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Brazilian (Low) Public Investment ______________________________ José Roberto R. Afonso, Geraldo Biasoto e Ana Carolina Freire CEPAL, 31/01/2007 19ª Seminário Regional Política Fiscal 1 Index Brazilian experience: an interesting case study International comparison Evolution of investment in Brazil Reflections Different types of investment projects Alternatives 2 The Brazillian problem: low growth China Transitions Economies Developing Countries África Ásia Oriental (-China) América Latina and Caribe Brasil World Developed Countries Souce: CEPAL, IMF 2003 10,0 7,0 5,2 4,7 4,2 2,0 0,5 2,7 1,9 ¹estimatives 2004 10,1 7,6 6,9 4,8 6,2 5,9 4,9 4,0 3,0 2005 10,2 6,4 6,4 5,4 5,1 4,5 2,3 3,5 2,5 2006¹ 10,2 7,2 6,5 5,6 5,3 5,3 3,5 3,8 2,9 2007² 9,0 6,5 6,0 5,0 5,0 4,7 3,7 3,3 2,4 ²projections 3 Brazilian Experience: an Interesting Case Study •One of the highest tax burden of the world (about 40% of GDP in 2006); •All fiscal targets set by the IMF have been systematically met; •Nevertheless, the public sector’s debt pile continues fairly high compared to that of similarly sized emerging economies (about 49% of GDP) 4 Brazilian Experience: an Interesting Case Study In the new century, the public sector has been registering a historic low in investment, even lower than the average levels seen elsewhere in Latin America; An increasing, and already the major part of expenditure on capital formation by public sector authorities, has become decentralized; Consequence: a low in public investment in infraestructures. 5 Th a M ila au nd rit i Ja us pa Ko n Lu T rea xe ur m ke bo y u M rg a Es lta to Ic nia el G and re H ec un e g Ire ary l M and ex Po ic rtu o ga C ze B Spa l ch ul in R gar ep ia u Po blic N land or w Sw Fr ay a itz nc er e la n C Sl yp d ov r ak Fin us R l an ep d Sl ubl ov i c Sw eni ed a So e ut Ch n h ile Li Afri th ca ua N A nia e u U the str ni r ia te la d nd S s Au tate st s C rali an a a Ire da la nd N Ge Ita ew rm ly Ze an al y an d R Bra om zi D an l en ia U ni B ma te e rk d lgi Ki um ng d La o n tv ia Low public investment – international comparison See Afonso, Schuknecth e Tanzi, (2003) e (2006). Pubic Investiment - % of GDP 8% 7% 6% 5% 4% 3% 2% 1% 0% 6 Th a M ila au nd rit i Ko us r Ja ea p M an ex Ire ico l Es and to n C ia So T hile u u Lu th rke xe Afr y m ica bo Ic urg el an d C ze B Ma ch ul lta R gar ep ia u Sw S blic itz pa e in Po rlan rtu d G ga Li ree l th ce ua Po nia U H lan ni un d te g d ar St y a C tes yp Sl ru o s Au ven st ia ra N li Sl o rw a ov a ak Ire y R lan ep d u Fr blic R an om ce C ani an a F N i a da e n N the lan ew rl d a Ze nd al s a Au nd st ria G Ita er ly m Sw an U e y ni te B den d r Ki az ng il d L on D atv en ia m Be ar lg k iu m Low public investment – international comparison Investment in % of Total Expenditure 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 7 Low public investment – international comparison % GDP: Public Investment versus Interest Payments (The explicit values correspond to the Public Investment as % of GDP) 10 Out of the chart: Turkey (Interest Payments = 22% of GDP) Brazil 1,9 8 Interest Payments Greece 3,8 6 Average Developing Countries South Africa 2,7 3,8 3,7 4 4,4 2,9 3 Romania 1,9 Latvia 1,3 Mauritius 3,4 3,7 3,3 2,9 Ireland 2 2,6 2,7 7,5 3,8 3,4 Malta 4,1 0 0 1 2 3 4 5 Public Investment 6 7 8 9 8 National Investment Tax % of GDP 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006¹ 20,54 19,26 19,86 19,69 18,90 19,29 19,47 18,32 17,78 19,58 19,93 19,70 9 Real Investment Rate - Gross Fixed Capital Formation as percent of GDP : 1995/2003 (at constant prices) Public Sector Public Sector and Private Sector Public Companies Public Sector 2003 2002 2001 2000 1999 1998 1996 2003 0,0 2002 0,0 2001 1,3 2000 5,5 1999 2,5 1998 11,0 1997 3,8 1996 16,5 1995 5,0 1995 Public Administration 22,0 1997 Private Sector 10 Public Sector Borrowing Requirement – 1995/2003 Public Sector Borrowing Requirement - 1995/2003 In percent of GDP 1995 1996 1997 1998 1999 2000 2001 2002 2003 PRIMARY SURPLUS 0.36% -0.10% -0.97% 0.01% 3.19% 3.47% 3.63% 3.89% 4.25% OVERALL SURPLUS (PSBR) -7.24% -5.90% -6.07% -7.46% -5.78% -3.61% -3.58% -4.59% -5.08% EXPENDITURE - SELECTED ITENS Interest Gross Fixed Capital Formation of which: infrastructure investment 7.60% 5.80% 5.10% 7.47% 8.97% 7.08% 7.21% 8.48% 9.33% 4.75% 4.61% 4.49% 4.38% 3.02% 2.90% 3.49% 3.81% 2.96% 2.68% 2.85% 2.72% 2.17% 1.41% 1.20% 1.38% 1.42% 1.11% Prepared by the authors. Primary Sources: GFCF - IBGE (Brazilian National Accounts - 2003); and results and interest - Bacen (Central Bank). Infrastructure investment - public GFCF in energy, comunications, transport and sanitation / public services (estimated in public administration). Coverage: nonfinancial public sector (public administration plus public enterprises). 11 Public Administration Borrowing Requirement – 1995/2003 Public Administration Borrowing Requirement - 1995/2003 In percent of GDP 1995 1996 1997 1998 1999 2000 2001 2002 2003 CURRENT REVENUES 34.43% 34.25% 34.10% 35.90% 37.78% 38.64% 40.28% 42.37% 42.35% CURRENT EXPENDITURE 39.91% 37.31% 36.35% 41.65% 42.79% 41.24% 41.64% 44.07% 45.31% Consumption 19.60% 18.49% 18.20% 19.13% 19.08% 19.06% 19.25% 19.93% 19.72% Interest 6.30% 5.10% 4.60% 7.31% 8.39% 6.76% 6.84% 7.74% 9.11% Other Transfers and Subsidies 14.01% 13.72% 13.55% 15.22% 15.32% 15.42% 15.56% 16.39% 16.48% GROSS SURPLUS -5.48% -3.07% -2.25% -5.75% -5.01% -2.60% -1.36% -1.70% -2.96% CAPITAL EXPENDITURE 2.92% 2.25% 1.94% 1.93% 1.32% 1.69% 1.89% 2.00% 1.50% 2.54% 2.31% 1.98% 2.80% 1.73% 1.90% 2.20% 2.20% 1.70% Gross Fixed Capital Formation of which: infrastructure investment 0.93% 1.08% 0.84% 1.09% 0.52% 0.61% 0.68% 0.52% 0.43% Net Acquisition Of Nonfinancial Assets 0.00% 0.00% -0.17% -1.02% -0.47% -0.47% -0.36% -0.14% -0.05% Net Transfers 0.38% -0.06% 0.14% 0.16% 0.07% 0.27% 0.05% -0.06% -0.14% Float, Errors and Omissions 2.51% 0.01% -1.45% 0.74% 0.48% -0.06% -0.89% -0.88% -1.27% PRIMARY SURPLUS 0.41% -0.20% -1.04% 0.36% 2.54% 2.41% 2.70% 3.16% 3.38% OVERALL SURPLUS (PABR) -5.89% -5.30% -5.64% -6.95% -5.85% -4.35% -4.14% -4.58% -5.73% Prepared by the authors. Primary Sources: IBGE (Brazilian National Accounts - 2003); primary and gross balance and interest expenditure, Bacen (Central Bank). Infrastructure investment - own estimating about GFCF expenditure in energy, comunications, transport and sanitation, by central plus subnational governments. Coverage: (only) public administration (excludes public enterprises). 12 Public Administration in Gross Fixed Capital Formation (1901-2003): Low during the last fifteen years 6 45% % of GDP 35% 4 30% 25% 3 20% 15% 2 10% 1 % of Total FGCF 40% 5 5% 0 0% 2003 1997 1991 1985 1979 1973 1967 1961 1955 1949 1943 1937 1931 1925 1919 1913 1907 1901 % of GDP Public Adm.GFCF-RatioGDP Public Adm/Total - GFCF 13 Decentralization of Public Administration Gross Fixed Capital Formation (1947/2003) 6 % of G DP 5 4 3 2 1 0 2003 1999 1995 1991 1987 1983 1979 1975 1971 1967 1963 1959 1955 1951 1947 Year Feder al S tate Local 14 Public Administration: Low in the Share of National Capital Stock (1950/2003) % of National Stock 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% 2001 1998 1995 1992 1989 1986 1983 1980 1977 1974 1971 1968 1965 1962 1959 1956 1953 1950 Year Global Buildings 15 Low in Public Sector Gross Fixed Capital Formation in Infraestructure (estimated): 1995/2003 (as percent of GDP at constant prices) Public Administration 0,0 0,0 2003 0,2 Local 2002 0,5 State 2001 0,4 1998 1,0 1997 0,6 2003 1,5 2002 0,8 2001 2,0 2000 1,0 1999 2,5 1998 1,2 1997 3,0 1996 1,4 1995 3,5 1996 Central 2000 Public Companies 1995 Public Administration 1999 Public Sector 16 Public Sector: Gross Fixed Capital Formation in Infrastructure (estimated): 1995/2003 As percent of Total GFCF Public Sector Public Administration Public Administration Central Public Companies State Local 6,0 15,0 4,5 11,3 2003 2002 2001 2000 1999 1998 1997 1996 2003 2002 2001 2000 1999 1998 0,0 1997 0,0 1996 1,5 1995 3,8 1995 3,0 7,5 17 Public Sector: Gross Fixed Capital Formation in Infrastructure 1995/2003 As percent of GDP (at constant prices) Communication Transport Energy Sanitation/Service 3,2 2,4 1,6 0,8 2003 2002 2001 2000 1999 1998 1997 1996 1995 0,0 18 Reflections Management of fiscal crises: Fiscal adjustments combining strong tax burden increases and intense low in public investments Restrictions to public debt for all purposes (capital os current expenses) Privatization restricted to some sectors 19 Reflections The management with foreign capital flows needs a government intervention that implies in fiscal costs to Treasury The efforts to decrease the internal debt-GDP are sterilized by the level of interest rate Demand restricted by tax and low real expenses (high level of interest payments) Private investment decisions against low public investment in infrastructure 20 Reflections The adjustment shape lead us to a trap: it’s impossible to enlarge the public investment tax with out a decrease in primary surplus or a new fiscal configuration The relation between the public and the private sectors in Brazil are complex: there are not easy solutions The Brazilian case is hard to compare to other international experiences = state presence at the birth of most sectors, regulation questions, federative issues 21 Opening a Fiscal Space to the Investment in Infrastructure Brazil – the public financing profile is still a problem. Inefficiency of government efforts on partnerships (PPP) or project exclusions from fiscal targets (PPI) Need to carry on profitable projects and those with positive externalities 22 The questions How increase public investment with out deterioration in private expectations on public deficit? Is there a manner to increase the allocation efficiency instead a high level of public investment? 23 Different types of investment projects Three types could be treated differently: - The 1st type would be the project with an adequate internal rate of return, as compared to the placement of notes in the market - The 2nd type would be that which has, in its initial stages, an internal rate of return inferior to the cost of raising funds in the market, but that IIR reaches a normal rate during the operation period - The 3rd type would be that project which really could not be expected to provide an internal rate of return demanded by the market over the course of its lifetime, but there are positive externalities (in social or economic sense) 24 Different types of investment projects In all cases: private management and resources borrowed from market (specific bonds for each project) In 2nd and 3rd cases: the gap against the IRR would be consider a disbursement; the Treasury would response by the equalization (accounting like deficit) The deviation of projects from the parameters initially drawn up would be treated specifically: increase deficit, annually added to PSBR 25 Different types of investment projects Enforcement on the administration by goals More transparency in fundamental projects Examination by financial market Credibility in public accounting measures Rebuild the public debt in other foundation 26 Different types of investment projects One is not looking to merely mobilize resources for investment - the idea is also to develop actions that are managerially efficient and worthy of financing for the market The differential should not however be given by the governmental structure but rather by the market The financing of such projects should involve specific resources, raised directly from the market 27 Alternatives a) division line in the balance sheets: current x investments b) OECD proposals: to deduce investment expenditures related to capital depreciation c) anti-ciclical fiscal policy - monitoring exceeding resources destined to public investment. - Risk of a anti-cyclical fiscal policy: lack of public investments during the cycle´s ascension can not be on to the responsibility of the private sector. d) separating public spending between public enterprises and public administration 28 Alternatives Exclusion of public enterprises from the PSBR and NPSD; PSBR and NPSD concepts; Revenue earmarking for investments; Tax treatment of capital goods. 29