NCPA - National Center for Policy Analysis

Brazil's States Start to Reform

July 2, 1999

Investors interested in Latin America are focusing their attention on efforts by Brazil's federal government to pass the Fiscal Responsibility Law. The legislation was introduced by the government of President Fernando Henrique Cardoso as a way to force Brazil's states to balance their budgets.

Since passage of the 1988 constitution, which required the transfer of federal resources to the states and gave governors the power to float debt, the states have been major contributors to the federal deficit and monetary instability.

But observers say that most states aren't waiting for passage of the law, but are quietly proceeding on their own with economic reforms and market incentives. Roughly two-thirds of the 27 governors are introducing fiscal reforms -- despite high-profile resistance by several governors.

  • The governor of Espirito Santo has dismissed 33,000 temporary workers and placed ceilings on public employee salaries.
  • The governor of Pernambuco is attempting to sell several state-owned companies, and is cutting public payrolls and reducing budget outlays.
  • In fact, 18 states have moved aggressively to reduce public employees' salaries, cut payrolls and fire employees on temporary job contracts.
  • The law says that states can spend no more than 60 percent of their budgets on salaries.

State social security systems which benefit former government employees consume as much as 39 percent of state budgets and are clearly in need of reform. Many beneficiaries receive retirement checks from one or more state agencies while drawing salaries from another. Many true retirees are below the age of 45 and are compensated at a rate two or three times that of their former salaries. But states are beginning to tax those checks.

Recent elections put state politicians on notice: reform or face defeat. Incumbent parties that lost gubernatorial elections spent an average of 99 percent of their budgets on public employees and pensioners, says the Wall Street Journal, while parties that won spent an average of 79 percent.

Source: Michael A. Warren, "Brazilian States, Once the Problem, Start to Reform," Wall Street Journal, July 2, 1999.


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