Brazil – Diagnostic and Reform Options for the System of Intergovernmental Fiscal Transfers to Brazilian States published by The World Bank (2022).
This report provides an analysis of the Brazilian intergovernmental fiscal transfer system, and presents reform options for the State Participation Fund (Fundo de Participação dos Estados e do Distrito Federal, or FPE). A good intergovernmental fiscal transfer system should consider-to the best possible extent-existing disparities in expenditure needs and fiscal capacity across states and allocate funds in a manner that equalizes local governments’ ability to provide services, without discouraging own revenue mobilization. Brazil is a federation that makes intensive use of intergovernmental transfers. Yet, the system is relatively inflexible, procyclical, and only partially redistributive. There are many transfer mechanisms in place, with different objectives, rules, and criteria, including general-purpose transfers, to support general expenditure needs without specific uses; specific-purpose transfers, to provide incentives for subnational governments to carry out specific functions; and conditional transfers, generally linked to concrete purposes, including financing capital projects or specific government programs. This report, which is based on the fiscal gap methodology, presents a new framework for the largest funding mechanism available for Brazilian states, the FPE.
