The Fiscal Situation of The States

BRAZIL ECONOMICS - Report 22 Feb 2022 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

The past two years have witnessed a significant improvement in the fiscal situation of the subnational entities, which in 2021 had a primary surplus of 1.2% of GDP. This is partly due to structural improvements, such as the reforms of the civil service pension systems in some states. However, the result in 2021 was strongly influenced by conjunctural factors, such as the financial support from the federal government during the pandemic and the substantial – but transitory – increase of ICMS revenues caused by the elevation of fuel prices. Most of the states entered this year (an election year) with full coffers, so there will be pressures to increase spending, with two effects in opposite directions. While on the one hand, this will promote expansion of demand via the multiplier effect, on the other it will worsen their fiscal situations, in an intensity that will increase to the extent the trajectory of their respective revenues returns to historic behavior​.

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