Expensive and Inefficient
General government expenditure in Brazil, excluding interest and transfers, amounts to 18.3% of GDP, above the median for both emerging economies and Latin American countries. Yet the return on this spending is low. Basic public services, such as education, healthcare and public security, fall short of what Brazilians should expect given their high tax burden. Spending increases in recent years have not been matched by corresponding improvements in service quality. The problem extends to transfers, which reach 18.9% of GDP, more than twice the medians for peer countries. Besides being poorly targeted, some of these transfers have been used for explicitly electoral purposes. The challenge of the new term will go beyond restraining expenditure growth and must necessarily include improving the efficiency of resource allocation.
Lula’s re-election, despite his fundamental hostility to fiscal discipline and preference for distributing benefits rather than providing quality public services, comes at a time when the rapid increase in public debt is making its rollover increasingly costly and public-sector efficiency ever more elusive, putting the country on a path toward crisis. The challenges of the new term, however, go beyond containing public spending, despite the fundamental importance of doing so. Public resources must be allocated more effectively so that they produce tangible benefits for society. The government spends too much and spends poorly. The mere expansion of federal primary expenditure under Lula, from 17.9% of GDP at the beginning of his term to an expected 19.2% at year-end, was not enough to prevent the president’s unpopularity.
The cost of government operations, including federal, state and municipal spending but excluding transfers and interest, amounts to 18.3% of GDP (Chart 1). This is well above the median for emerging economies (16.2%) and Latin America (14.6%). Our calculations use IMF data from the World Economic Outlook and Global Financial Stability Report. For India and Argentina, we use their respective national accounts; the similar methodologies make comparisons possible.
Public employee compensation alone absorbs 12.7% of GDP in Brazil, considering the four quarters through the second quarter of this year. This share reached 13.4% in 2019, declined to 12.0% in 2021, and has risen again in recent years.
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