BRAZIL

Brazil is a federal republic under a presidential system (Constitution of 1988, confirmed by referendum in 1993), formed by the indissoluble Union of three autonomous levels of government (Title III): the federal (called the Union), the states and the municipal level. In the Brazilian multi-level governance framework, municipalities are federal entities having their autonomous relations with both the states and the Union. The federated states and the Federal District have their own constitutions, which cannot contradict the 1988 Constitution. Neither the Union nor states’ governments can prohibit actions by municipalities.

The Constitution establishes the division of powers into a flexible tri-partition. The judiciary is organised at the federal level in the form of counties covering several municipalities or parts of larger municipalities. States also have their own judiciary system, except for special cases of labor, electoral, military and federal justice. Both the executive and legislative branches are organised independently in all tiers of government. The president, state governors and mayors are elected by universal suffrage as heads of their respective government for four-year terms. Elections take place every two years: the last municipal elections were held in 2020 and the upcoming federal and state elections in October 2022. While state and municipal legislative houses are unicameral, the National Congress is bicameral, composed of the Senate and the House of Representatives. The 81 senators are elected for an eight-year term, through state districts of 3 senators per state. Every four years, part of the Senate is renewed. The House of Representatives is composed of 513 members elected on the same basis. The number of representatives being calculated based mainly on population.

The Ministry of Cities was created in 2003 as the coordinating body of urban policies and investment, resulting from the City Statute passed in 2001. In addition, the National Council of Cities and the National Conference of Cities were created in 2004 with the purpose of formulating urban policies in coordination with civil society. The Ministry of Cities oriented the implementation of Councils of Cities in each state (more than 20 by 2014), as permanent collegial advisory bodies of said Ministry, contributing to inclusive multi-level policy making, implementation and monitoring of the National Policy for Urban Development (PNDU). There are similar structures promoting social and federative participation on different issues such as Health, Public Safety or Water and Sanitation. The National Council for Fiscal Policy (CONFAZ) is a specific coordination mechanism between the Union and the states/federal district governments.

Furthermore, two private and non-profit institutions represent local governments and defend their interests in the National Congress and the Federal Government: the National Confederation of Municipalities (Confederação Nacional dos Municípios) and the Mayors’ National Front (Frente Nacional dos Prefeitos). Among state governments, the cooperation is found in the States’ Committee of Finance Secretaries (Comsefaz) - dedicated exclusively to public finance issues - and the Northeast Consortium (Consórcio Nordeste) - with broad development objectives such as joint procurements and the integrated implementation of public policies.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
5 570 municipalities (municípios)		26 states (estados) 1 Federal District (Distrito Federal)
Average municipal size: 38 298 inh.
5 570		27	5 597

OVERALL DESCRIPTION: Brazil is formed by the union of 26 federal states, the Federal District and 5 570 municipalities (including the state district Fernando de Noronha and Brasilia, which is both the Federal District and a local government). According to the 1988 Constitution, there is no hierarchy between these entities. The Federal District cannot be divided into municipalities and has characteristics common to both states and municipalities. It is structured into administrative regions. The rest of the country is further divided into five other administrative regions (North, Northeast, Center-West, Southeast and South). In addition, the Union is responsible for the demarcation and protection of both indigenous and quilombos heritage land.

The island of Fernando de Noronha is the unique state district under the supervision of the State of Pernambuco. The 1988 Constitution extinguishing this federal territory and reincorporated it as part of the State of Pernambuco (Art. 15). The Constitution also established (Art. 20) the oceanic islands, beaches, and Navy terrains (this last covering nearly 20% of the island’s area) as property of the central government but in 2002, an agreement was signed for the State of Pernambuco to administer these Union lands. In 2022, the federal government started a dispute in the Supreme Court over the island of Fernando de Noronha, arguing that the archipelago is of federal property and that the State of Pernambuco is not complying with the former contract.

REGIONAL LEVEL: The Brazilian population is concentrated in the Southeast region, with 42% of the country’s inhabitants living in 10.8% of the territory. In contrast, the North region, with 45% of the area, accounts for less than 9% of the population.

The levels of regional inequalities in Brazil are among the highest in the world, although it has decreased in the recent decades. In 2017, the HDI within states ranged from 0.850 (very high) in the Federal District to 0.683 (medium) in Alagoas. Four states appear with medium HDI, 20 states rank high and three rank very high. The Federal District and the states of Rio de Janeiro and São Paulo are the most densely populated, while the least densely populated states are Roraima, Amazonas and Mato Grosso.

MUNICIPAL LEVEL: Municipalities are endowed with legal personality and some administrative autonomy, being the smallest autonomous units of the Federation. The 2001 City Statute provides guidelines for municipal governments and all stakeholders to promote the social function of land, integrated territorial planning and the democratic management of the city. In 2013, five new municipalities were created. A draft bill renewing the procedure for the creation, merger and dismemberment of municipalities was submitted in August 2015, and was approved in a special commission of the Chamber of Deputies in March 2018. Since then, it is awaiting voting by all deputies for its final approval, considering that the president has the power of veto on the subject.

There are great discrepancies in geographical and population sizes. In 2021, 57.7% of the Brazilian population lived in 5.9% of the municipalities, which are those with more than 100 000 inhabitants, and 17 municipalities had more than one million inhabitants. The largest cities, according to estimates from IBGE for July 2021, are: São Paulo (12.4 million); Rio de Janeiro (6.8); Brasília (3.1); Salvador (2.9); Fortaleza (2.7); and Belo Horizonte (2.5).

HORIZONTAL COOPERATION: The 2015 Metropolis Statute provides constitutional regulations for the creation of metropolitan areas by state governments. After their creation, metropolitan Aareas are expected to formulate an integrated urban development plan (PDUI) within three years. In 2021, there were 74 metropolitan regions formally established by law and 8 metropolitan regions either completed and moved to approving the related law or were in process of completing the PDUI (Vitória, Rio Cuiabá Valley Santos, Belo Horizonte, Rio de Janeiro, Recife, Salvador and São Luiz). The Union is responsible for establishing the three integrated development regions which are metropolitan regions overlapping state boundaries.

Intermunicipal consortia were established by Federal Law Nº11.107/2005 as voluntary institutional arrangements formed for the purpose of carrying out “public functions of common interest”. According to the Observatory of Public Consortia, there were 601 public consortia in 2021, encompassing a total of 4 723 municipalities (nearly 85% of local governments in Brazil). The most common function of government carried out by these agreements are health (328), waste collection and disposal (230) and environment protection (213). Eight states also participate in consortia in cooperation with municipalities.

The state constitutions and municipal organic laws detail the competences for their respective jurisdictions within the overarching framework set by the 1998 Constitution. The Union is exclusively in charge of functions regarding the national interest, whereas functions of local interest are exclusive competences of municipalities. The states are responsible for public functions of regional interest, which include functions that cannot be undertaken by municipalities and those delegated by the Union. These may include transportation, water management or public order and safety. Lastly, there are functions of common interest which are shared between all levels of government, such as health care, education, social security, welfare, agriculture and food distribution, sanitation and housing. The City Statute expands constitutional regulations on urban policy. A series of federal laws build on the City Statute for better provision of services (e.g., public private partnerships and the national sanitation policy (Federal Laws No. 11.079 and 11.445 of 2004 and 2007)). Since 2015, the Metropolitan Statute clarifies the assignment of shared responsibilities of common interest between cities and states under a coordinated mechanism and provides for civil society participation in the establishment and monitoring of the PDUI.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Municipal level
1. General public services (administration)	Administration and operation of general services; Operation and maintenance of public buildings and facilities; Administrative services	Administration and operation of general services; Operation and maintenance of public buildings and facilities; Administrative services
2. Public order and safety	Administration and command of military police and fire-fighters; Civil police operations, administration of the prison system; Road traffic control	Municipal civil guard; Emergency services (shared)
3. Economic affairs / transports	Agriculture and rural development; Regional economic development and support to local enterprises and entrepreneurship; Regional tourism; Ports; Management and maintenance of state highways and roads; Management of inter-municipal transport	Maintenance of urban roads; Urban transport; Local tourism; Maintenance of building projects
4. Environment protection	Environmental licensing (shared); Environmental education (shared); Protection, preservation and restoration of regional natural resources	Environmental licensing (shared); Environmental education (shared); Protection and preservation of fauna and flora; Parks and green areas in municipalities; Waste collection and disposal
5. Housing and community amenities	Supply and treatment of water and basic sanitation (shared); Energy production (when delegated by federal government); Metropolitan land use planning; Housing construction and settlement upgrading (shared)	Supply and treatment of water and basic sanitation (shared); Public lighting; Street maintenance and urban paving, street cleaning; Urban development and land use planning; Housing construction and settlement upgrading (shared)
6. Health	Hospital services; Preventive healthcare; Secondary and tertiary health services	Basic health care and service delivery, Operation and administration of health units (shared within the Unified Health System)
7. Culture & Recreation	Regional museums; Libraries, Cultural activities and preservation of heritage	Sports facilities; Libraries; Municipal museums; Support to cultural activities of communities; Municipal exhibitions; Theatre and music production
8. Education	Secondary and higher education; Support to municipal administration of basic education	Administration of kindergartens; pre-schools and basic education
9. Social Welfare	Social Protection (shared); Support municipal provision of care services	Municipal Social Assistance Policy as an integral part of the Unified System of Social Assistance (SUAS)

Scope of fiscal data: States; the Federal District and 5 570 municipalities

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The 1988 Constitution specifies tax powers (art. 145 to 162) of all the entities of the Federation, their respective mandatory spending assignments (art 21 to 32), and revenue sharing schemes (art. 157 to 159). In the nineties, Brazil adopted a Fiscal Responsibility Law to control state and municipalities’ debts and personnel expenses, as well as to regulate budget planning, fiscal reports and transparency procedures. After some years of recurrent budget deficits, Brazil has adopted more contractionary fiscal policies since 2015. In 2016, a Constitutional Amendment was approved resulting in a new fiscal regime, instituting a spending cap on central government’s primary expenses for twenty years and revising the required minimum allocation on health and education. The spending cap law excluded extraordinary expenses of its calculation, which allowed the central government to implement measures against the COVID-19 crisis, including fiscal transfers for subnational governments. In 2021, the law was altered, resulting in a higher spending limit in 2022. In addition, the increased indebtedness levels at subnational level (especially in the case of state governments) in the past years have led to the adoption of Complementary Laws (no. 156/16, 159/17 and 178/2021) with the aim of renegotiating debt repayment flows with the central government and adopting mechanisms for reestablishing primary surpluses of insolvent states.

Subnational, state and local government expenditure by economic classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	3326	1885	1440	22.4%	12.7%	9.7%	36.5%	20.7%	15.8%	100.0%	100.0%	100.0%
Inc. current expenditure	3135	1815	1320	21.1%	12.2%	8.9%	35.4%	20.5%	14.9%	94.3%	96.3%	91.6%
Compensation of employees	1350	682	668	9.1%	4.6%	4.5%	69.2%	34.9%	34.2%	40.6%	36.2%	46.4%
Intermediate consumption	656	236	420	4.4%	1.6%	2.8%	84.0%	30.3%	53.8%	19.7%	12.5%	29.1%
Social expenditure	537	415	122	3.6%	2.8%	0.8%	15.5%	12.0%	3.5%	16.2%	22.0%	8.5%
Subsidies and current transfers	344	334	10	2.3%	2.3%	0.1%	23.0%	22.3%	0.7%	10.4%	17.7%	0.7%
Financial charges	82	72	10	0.6%	0.5%	0.1%	8.9%	7.8%	1.1%	2.5%	3.8%	0.7%
Others	165	75	90	1.1%	0.5%	0.6%	74.1%	33.7%	40.3%	5.0%	4.0%	6.2%
Incl. capital expenditure	191	70	120	1.3%	0.5%	0.8%	70.9%	26.1%	44.8%	5.7%	3.7%	8.4%
Capital transfers	13	11	2	0.1%	0.1%	0.0%	23.4%	19.4%	4.0%	0.4%	0.6%	0.2%
Direct investment (or GFCF)	177	59	118	1.2%	0.4%	0.8%	83.9%	28.0%	55.9%	5.3%	3.1%	8.2%

EXPENDITURE: In FY 2020, expenditure incurred at the subnational level corresponded to 22.4% of the GDP, an increase of 1.2% of GDP compared to 2019 due to the COVID-19 crisis – the combination of the rise in health spending and the economic downturn. Subnational governments accounted for 44% of public spending. Both states and municipalities are important social and economic actors, accounting for a large share of public spending (respectively 20.7% and 15.8%). Subnational budgets are mainly devoted to personnel expenses, due to their focus on labor intense functions (mainly security, education and health) and the special pension schemes for security and education public servants. In 2020, staff expenditure accounted for 58.2% of state’s primary spending (36.2% on active employees and 22% on retired), and 54.9% in the case of local governments (46.4% active and 8.4% retired). State expenditure declined 0.64% of GDP from 2010 to 2020, reflecting different trends in its components. Interest payments decreased 1% of GDP, caused by the combination of the renegotiation of their debts with the central government, in 2016, and the reduction of the Brazilian public debt interest rates (the new index for the renegotiated debt). On the other hand, from 2010 to 2020, employers’ social benefits (public servants’ pensions) increased 1% of GDP, explained mainly by the early retirement of security and education servants. Local governments presented an increase in total expenditures of 1.6% of GDP, driven mainly by the rise of staff spending (1% of GDP) and public servants’ pensions (0.4% of GDP). This was a result of the decentralisation process initiated in the mid-nineties, focused on the execution of basic social services (education and health) by municipalities.

DIRECT INVESTMENT: In contrast, only 5.3% of subnational governments' budgets were allocated in investments in 2020. Nonetheless, subnational governments represented about 84% general government’s direct investment. Over the last decade, states’ direct investments decreased 0.7% of GDP, caused by a combination of revenues’ low dynamism and the growth of staff and mandatory expenses. In the case of municipalities, the GFCF remained relatively stable, decreasing by only 0.1% of GDP, reflecting their better financial situation. Over the past two decades, public investment has been considerably below the Latin American countries and income group averages resulting in much lower capital stock. In 2020, subnational public investment accounted for 1.2 % of the GDP.

Subnational, state and local government expenditure by functional classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure by economic function	3326	1885	1440	22.4%	12.7%	9.7%	-	-	-	100.0%	100.0%	100.0%
1. General public services	659	379	280	4.4%	2.6%	1.9%	7.2%	4.2%	3.1%	19.8%	20.1%	19.4%
2. Defence	2	1	1	0.0%	0.0%	0.0%	1.7%	1.0%	0.7%	0.1%	0.1%	0.1%
3. Security and public order	355	344	11	2.4%	2.3%	0.1%	68.8%	66.7%	2.1%	10.7%	18.2%	0.8%
4. Economic affairs/transports	237	100	137	1.6%	0.7%	0.9%	64.1%	27.0%	37.1%	7.1%	5.3%	9.5%
5. Environmental protection	61	10	52	0.4%	0.1%	0.4%	86.1%	13.4%	72.8%	1.8%	0.5%	3.6%
6. Housing and community amenities	77	13	64	0.5%	0.1%	0.4%	60.1%	10.4%	49.7%	2.3%	0.7%	4.4%
7. Health	760	263	497	5.1%	1.8%	3.3%	65.7%	22.8%	42.9%	22.8%	14.0%	34.5%
8. Recreation, culture and religion	26	12	14	0.2%	0.1%	0.1%	68.2%	30.6%	37.7%	0.8%	0.6%	1.0%
9. Education	488	237	251	3.3%	1.6%	1.7%	60.3%	29.3%	31.0%	14.7%	12.6%	17.4%
10. Social protection	661	527	134	4.5%	3.6%	0.9%	18.6%	14.9%	3.8%	19.9%	28.0%	9.3%

For states, the largest expenditure lines were social protection (28% of total states’ spending, composed mainly by public servants’ pensions), general public services (20.1%), security and public order (18.2%) and health (14.0%). Municipal spending also reflects the distribution of responsibilities and highlights the effect of the Covid crisis on basic health services demand: health (34.5%), education (17.4%) and general public services (19.4%). In 2020, municipal expenditure on environmental protection reached 72.8% of the general government spending in the same category, reflecting the leading role of local governments in waste management, while at state level, expenditure on security and order accounted for 66.7% of general government spending in the same category.

Subnational, state and local government revenue by category
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	3422	1923	1499	23.1%	13.0%	10.1%	59.5%	33.5%	26.1%	100.0%	100.0%	100.0%
Tax revenue	1490	1199	292	10.1%	8.1%	2.0%	43.6%	35.1%	8.5%	43.6%	62.4%	19.5%
Grants and subsidies	1533	481	1052	10.3%	3.2%	7.1%	-	-	-	44.8%	25.0%	70.2%
Tariffs and fees	112	66	46	0.8%	0.4%	0.3%	-	-	-	3.3%	3.4%	3.1%
Income from assets	41	12	28	0.3%	0.1%	0.2%	-	-	-	1.2%	0.6%	1.9%
Other revenues	246	165	81	1.7%	1.1%	0.5%	-	-	-	7.2%	8.6%	5.4%

OVERALL DESCRIPTION: The Constitution assigns exclusive powers to each of the three spheres of government, and important taxes on goods and services are assigned to the subnational levels of government, with autonomy for the establishment of rates. The constitutional text also details revenue sharing schemes, ensuring that 47% of important federal taxes are passed onto the subnational levels reaching 2.7% of GDP in 2020. In most parts, grants are not earmarked, although the Federal Constitution ensures that each level of governments invests a minimum amount of the public budget (including grant revenues) in priority sectors, such as health (25% for states and municipalities) and education (12% for states and 15% for municipalities).

Subnational revenue grew 2.8% of GDP between 2010 and 2020, ending the period at 23.1% of GDP. This is a combination of the increase of current grants by 1.9% of GDP and of tax collection by 0.7% of GDP. The composition of own revenues and grants is quite different for states and municipalities. Local governments depend significantly on transfers (70.2% of their total revenues in 2020), while states rely much more on tax revenues (62.4% of their budget in 2020).

TAX REVENUE: In 2020, subnational tax revenue amounted to 10.1% of GDP, of which 8.1% corresponded to state-levied taxes and 2.0% to taxes collected at the municipal level. Over the period 2010-2020 the Brazilian municipalities experienced a growth of 0.4 of GDP% in the collection of their taxes, while states’ taxes increased by 0.3% of GDP. At the state level, the most important source of revenue is the tax on the circulation of goods and services (ICMS), which represented 86% of their tax revenue in 2020. States also collect a tax on the ownership of motor vehicles (IPVA), which together with the ICMS, are shared with local governments at 50 and 25% respectively. At the municipal level, the two main taxes are the tax on services (ISS) – 47.8% of local tax revenue in 2020 – and the tax on the property of real estate (IPTU) – 32.5% of tax collection

GRANTS AND SUBSIDIES: Grants and subsidies can be divided into two main types: compulsory transfers and voluntary transfers. The 1988 Federal Constitution increased subnational share on federal taxes and implemented the health transfer system to finance the Unified Health System (SUS). In the mid-nineties, the central government enhanced the decentralisation of health and education services and created the basic education fund (Fundeb) to finance the local provision of these services. Most grants are shared according to non-discretionary constitutional rules. In FY 2019, for instance, more than 95% of the grants received by subnational governments were compulsory and allocated according to formulas established in the Constitution or in laws.

Voluntary transfers are made on the basis of project agreements, adjustments or other similar instruments, in order to carry out works and/or services of common interest. Such transfers can take the form of cooperation aid or financial assistance outside of legal or constitutional mandates or those destined to the Unified Health System. Compulsory transfers are determined by the Constitution and are mainly composed of a share of the central government’s revenue.

The portion received from the personal and corporate income taxes represents a fundamental funding source for subnational budgets. The States Participation Fund (apportioned from the income tax and tax on industrialised goods) is the main intergovernmental transfer for states. Grants declined by 0.24% of GDP between 2010 and 2019, but increased by 0.48% of GDP from 2019 to 2020, reaching 3.07% of GDP in 2020, due to emergency transfers related to the COVID crisis. The main revenue sharing mechanisms for local governments are the Municipalities Participation Fund (also from central government taxes); the municipal share of 25% of states’ VAT (75% of which are distributed according to the value added in each municipality); and the 50% share of the property tax on vehicles (allocated to the cities where the cars are licensed). The basic education fund (Fundeb) and health transfers (SUS) are also important sources of revenue for some local governments. Intergovernmental transfers to municipalities grew from 5.6% of GDP in 2010 to 6.1% of GDP in 2019, reflecting their strong position in the Brazilian Federation since the 1988 Constitution. In 2020, the amount reached 7.1% of GDP due to the increase in health-related transfers and the decline of GDP.

The 3 Regional Financing Funds overseen by the Ministry of National Integration and managed by Regional Deliberative Councils of Superintendence and Regional Banks are provided for in the Constitution (article 159). It states that 3% of the inflow of income taxes (IR) and tax on industrialised goods (IPI) are intended to support loans to the private sectors of the North, Northeast and Midwest administrative regions, including some municipalities of the states of Minas Gerais and Santa Catarina.

OTHER REVENUE: In FY 2020, tariffs and fees corresponded to 3.3% of subnational revenues, making up 3.4% of states’ and 3;1% of municipal budgets, respectively. Fees may be created by the three spheres of government. At the municipal level, the most important fees comprise license fees, charges related to public lighting and cleaning fees. In 2020, states also received royalties coming from the exploitation of natural resources (oil – including presalt-, gas, minerals and water). In addition, both states and municipalities received return on investment, rents and dividends paid on public properties and state-controlled companies. Much like in the case of taxes, subnational governments have the autonomy to set the rate/value of tariffs, but the power to create them is limited by the Constitution.

Subnational, state and local government fiscal rules and debt
2020	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	2754	2268	486	18.6%	15.3%	3.3%	16.9%	14.0%	3.0%	100.0%	82.4%	17.6%	-	-	-
Financial debt	2065	1872	193	13.9%	12.6%	1.3%	13.4%	12.1%	1.3%	100.0%	90.6%	9.4%	100.0%	90.6%	9.4%
Currency and deposits	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Bonds / debt securities	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Loans	2065	1872	193	13.9%	12.6%	1.3%	-	-	-	-	-	-	-	-	-
Insurance pensions	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Other accounts payable	689	396	293	4.6%	2.7%	2.0%	-	-	-	-	-	-	-	-	-

FISCAL RULES: The Federal Constitution of 1988 establishes the “golden rule”, prohibiting funding current expenditures with borrowed resources. After several defaults by subnational governments and debt renegotiations through the 80s and 90s, the federal government created a system of debt control in which subnational governments have to commit to a Fiscal Adjustment Program (FAP) in the return for the bailout. Moreover, after the 1998 crisis, a Fiscal Responsibility Law was enacted in 2000, imposing constraints on state and municipalities’ debts and personnel expenses, as well as regulating budget planning, fiscal reports and transparency procedures at the three levels of government (only the central government was exempted from a debt ceiling). In 2014-2015, the country’s economic downturn combined with expenditures rigidity severely affected states’ finances, which led to a new round of debt renegotiations that, in some cases, demanded the implementation of current spending caps and other fiscal consolidation measures. Also, in 2017, the FAP was reformulated so that its goals and regulations were aligned with those of the Fiscal Responsibility Law.

DEBT: The FAP and the Fiscal Responsibility Law (FRL) sets debt ceilings for states (200% of net current revenues) and municipalities (120% of net current revenues). The main part of states’ debts is with the central government. In the current framework, subnational governments cannot issue bonds but are allowed to borrow from banks and international organisations. The central government issues guarantees to ensure significantly lower rates. In the case of subnational government default on those loans, the central government may hold constitutional transfers.

After more than 10 years (2001-2013) of subnational government debt reduction by approximately 10% of GDP, caused by a combination of primary surpluses and robust economic growth, the flexibilisation of borrowing requirements and the domestic economic recession that started to affect revenues in 2014 resulted in increasing indebtedness. Subnational borrowing levels reached 15.3% of GDP for states and 3.3% for municipalities in 2020. This led to the creation of the Fiscal Recovery Regime for states in fiscal crisis, constituted mainly by reprogramming debt repayments in exchange for austerity measures. Goiás and Rio de Janeiro were the only two states under the Fiscal Recovery Regime.

TERRITORIAL MANAGEMENT OF THE CRISIS: In response to the pandemic, the federal government created the National Coordination Committee for the fight against COVID-19 on 25 March 2020 to debate the implementation of measures and to help coordination with other powers (legislative and judiciary) and levels of government. The Committee is composed by the president of the Federation, of the Senate and of the Deputy Chamber. A representative of the judiciary also participates as an observer.

The existing mechanisms and legal framework influenced the country’s response to the pandemic. The Constitution defines the provision of public health services as a shared competence between the federal and subnational governments and attributes to the central government the responsibility for the edition of general rules (art. 24). It also sets decentralisation and participation as one of the main principles that guide the Unified Health System (SUS). This participation of subnational governments in national decision making about health policy is possible through a series of councils (health secretaries (Conass), municipalities’ health departments (Conasems), states’s delegates (Conares)) and the Bipartite (CIB, of states and local governments) and Tripartite Commissions (CIT, with the three levels together).

Even with the existence of institutions for federative cooperation, a series of conflicts regarding the role of the public sector in the response to the crisis hindered policy coordination. One of the main deadlocks was in the case of social distancing measures, when the central government edited norms (Law 13.979, in February/2020, and MP n. 926, in March/2020) to give the president the exclusive power to define the essential activities which would be exempt from closing. The conflict was taken to the Supreme Court, which, in March 2020, ruled in favor of states and local governments’ competence over those decisions. The acquisition of vaccines was another subject of conflict. In this case, major purchases by the federal government between January and March 2021, and their distribution to states and municipalities, which were responsible to administer the vaccines, settled the dispute. The existing structure and experience accumulated with the National Immunisation Plan (PNI) was decisive to facilitate policy coordination in the area. The PNI, created in 1973, presents a history of integrating the three levels of government to plan, regulate and implement large scale vaccination programs over the vast Brazilian territory. These factors helped Brazil to reach more than 70% of the population being fully vaccinated by the end of 2021, according to data from the Ministry of Health.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Subnational governments encountered difficulty to implement economic and social measures due to their limited fiscal space before the crisis and the immediate impact of the recession on public finances. Moreover, subnational governments are not the main levels of government responsible for social assistance. In this context, social assistance expenses increased by 0.02% of GDP (from 0.03% to 0.05%) both in states and in local governments. The State of São Paulo, for example, which represents 32% of Brazil’s GDP, instituted cash transfers to vulnerable families who were dependent on school meals (0.005% of GDP in 2020) and subsidised loans for affected companies (R$ 2.3 billion on loans, or 0.03% of GDP in 2020). States and municipalities also instituted emergency transfers to vulnerable families and deferrals on the tax on the circulation of goods and services (ICMS), the tax on the ownership of motor Vvehicles (IPVA) and the tax on urban property (IPTU).

The National Congress had a leading role in the discussion of actions to cope with the crisis, approving laws to adopt important financial aid to individuals (such as the emergency transfers to families, of approximately 4% of GDP), states and municipalities (0.8% of GDP). The central government also participated in measures to alleviate subnational finance and suspended debt and interest payments with the Treasury and federal banks.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: State revenues were affected immediately as the ICMS, their main tax revenue, decreased by 20% in the 2^nd quarter of 2020 compared to 2019. By the end of 2020, tax collection recovered to similar levels of 2019 due to inflation and the rise of oil prices (the ICMS had only declined by 1.5% by the end of 2020). During the crisis, states had to cope with the impact of the demand over health spending since they are responsible for medium complexity services, which led to an increase of 14.6% of state health expenses in 2020. Education moved in the opposite direction, and school closure resulted in an expenditure decline of 8%. Although staff expenditure is rigid, extra working hours and auxiliary expenses related to the operation of schools were significantly reduced. In 2020, total primary expenditure remained stable in real values and grew 0.4% of GDP due to the retraction of economic activity.

Municipalities’ tax collection followed the same trend, with a severe decline in the 2^nd quarter of 2020, when the tax on services (ISS) decreased by 20% and the tax on the property of real estate (IPTU) by 21%. By the end of the fiscal year, both taxes presented a softer 4% and 1.7% drop for ISS and IPTU respectively. Local government finances were also affected by the elevated demand of health expenditures, since municipalities are responsible for low complexity services. Their spending on health increased by 8% in 2020, while education expenditures declined by 13%. Total primary spending in 2020 grew by 5% in real terms and up to 0.8% of GDP.

The effects of the crisis on subnational revenue in the 2^nd quarter of 2020 led to negotiations on extraordinary transfers from the central government amounting 0.8% of GDP, divided equally between states and local governments.

ECONOMIC AND SOCIAL STIMULUS PLANS: The central government implemented emergency measures to face the crisis, such as the aid to vulnerable families, the employment maintenance program, credit guarantee operations, transfers to subnational governments and states’ debt payments suspension. These temporary policies were debated mainly between the central government and the Congress. The Chamber of Deputies and the Senate became the main locus of subnational participation in the elaboration and implementation of economic and social policies. Some states and municipalities also implemented transfers to impacted families and tax deferrals, according to their own emergency plans.