majority in the Senate (more than two-thirds of the votes) and a comfortable position in the lower house, allowing them to block any changes that run against their particular interests.

• (d) Previous constitutional rules that prohibit members of local government councils, in municipalities with less than 300 thousand inhabitants to be remunerated were erased, thus leading to a wave of multiplication of the number of municipalities in the country.

• (e) Furthermore, provisory rules set up in 1989 to distribute funds that should reduce fiscal disparities were frozen since then, leading as mentioned above to opposite results.

Altogether, these measures reinforced imbalances in the political representation of subnational governments on the national parliament adding to the difficulties to implement major changes. Therefore, intergovernmental transfers that should function as a fiscal equalization regime make the opposite, due to rules adopted in 1989 that resisted any proposal to correct fiscal imbalances since then.

On the other side of the table, the hard budgetary constraints faced by the federal government did not allow him to use a firm hand to conduct a discussion to search for some agreement to overpass resistance to changes. In this context, every attempt to reform the fiscal federalism regimen over the last three decades was doomed to fail.

What could be done to walk out of this trap? My proposal is to install a national dialogue on federalism to explore in detail the problems that accumulate over time, before incurring again the same error of the past thirty years of putting upfront a detailed proposition of a constitutional amendment to the Constitution to be discussed in the national parliament.

That means not to start the discussion by the end. Solutions for every big problem demand to be exposed in a clear way what are the problems that need to be solved and how to search for alternatives that could reconcile distinct perceptions of the problem. Besides, it is almost impossible to solve all problems at once. A more reasonable approach is to set up a path to be followed in steps, choosing carefully the first one that could remove barriers to proceed along the way until the end of the route.

In the Brazilian case, this is very important due to the variety of problems that accumulated over time. First of all, it is important to bring states and municipalities to the same table. Up to now, this did not happen, so it is very important to do it this time. The position of the states is more or less known and reflects the wall erected in 1989, even though this wall does not any more reflect the diversity of situations that we face nowadays,

The same is not true in the case of the local governments. Over time they formed two groups that differ in terms of the number o inhabitants. One congregates those with a population above 80 thousand residents and the other those below this threshold. Each of them belongs to a political organization that does not share a common view regarding any discussions on fiscal reforms.

Why is so? This format was conceived a long time ago and does not anymore reflect the situation we encounter nowadays, but in the midst of the fog that obstructs a clear vision of alternatives, they cling to the old arrangements till something new can be perceived. As in the case of the states, the pattern of regional disparities is very different nowadays, but in doubt about what to do it seems better to wait until things can be clearly exposed.

Why this was not sufficient to change the rules? The main reason is the abovementioned political arrangement that blocks the attempts to do that, To give a good example of the conflicts that surround any tentative to do that it is worth mentioning that in 2012 the supreme court declared that the ongoing criteria to share the national fund created to reduce the effect of the concentration of the state’s tax basis in the more industrialized states was unconstitutional and, therefore had to be changed. In 2013 the President of the Senate at the time installed a special commission to present suggestions to do that, to no avail. The deadline arrived and nothing has been done. So, an extension was conceded and the parliament approved in a hurry a new law that in practice changed nothing, but gave an excuse to keep things untouched until now.

It is not possible anymore to avoid the need to reform the Brazilian fiscal federalism nowadays. On the one hand, under the present Constitution states have the power to tax goods and some specific services like telecommunications, energy and transportation, whereas services in general are in the realm of local governments, a situation which is clearly not possible to sustain anymore.

On the other, technological innovations, coupled with the globalization of economic activities are disrupting the old standard of business organization worldwide. With the advancement of the so-called Digital Economy, it becomes impossible to attach the main tax basis to a specific location as digital transactions generate conflicts both at the international level and within a federation. Putting it in simpler terms, the territory is not anymore, a reference to allocate tax powers.

In that case, the usual criteria for operating a regimen of fiscal equalization will also need to adapt. Fiscal equalization was a solution for the fact that revenues from the traditional tax basis were concentrated in richer parts of the federal territory, Therefore it was necessary to transfer resources to less fortunate entities so as to get as close as possible to the ideal of providing all members with enough resources to attend to the basic needs of their population.

In this new world, fiscal equalization will need to adopt a new formula to operate equalization transfers. Perhaps the guide for this should be the principle inscribed in the German Constitution, which says that every citizen should have access to equal opportunities to ascend the social ladder, regardless of the place of birth and residence.

Recourse to socioeconomic data could be a new guide to devise a formula to reach the purpose of equalization transfers, especially in countries like Brazil where economic and social disparities are still great and tend to increase in the wake of the advance of the digital economy, which ask for better qualification of the labor force.

As we mentioned before, this will not be easy, but insofar as technological innovations will also call for a thorough reform of the Brazilian tax system, there might arise an opportunity to move ahead. One of the reasons for the failure of several attempts to reform the tax regimen in the last thirty years was the fact that none of them dealt with this at the same time. Now it is impossible not to do it again for reasons already mentioned.

To that end, we might put in place the proposal we made few paragraphs above to install a federal dialogue aimed at putting in perspective the main points of conflicts and adopt a strategy to move from those that are seen as easier to reach an agreement to those that face more barriers to surpass, in order to go ahead. Some preliminary ideas to put in place this dialogue are presented below.

First there will not be easy to reach an agreement on how to unify the tax basis of subnational governments, since the bigger municipalities will resist the idea of giving away the power to collect revenues for a basis that is growing to share a basis that is shrinking. Second, adopting a uniform basis for taxing goods and services might increase regional disparities that might run against the interests of the less developed states. Third, as mentioned above, that will call for a thorough reform of the intergovernmental transfers of resources to reduce vertical and horizontal disparities among states and local governments Fourth, this will have to come jointly with measures to promote intergovernmental cooperation to improve the quality in the provision of basic services to the population and open up the room to investments aimed at reducing regional inequalities.

As we pointed out, instead of putting out a proposal for reforming fiscal federalism at once, we have to move cautiously. The first step should deal with rewriting the rules for apportioning the resources from the federal funds that should equalize state and local governments revenues, to reduce distortions that accumulated over time,.alongside alternatives to move toward a unified basis for taxing goods and services, A joint approach could start the federative dialogue and make it easier to reach an agreement to move on since gains and losses from one side could be compensated by the other. Could the impact of the Covid-19 pandemic be a turning point in the history of the Brazilian fiscal federalism? The health, social and economic crisis stemming from the Covid-19 pandemics represents one of the greatest challenges faced by governments around the world in the last century. At the time of writing this article, the virus has infected hundreds of millions of people, leading to millions of deaths. Brazil, in particular, has become a hotspot for the disease, registering some of the highest infection and death rates in the world, among the most populous countries in the world.

Due to the unique territorial dimension of this crisis, subnational governments have a key role to play in the containment measures and the provision of health care (OECD, 2020). Therefore, it is not surprising that some aspects of federalism have become central in the midst of the crisis, especially in Brazil, which, as explained in this article, already faced several challenges in this arena. Although it still may be too early to fully assess the federal response in Brazil, it is possible to draw some early conclusions and even postulate possible consequences and paths for the Brazilian federation.

With regard to the immediate response to the health crisis, it is worth highlighting two central aspects. First, a Supreme Court ruling that reaffirmed the constitutional guarantee of subnational governments autonomy in matters of health and epidemiological surveillance, allowing states and municipalities to implement the international guidelines for medical and health measures to contain the virus, despite the resistance of the central government.²⁹ The second aspect concerns the relevance of the Unified Health System (SUS), one the largest public and universal healthcare systems in the world, that operates in a fairly decentralized way. As a matter of fact, subnational governments account for about 60% of the financing of consolidated government expenditure on the health function, executing 86% of the expenses (Graziane et al., 2020).

The economic fallout has affected central and subnational finances, both by the falling tax revenue and by the increase in spending. Since subnational governments in Brazil are not able to issue public debt and have limited access to loans (that typically are subjected to a financial guarantee from the central government) it was up to the central government to provide some temporary fiscal relief. This was done via the compensation of the loss of revenue from the participation funds, by an emergency aid to subnational entities, and by increased transfer of resources from the Ministry of Health to the state and municipalities, amounting up to BRL 80 billion.

There is, however, some indication that this crisis may become an inflexion point in the Brazilian federative relations. The central government chose to relinquish its privileged position to coordinate a national response strategy. One silver lining, however, has been the unprecedented cohesion and cooperation of states and municipalities, in light of the central government's abstention. Governors and mayors, together with the National Congress, assumed the leadership in the battle against the virus, and used political and popular pressure to force the central government to take some action.

One can only suppose if this newfound alliance will go on in the next years, during the structural reforms at play, ultimately leading to a strengthening of subnational entities and a decentralization process, or the old ways will return and deepen, following the progressive deterioration of subnational public finance. Those who managed to survive, will see.

Only by recognizing the need to establish a federal dialogue it could be possible to find ways to succeed in conducting the huge task that lay ahead. It is not easy but it can be done. And the opportunity to learn from the experiences of other countries that will be provided by the initiative of the Forum of Federations offers a good opportunity to Brazil.