The Future of Federalism
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The Future of Federalism

Intergovernmental Financial Relations in an Age of Austerity

Edited by Richard Eccleston and Rick Krever

The crisis and its aftermath had a dramatic short-term effect on federal relations and, as the twelve case studies in this volume show, set in place a new set of socio-political factors that are shaping the longer-run process of institutional evolution and adaptation in federal systems. This illuminating book illustrates how an understanding of these complex dynamics is crucial to the development of policies needed for effective and sustainable federal governance in the twenty-first century.​
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Chapter 12: The global crisis and Brazilian federalism: effects and perspectives

José Roberto Afonso and Luiz de Mello

Abstract

The global crisis had a milder adverse effect on Brazilian subnational budgets than in most OECD countries, essentially on account of a less severe deceleration in economic activity – at least until a sharper deceleration since 2011. Counter-cyclical responses were predominantly of a quasi-fiscal nature in the form of capital injections by the National Treasury in government-owned financial institutions, but also included some targeted tax cuts at the central and state levels. Since then, and despite a pick-up in activity, budget outcomes have deteriorated at the central and subnational levels, with gradually falling primary budget balances and an increase in gross indebtedness for the general government. Also, a ratcheting-up of current expenditure is constraining the ability of the states and municipalities to invest, despite rising borrowing after the crisis. Moreover, a number of structural challenges will need to be addressed to put the subnational finances on a sounder footing and in support of stronger long-term growth. They include a reform of the state-level VAT, a rationalization of expenditure to deal with the emerging pressures associated with population ageing and to enhance cost-effectiveness of subnational programmes, efforts to reduce budgetary rigidities due to widespread revenue earmarking and mandated spending, and further institutional improvements to foster coordination among the different layers of government.

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