Brazil’s economic growth has been lower than in other emerging economies. Strengthening productivity growth and investment will support further progress in improving household incomes while reducing poverty and inequality. Implementing a strong fiscal framework and a comprehensive tax reform, as well as fine-tuning social protection programmes, will restore confidence in public finances and create fiscal space for productive investment. Further reductions in regulatory barriers to competition, including by fostering trade integration, would boost firms’ productivity. Mobilising currently underutilised labour resources by improving female labour force participation and reallocating education spending will help sustain stronger long-term economic growth. Halting illegal deforestation and greening agriculture by investing in smart technologies and training will make growth more sustainable.
OECD Economic Surveys: Brazil 2023
1. Key Policy Insights
Abstract
Introduction
After the deep recession caused by the pandemic, growth rebounded strongly and is currently exceeding the economy’s potential growth (Figure 1.1, Panel A). Unemployment has fallen to its lowest level since 2015 (Figure 1.1,Panel B). Inflation peaked in June 2022 at levels not seen since the financial crisis in 2009 and has come down to the inflation target since.
Figure 1.1. Economic activity is rebounding
Source: OECD analytical database.
The time has now come to re-focus on the pressing structural challenges that Brazil is facing. Productivity has been declining since 2010 and growth in GDP per capita has been disappointing, especially when compared to other emerging economies (Figure 1.2, Panel A). Low investment, particularly in infrastructure, has contributed to declining productivity. Logistics bottlenecks, high costs of transport and a deteriorating quality of roads -on which most of goods and commodity exports are transported- hamper competitiveness (Figure 1.2, Panel B). Competition, a key driver of productivity growth, is hampered by complex regulations and administrative burdens that act as entry barriers, while cumbersome insolvency procedures and judicial uncertainty raise financing costs and slow down the flow of resources to the most productive firms.
Over the last decades, growth has been mostly explained by favourable demographic developments, and a rising labour force supported growing per-capita incomes even as productivity declined. Demographics are now reaching a turning point, and over the next 25 years, rapid population ageing will reverse the entire boost to growth from demographics since the year 2000. Unless gains in labour productivity can offset slower labour force growth, economic growth is set to slow markedly over the medium to longer term.
Boosting economic growth will support further improvements in household incomes but will not be enough to ensure rising living standards for all Brazilians. The first decade of the millennium saw the emergence of an entire new middle class as inequality declined visibly amid strong growth and rising educational attainments (Neri, 2011). Since then, however, the extremes of the income distribution have gained weight again, hollowing out this new middle class. The pandemic support initially overcompensated income losses among poor households in 2020, but its withdrawal led to an increase in poverty rates in 2021 (Neri, 2022). Average real household incomes are now back to their levels of 2012, implying a lost decade in terms of social progress. Brazil has one of the highest levels of income inequality in the world (Figure 1.3, Panel A).
Figure 1.2. Low productivity and infrastructure competitiveness are impeding a stronger growth
Source: World Bank; World Economic Forum; and OECD calculations.
Social policies have played and will continue to play a key role for reducing poverty and fighting inequalities. Brazil’s flagship anti-poverty programme Bolsa Família has been a well-targeted instrument to support those most in need. Its level has been raised substantially, on a permanent basis, in line with earlier OECD recommendations. An outstanding challenge is to find permanent fiscal space to finance this more generous social programme.
Labour market participation and employment remain about 20 percentage points lower among women than among men, and men earn on average 34% more, controlling for differences in qualifications. Lack of childcare services and public urban transport are an obstacle to higher female participation to the labour market. Despite significant public spending on education, learning outcomes remain weak and highly correlated with socio-economic background and race. Further improvements along these dimensions will be key to increase the country’s human capital and potential growth.
Greening the economy represents a challenge but also offers opportunities. Deforestation is now falling again after increases in recent years, which had added to climate change risks. Deforestation is one of the main sources of greenhouse gas emissions, followed by agriculture.
Figure 1.3. Inequalities are high and deforestation has decreased recently
Note: Panel B shows monthly deforestation according to INPE’s deforestation alert system, DETER.
Source: World Bank; Instituto Nacional de Pesquisas Espaciais; and OECD calculations.
However, thanks to a remarkably clean electricity matrix based on hydropower and a rising share of other renewable sources, energy use and production have a relative low carbon footprint. The potential for solar and wind energy generation is outstanding in international comparison and may become a major competitive advantage in the future, with significant potential to strengthen Brazil’s export performance.
Against this background, the main messages of this Survey are:
Implementing the new fiscal framework and a comprehensive tax reform will restore confidence in public finances. Aligning monetary and fiscal policies in the fight against inflation will help to bring it back to target and keep expectations anchored. Social challenges have been forcefully addressed by enhanced social benefits, but further improvements in spending efficiency will be required.
Strengthening productivity growth and investment will be key challenges for the years to come, including by boosting infrastructure investment and improving the planning, selection, prioritisation, and implementation of projects. Reforming the complex tax system and reducing regulatory barriers to competition would also boost firms’ productivity.
Introducing carbon pricing and climate adaptation measures will be key to deal with the challenges of climate change. Halting illegal deforestation and investing in smart technologies, training and financial capacity of low-scale farms will reduce the greenhouse gas emissions and accelerate the greening of the economy.
Following a strong recovery, the economy is growing above the low potential
Growth remains strong
The strong economic rebound from the pandemic that initiated in 2021 continued in 2022 as GDP growth reached 2.9%, significantly above current OECD estimates of potential growth (Table 1.1). Following a slowdown in late 2022, growth rebounded strongly on account of a buoyant agriculture sector. GDP growth is projected to reach 3.0% in 2023 and 1.8% in 2024, driven by strong domestic demand. Household consumption growth continues to be the main engine of growth in 2023 despite tight monetary conditions (Figure 1.4) On the supply side, a record agricultural harvest provided a strong boost to GDP growth in 2023, while the services sector is growing at a slower pace. As external demand is expected to decline and commodity prices fall, exports will contribute moderately to growth. Fiscal policy uncertainty has been weighing on confidence and investment but is expected to dissipate with the implementation of a new fiscal framework.
The labour market has been improving since the pandemic, but unemployment is projected to stabilise over 2023-24. Labour participation remained below pre-pandemic levels over 2022 but is improving, while job creation reached a historic high during 2022. The unemployment rate has declined continuously, from over 14% in early 2021 to 8.0% in July 2023, partly related to lower labour participation (Figure 1.5). Average monthly nominal wage increased by 7.5% in 2022, corresponding to an average real decrease of 1.1%. Higher social transfers to low-income families have contributed to sustained demand in 2022. The effect should be fading in 2023, though the increase of civil servants’ wages announced by the federal government and the permanent increase of social transfers will strengthen aggregate household income.
Table 1.1. Macroeconomic indicators and projections
Note: Contribution to changes in real GDP.
Source: OECD projections, OECD Economic Outlook Database, Central Bank of Brazil, and IMF.
Figure 1.4. Indicators point to growth picking up
Source: CEIC; OECD analytical database; Central Bank of Brazil; and OECD calculations.
Figure 1.5. The labour market has improved but real wages remain below pre-pandemic levels
Note: 1. CEIC seasonally adjusted series by X-12 ARIMA.
Source: IBGE; and CEIC.
Exports growth remained strong during 2022, partly supported by commodities. Favourable weather conditions for agricultural production boosted exports in early 2023 but falling commodity prices and weaker global demand, including from China, Brazil’s main export market, will limit export performance (Figure 1.6). Imports will rebound in 2024 driven by capital goods. The current account deficit in 2022 has been driven by the deterioration of the income and transfers balance but will be recovering in 2023-2024 (Figure 1.7). Overall, the exchange rate remained relatively stable as internal interest rates increased along with increases in advanced countries. The economy has significant cushions against external financial risks, as currency reserves of 15.8% of GDP (as of 2023Q1) make the public sector a net creditor in foreign currency.
Figure 1.6. A balanced export products and destinations matrix
Source: UN Comtrade; UNCTAD; and OECD calculations.
Figure 1.7. The external balance remains robust to foreign financial developments
Note: 1. Moving average, excluding reserves.
Source: Central Bank of Brazil; CEIC; and OECD calculations.
Risks are balanced
Risks to economic activity are balanced. On the upside, a successful implementation of the new fiscal framework and other reforms, could provide an even larger boost to confidence in public finances than expected and sustain stronger investment. A successful adoption of the tax reform in 2023 could raise productivity beyond current expectations (Table 1.2). On the downside, a failure to implement key reform plans, such as the tax reform or the new fiscal framework, could erode confidence, leading to lower growth. Moreover, a slower decrease in inflation could delay monetary policy easing, which would hurt investment and consumption. Finally, weaker growth in China, Brazil’s main trading partner, could lead to lower exports.
Additional risks include the impact of protracted high rates on household debt service costs, especially for revolving loans which have outgrown other loan modalities. Global financial market developments, including policy rates in advanced countries, remain a risk for financial flows and the currency. By contrast, direct macroeconomic risks from Russia’s war against Ukraine are limited, as Brazil’s goods trade with Russia, Ukraine and Belarus is modest.
Table 1.2. Events that could lead to major changes in the outlook
The financial system has substantial safety buffers
Brazil’s financial sector has remained stable and resilient since the COVID-19 pandemic. Bank capitalisation remains comfortably above regulatory requirements (Figure 1.8). Against the background of a recent relaxation of capital requirements aimed at encouraging banks to lend, regulatory capital to risk-weighted assets has decreased by 2 percentage points compared to pre-pandemic levels. Non-performing loans have also been on an increasing trend in 2022 along with higher inflation and interest rates, and the withdrawal of post-COVID-19 policy and financial support measures. Stress tests carried out by the Central Bank (BCB, 2023) suggest that banks are enough resilient to macro-financial shocks and can withstand substantial shocks to growth or risk premiums. Capital and liquidity buffers are adequate, and if needed, banks could draw down their capital conservation buffers and their stock of high-quality liquid assets. High margins point to scope for strengthening competition among financial institutions, as currently pursued by the Central Bank (BCB, 2022).
Figure 1.8. Banks are well capitalised but loan quality has deteriorated
Source: Central Bank of Brazil.
The financial system has substantial exposure to domestic public debt (61%) and financial markets-sovereign linkages should be closely monitored. Government debt is predominantly issued on the domestic market and in domestic currency (Figure 1.9, Panel B). Gross public debt is exposed to roll-over risk as 29% of gross public debt comes due within 12 months, reflecting short average maturities of 4 years (Tesouro Nacional, 2023). Interest expenses are vulnerable to short-term changes in economic conditions as 38% have floating rates linked to overnight interbank rates and 32% of outstanding bonds are inflation-linked. With over 95% of gross public debt denominated in domestic currency, exchange rate risks are not a concern for public debt, especially as foreign-currency bonds have a longer average maturity of 7 years.
Figure 1.9. The financial system is exposed to public debt
Note: Data for 2022Q3.
Source: Bank for International Settlements.
A new instant electronic payment system (PIX) established by the Central Bank in late 2020 and an enhanced credit registry that also includes positive payment histories in addition to payment defaults (Cadastro Positivo) are improving both the efficiency and the inclusiveness of the financial system. Two thirds of the adult population use PIX and 131 million individuals have either made or received a PIX transaction. The progressive introduction of the new credit registry in 2021 has enhanced the sharing of customer data between financial institutions and is supporting competition in financial intermediation. Analysis from the Central Bank suggests the database has led to a 10.4 percent reduction in borrowing costs on non-payroll-deductible loans (BCB, 2021).
Given significant earmarking of bank funds towards directed lending programmes, Brazil’s credit market is segmented into a credit market from non-earmarked sources using market rates and an earmarked credit market with regulated rates. New loans in the non-earmarked credit market have increased three times more rapidly than directed loans from earmarked funds. This reflects the evolution towards a more competitive credit market (Figure 1.10).
Figure 1.10. The competitive segment of the credit market is gaining weight
Note: Both lines include corporate borrowers and households.
Source: Central Bank of Brazil.
Household indebtedness has increased during the post-pandemic recovery. Household debt service stands at 27% of gross disposable income in early 2023 and has been increasing steadily since mid-2021, driven by the sharp rise of interest rates and to some extent by higher debt (Figure 1.11, Panel A). Second, the share of revolving credit lines to households has been increasing since the pandemic (Figure 1.11, Panel B). Mortgages credit remains low. The evolution of revolving credit should be monitored closely, and macro-prudential measures strengthened, to prevent an excessive build-up of debt. A recent programme to promote the debt restructuring of highly indebted households may help reducing debt service burdens and allow them a fresh start. Credit to corporates both from banks and the capital market amount to 51% of GDP and declined marginally in the second semester of 2022 but continued to grow at levels higher than those of the pre-pandemic period (BCB, 2023). Risks associated with credit to firms remain high, but provisions are above the estimated expected losses for the loan portfolio (BCB, 2023).
Figure 1.11. Household debt service has increased and revolving credit lines have gained weight
Source: Source: Central Bank of Brazil.
Monetary policy has reacted forcefully to persistently high inflation
Inflation accelerated substantially from the end of 2020, mostly explained by higher food and energy prices (Figure 1.12). In August-September 2021, the worst drought in over 90 years significantly reduced water levels in the reservoirs used for electricity generation. The drought also contributed to rising food prices, while pervasive bottlenecks in global value chains pushed up prices of industrial goods. As a result, inflation reached more than 10% in 2021, a record high since 2015.
During early 2022, Russia’s war of aggression against Ukraine and the resulting global price surge added to inflationary pressures. Inflation peaked in April 2022, before starting to decline more visibly as of August. Headline inflation has receded from 11.9% year-on-year in June 2022 to 3.2% in June 2023, but then picked up in August (4.16%) and in September (5.2%). It has slightly declined in October to 4.8% and 4.68% in November. Though declining, core inflation remains above headline inflation and the inflation target. The decline of headline inflation was initially mainly due to falling international oil prices and significant tax relief that reduced the tax burden on fuels, electricity, natural gas, communications, and public transport. The tax exemptions on fuels have mostly been removed in early 2023. Since the beginning of the year, the decline in inflation has become broader based, starting with declining food and petrol prices, and then tradable goods. Although core inflation remains far more persistent than the more volatile consumption items, the number of individual items with rising prices is now declining. Slower credit growth will reduce household consumption and contribute to lower inflation. Although ongoing monetary policy tightening in advanced countries may continue to put pressure on the exchange rate, the currency has strengthened recently.
Figure 1.12. Headline and core inflation have declined
1. Core inflation excludes energy and food products. The shaded area corresponds to the inflation tolerance band.
Source: OECD Economic Outlook database; Central Bank of Brazil; and OECD calculations.
The central bank responded swiftly and aggressively to rising inflation and took decisive and successful actions to avoid a de-anchoring of inflation expectations (Figure 1.13). The benchmark policy interest rate (Selic rate) increased from 2% in March 2021 to 13.75% in August 2022. The central bank initiated monetary policy easing in August 2023 by reducing the policy rate from 13.75% to 13.25%, followed by further rate cuts to 12.75% in September, 12.25% in November and 11.75% in December. However, as inflation has declined, real interest rates remain high; currently among the highest among advanced and emerging economies. In light of the downward trend of inflation, there is room to continue easing policy rates, while ensuring that inflation expectations are anchored at the target in the medium run. The recent adoption of a continuous 3 percent inflation target from 2025 onwards, in line with regional peers, should help reduce uncertainty and improve monetary policy effectiveness. Preserving the credibility of monetary policy is essential to maintain inflation expectations firmly anchored. Curbing demand pressures emanating from fiscal policy in the short run and boosting the credibility of fiscal policy in the longer run would support monetary policy in controlling inflation and could allow interest rates to come down further.
Figure 1.13. Monetary policy has reacted successfully to rising inflation
Note: Inflation expectations are calculated as market expectations from the Central Bank’s FOCUS survey, 12-months ahead.
Source: CEIC; Central Bank of Brazil; and OECD calculations.
Fiscal reforms are needed to stabilise public debt and create fiscal space
Fiscal support, provided during the early stages of the COVID-19 pandemic and then in 2022 to cushion the impact of higher international energy prices on households and firms, has been almost entirely withdrawn. In April 2020, the government introduced a temporary emergency benefit of BRL 600 per month for self-employed and unemployed workers earning up to half the minimum wage. The emergency benefit was reduced to half that level in September 2020 and completely withdrawn in December 2020. To cushion the impact of inflation on households and firms, temporary tax exemptions on fuel were introduced in July 2022. These exemptions have been progressively withdrawn in December 2022 and March 2023. Remaining exemptions only apply to diesel and are scheduled to end in December 2023.
COVID-19-related policy measures drove gross public debt to 87% of GDP by the end of 2020. The strong recovery in 2021 and 2022 led to debt receding to 73% of GDP by the end of 2022, but an expansionary fiscal policy, higher interest rates and lower growth are now putting debt on an upward trending trajectory again, with gross public debt reaching about 80% of GDP in 2024 according to OECD projections. OECD debt simulations further suggest that gross public debt will reach 90% of GDP in 2047. This baseline scenario assumes that the adopted new fiscal framework and the tax reform are implemented lifting potential growth by around 0.5 percentage point (Figure 1.14). The primary fiscal surplus would rise to 1.0% of GDP from 2026, accounting for higher tax revenues from improvements in tax collection.
The debt trajectory is highly sensitive to the implementation of the reform agenda. A lower fiscal consolidation (exemplified by a balanced primary surplus from 2025) would lead to a clearly unsustainable debt trajectory with the debt level reaching 100% of GDP as soon as 2037 and a strong upward slope, as shown by the green line. A more ambitious package of structural reforms (see Table 1.3) would boost potential growth and lead to a decline of the debt-to-GDP ratio (the red line in Figure 1.14).
Figure 1.14. Reforms are needed to stabilise gross public debt
Note: Projections of ageing-related expenditures are reflected in all scenarios. In the baseline scenario, the primary fiscal result improves from -1.2% in 2022 to +1.0% of GDP by 2026, in line with projections by the Treasury and the OECD. After 2026 compliance with the new fiscal framework is assumed. The exchange rate and the interest rate are assumed to remain constant after 2025. The tax reform is assumed to boost GDP growth to 2.0% from 2026. The ambitious reforms scenario assumes structural reforms that add an additional 0.5 percentage point as of 2026 (see table 1.3). The slower fiscal adjustment scenario assumes that compliance to the new fiscal rule is not strict, and the primary balance surplus is 1 percentage points below the baseline.
Source: OECD calculations based on National Treasury, IBGE (Instituto Brasileiro de Geografia e Estatística), Brazilian Central Bank and OECD projections.
Table 1.3. Expected gains from structural reform are substantial
Estimated impact of selected reforms on real GDP after 15 years
Note: These estimates were obtained on the basis of the OECD Long term growth model (Guillemette and Turner, 2018). Scenario A assumes aligning product market regulations as captured by the OECD PMR indicator with the current OECD average by 2060. Scenario B assumes a reduction in average tariffs by around 7 percentage points by 2025, when they would reach the level prevalent today in the five OECD economies with the lowest tariffs. In addition, the capital account is assumed to open gradually to reach Chile’s current level by 2025. Scenario C assumes that institutional quality, as captured by the Worldwide Governance Indicators (Kaufmann, Kraay and Mastruzzi, 2010), converges to the current OECD median value by 2060. Scenario D assumes raising public investment by 2 pp. of GDP permanently leading the capital stock to stabilise around 8% higher than in the baseline scenario. The individual reform effects do not sum up to the effect of the ambitious reform scenario due to non-linear effects in the model.
Source: OECD calculations.
Strengthening fiscal rules will be key for debt sustainability and confidence
Brazil’s budget process is constrained by widespread revenue earmarking and mandatory spending floors for certain expenditure items. The 1988 Constitution introduced separate minimum shares of spending earmarked for health, education, and social security. For example, at least 18 percent of tax revenue should be allocated to education at the federal level and 25 percent at the subnational level. While ensuring sufficient funding for health, education, and social security is understandable from a social policy perspective, it limits the flexibility of fiscal policy to account for demographic changes or adjust to adverse economic shocks. Budget rigidities contribute to the pro-cyclicality of fiscal policy and are associated with lower efficiency of public spending (Herrera and Olaberria, 2020).
A significant share of mandatory expenditures is indexed, either to the minimum wage or inflation. Minimum pension benefits, which the overwhelming majority of pension beneficiaries receive, are indexed to the minimum wage, leading to increases in the minimum wage having sizeable fiscal implications. Indexation has led to a considerable increase in mandatory expenditures and reduced fiscal space. At the end of 2022, 91% of the proposed budget for 2023 reflected mandatory spending, leaving the new government with very limited fiscal space for implementing policy priorities and also for public investment.
Public finances have been governed by a series of fiscal rules, often strongly focused on the short-term. Fiscal targets can change every year, creating some uncertainty about the fiscal stance in the medium-term. A public expenditure ceiling established in 2016 sought to make fiscal policy more predictable and soon became the most binding fiscal rule. The rule restricted real spending growth to zero, but without addressing constitutionally mandated spending items and automatic indexation mechanisms.
Ad hoc changes to the fiscal rules became increasingly frequent to avoid breaching the rules, weakening the credibility of the fiscal framework. In 2021, for example, large spending items were excluded from the spending ceiling and the primary balance target. Successive changes have created fiscal uncertainty and made the rules more difficult to enforce. Without a waiver from the rule for 2023 voted by the Congress in December 2022, a recent 50% increase in benefit levels of the Bolsa Família transfer programme, one of the main electoral promises of the current administration, would not have been possible.
A new fiscal framework was approved by Congress in August 2023, meant to enhance medium-term predictability in public finances while also adding flexibility, most notably for investment. The new fiscal framework establishes a rolling four-year primary balance target, with a tolerance band of 0.25 percentage points around it, providing a prudential margin to accommodate moderate shocks affecting public finances. Real growth in public spending is allowed, within a range of 0.6% and 2.5%, but capped at 70% of the previous year’s effective revenues growth. This ensures that spending is not based on unrealistic assessments of future revenues. It also guarantees that whenever revenues exceed expectations, part of it is used to reduce public debt. The new framework also contains a mechanism to bring the primary balance back to target when deviations occur: If the actual primary balance is below the floor of the tolerance band, public spending growth in the following year will be limited to 50% of effective revenue growth. The new rules replace the current primary balance target and the expenditure ceiling rule, albeit at the cost of additional complexity.
The new framework also establishes that the annual budget law should provide public debt projections over 10-years, assuming compliance with the established primary balance targets, to assess the associated debt-to-GDP trajectory and fiscal sustainability. Experience from other countries points to the benefits of using the debt trajectory to anchor fiscal rules (Fall et al., 2015). In Colombia, for example, despite compliance with the structural primary balance target introduced in 2011, debt continued to increase significantly. To address concerns regarding the long-term sustainability of public finances in Colombia, the medium-term fiscal framework was reformed in 2021 to formally link the structural primary balance target to a sustainable public debt trajectory (Box 1.1).
Reducing budget rigidities is one area where the new rule is unlikely to bring much progress. Scaling back mandatory spending floors and earmarked revenues, while rethinking some automatic indexation mechanisms, would allow more flexibility to adjust policies to changing priorities and Brazil’s volatile macroeconomic environment and should be a priority (OECD, 2020a; Medas, 2019). Developing indicative and rolling multi-year budget plans would be a better alternative option to ensure appropriate funding of priorities and to protect public investment and social spending over time (Box 1.2).
Box 1.1. Colombia’s Medium-Term Fiscal Framework
Following the pandemic and the temporary suspension of fiscal rules in 2020, the Colombian government enacted the “Social Investment Law” in 2021, which re-activated the fiscal framework and re-anchored the fiscal path with explicit deficit targets linked to a new debt limit. In this revamped medium-term fiscal framework, the net government debt should not exceed 71% of GDP in any circumstances. Nonetheless, the structural primary balance target should be calculated and defined so that the net government debt reaches 55% of GDP, to provide a prudential margin. If public debt at some point exceeds 71% of GDP, the structural primary balance target will be automatically set to at least 1.8% of GDP until debt is brought back below its limit.
Source: Comité Autónomo de la Regla Fiscal (carf.gov.co).
In Brazil, annual budgeting often fails to take into account the full cost of policy decisions and it also fails to provide resource predictability for line ministries. Since the early 2000s, multi-year plans, known as Planos Plurianuais, were meant to provide medium-term guidance on public spending. However, the link between the multi-year plans and annual budget laws is weak, and they are not binding. The allocation of budget resources across ministries should be anticipated and discussed for multiple years to ensure compliance with the new medium-term primary balance target. The budget allocations should guarantee that multi-year fiscal objectives are effectively translated into budget execution. Several OECD countries have successfully implemented multi-year budgeting planning (Box 1.2). The new fiscal framework provides for the establishment of a new medium-term budget plan, with a rolling four-year horizon, which would be annexed to the annual budget law and should be swiftly implemented.
Box 1.2. Multi-year budgeting in selected OECD countries
Medium-term budgeting has long been proposed to reduce over-reliance on annual budgets. Australia was the first OECD country to introduce a medium-term budget framework in 1983 and many countries followed with some sort of medium-term budget plan, based on different approaches.
Indicative multi-year budget plans. Some countries use indicative multi-year expenditure and revenue estimates, presented with the annual budget and intended to reflect future costs of current policies. Indicative multi-year budget plans can contain significant detail. In New Zealand, for example, the indicative multi-year budget plan is broken down to the programme level. In Canada, multi-year plans are detailed at the ministry level. These detailed multi-year estimates are meant to inform and guide the decision-making process, without binding future decisions.
Binding multi-year budget plans. In other countries, multi-year expenditure and revenue estimates are presented with the annual budget as a commitment and are intended to bind future policy changes. In such cases, the level of detail tends to be lower, and the frequency of revisions varies depending on the level of aggregation. In Austria, Finland, the Netherlands, and Sweden, a binding expenditure limit is fixed for the central government for two or more years and cannot be revised. Multi-year limits on expenditure categories within that aggregate ceiling are not imposed but left to the annual budgeting process. In France and the United Kingdom, multi-year expenditure limits are fixed for each line ministry but can be revised during that period. Australia publishes binding multi-year expenditure estimates for each programme, which can be revised twice a year under specific circumstances.
Source: Jason, H. et al. (2013), "Chapter 4: Medium-Term Budget Frameworks in Advanced Economies: Objectives, Design, And Performance". In Public Financial Management and its Emerging Architecture. USA: International Monetary Fund. Retrieved from https://www.elibrary.imf.org/view/book/9781475531091/ch004.xml
Subnational governments can create sizeable fiscal risks for the central government. Current law establishes several rules regarding debt and wage bill limits to prevent the build-up of fiscal imbalances at the subnational level. However, these rules have not been effectively monitored and are hard to enforce, ultimately leading to soft budget constraints for subnational governments (Medas et al., 2019). The debt ceiling is defined at 200% of net current revenues for states and 125% for municipalities, allowing for large increases in spending and debt during economic booms, which are then hard to revert during downturns. A few states and municipalities have built up large debt over time and some of them are still taking up more debt than allowed by law. The Federal government intervened several times on subnational finances, creating an expectation for future financial support, and incentives for further spending (Bornhorst et al., 2019).
In practice, the CAPAG system (“Capacidade de Pagamento”) has been the most effective tool to limit fiscal risk from subnational governments by conditioning federal guarantees for new subnational lending to minimum fiscal performance standards (Box 1.3). To remain relevant, the CAPAG indicators’ thresholds should be regularly updated and calibrated based on rigorous debt sustainability analyses. In the future, the CAPAG ratings could be used to determine the extent of permitted new borrowing of subnationals rather than to decide eligibility for federal guarantees. This would allow those subnational governments with strong fiscal accounts to borrow more, while in turn creating long-term incentives for subnationals to strengthen their fiscal accounts.
Brazil’s high degree of decentralisation would even require more coordination in the pace of fiscal adjustment across levels of government. So far, the government has not clarified how efforts to comply with the new fiscal rules will be distributed across the central government, states, and municipalities, nor how the new fiscal rules will interact with other existing rules, such as the Golden Rule, which has done little to preserve public investment in the past. Complexity could be reduced by consolidating all fiscal rules into one law, ensuring consistency and clarifying the hierarchy among different fiscal rules.
Box 1.3. The “Capacidade de Pagamento” or CAPAG internal credit ratings system
Subnational governments applying for credit guarantees from the Federal government are subject to a system of internal credit ratings. Subnational entities can be classified in one of four categories, reflecting the health of their fiscal position. Ratings are determined according to: (i) the ratio of gross consolidated debt to net current revenues; (ii) the ratio of current expenditures to adjusted current revenues; and (iii) the ratio of financial obligations to gross disposable cash balances. To be eligible to receive a credit guarantee from the Federal government, a subnational government must achieve a minimum rating standard.
Source: Saxena (2022), How to manage fiscal risks from subnational governments, How To Notes, Note 22/03, Fiscal Affairs Department, International Monetary Fund, Washington D.C., September 2022. ISBN 9798400218378; Medas et al. (2019), “Brazil: Strengthening the framework for subnational borrowing”, Technical Report, Fiscal Affairs Department, International Monetary Fund, Washington D.C., July 2019.
Table 1.4. Past OECD recommendations on fiscal policies
Redesigning the tax system can strengthen growth and equity
Brazil’s tax system is extremely complex and induces several distortions to the economy. First, tax compliance costs are among the highest in the world (Figure 1.15). From an efficiency perspective, costly compliance activities can be seen as a waste of economic resources, as they increase the implicit tax burden of individuals and businesses without increasing the revenues of the government. Second, the incentives created by the current tax system distort economic decision-making and the optimal allocation of resources. Finally, complex rules can provide tax planning opportunities for well-informed taxpayers, thus contributing to the persistence of income inequality.
Figure 1.15. Tax compliance costs are extremely high
Hours required to prepare taxes, 2018
Source: World Bank.
There is ample scope to simplify indirect taxation, for instance. Currently, there are five main different taxes on the consumption of goods and services, applying to sometimes overlapping bases and at different levels of government: three federal taxes (PIS, Cofins and IPI), one state tax (ICMS) and one municipal tax (ISS). None of these taxes has a large base: the IPI only applies to industrial goods; the ICMS applies to the sale of merchandise and to transport and communication services provided across municipalities and states; the ISS applies to remaining services defined in a list; PIS and Cofins apply only to firms’ revenues. It is often difficult to determine where the scope of the ISS ends and where the incidence of the ICMS starts. Determining which goods and services fall into the category of industrial goods for the IPI is also a frequent source of litigation.
The PIS, Cofins and the ICMS are in principle designed to be mostly non-cumulative, although businesses’ right to claim tax credits for these taxes paid on intermediate inputs are often restricted and subject to complex definitions and procedures, which gives rise to excessive litigation. Obtaining tax credits for interstate transactions is even more cumbersome. Finally, it can take years in Brazil for firms to receive the accumulated tax credits from the tax authorities.
The ICMS tax is not fully uniform across states, adding even more complexity and hampering interstate trade. Each state applies its own tax rate(s), exemptions, and tax benefits, so that de facto companies wishing to sell goods and services nationwide are required to comply with 27 different tax codes. For foreign companies wishing to enter the Brazilian market, this represents a significant barrier to entry. For interstate transactions, the system applies a mixture between origin and destination principles, leading often to double taxation.
Consumption taxes are not uniform across sectors, resulting in distortions and misallocation of resources across sectors and firms. The ISS, which applies to most service activities, has a lower tax rate than the other taxes. As a consequence, firms have low incentives to hire services from external firms in other sectors of activity that do not fall into the ISS list, even if these firms are more productive. Imported services and financial transactions are subject to, yet, another tax, called CIDE, with a tax rate that can go up to 50% in some cases, which precludes Brazilian firms from the competitive advantage of imported tradeable services.
Several proposals have been put forward to reform the indirect tax system. The Senate and the Chamber of Deputies have both made comprehensive proposals to consolidate the different consumption taxes into a unified value-added tax. These proposals have been combined into a single draft law and endorsed by the government. The resulting draft law is based on simple rules harmonised across states, a broad base, full tax credit of the value-added tax on all inputs and zero rating for exports. The proposal unifies three federal taxes (PIS, COFINS, IPI), as well as one state and one municipal tax (ICMS and ISS, respectively), into separate value added taxes (VATs) administered by the federal and the subnational governments. These two VATs would have a common tax base, but states could apply different rates, while taxing on the basis of the destination of goods and services. The reform also introduces a fund to compensate states that lose revenues after the changes, to be financed by the federal government. Finally, the new draft stipulates a specific timeline for the transition to the new system, beginning in 2026 and ending in 2033 for taxpayers. Questions that are currently still open to debate include the extent of exemptions and different rates across goods and services.
The government has made reforming the taxation of consumption goods and services a key priority. A special secretariat has been established to provide accurate assessment of the different options and drive the negotiations between the two chambers of Congress and the government, with a view toward distilling a consensus approach from the two existing proposals. Congress finally approved the consumption tax reform in December 2024. One of the main political challenges related to the distribution of revenues across subnational governments. Some states and municipalities will experience significant revenues shortfalls with a full application of the destination principle. To address these concerns, both proposals guarantee a long transition period of 15 to 50 years, during which the current distribution across states would be preserved initially, adjusted for inflation, and progressively changed to the destination principle. This will ensure that states have time to adapt and allow the likely growth dividend from this tax reform to materialise. India faced similar challenges for the VAT reform implemented between 2003 and 2017 (Box 1.4).
Box 1.4. VAT reform in a federal state: the case of India
India has 29 states and six union territories, and all 29 states have revenue-raising authority. Prior to the reforms, states’ own revenues accounted for about one third of public revenues.
Before the reform
States’ tax revenues came mostly from indirect taxes including a sales tax on commodities and another tax on commodities traded across states, called the central sales tax (CST). States also collected a 4% tax on inter-state trade of domestic goods. State governments could set differentiated tax rates by product. Some states had up to 19 different rates, ranging from 0.25 to 37%.
The introduction of a VAT on commodities in 2003
For commodities, the sales tax was replaced with a VAT in 2003. VAT rates were harmonized across states with a 12.5% standard rate, a 4% reduced rate for basic goods, and a 1% rate on gold, silver, precious and semiprecious stones. The VAT allowed input tax deductions and was progressively implemented from 2003 to 2008. The interstate tax rate was progressively lowered and finally removed in 2017. To limit revenue losses, the central government compensated states in the first three years.
The introduction of a national-level Goods and Services Tax (GST) in 2017
Multiple indirect taxes were merged under the Goods and Services Tax, a comprehensive consumption tax levied on all goods and services with two components: a Central Goods and Services Tax, levied by the Central Government, and a State Goods and Services Tax, levied by subnational governments. For the inter-state trade of goods and services, an Integrated Goods and Services Tax was introduced, as the sum of the above. The Goods and Services Tax rate varies from 5% to 28% depending on the goods and services, being 18% in most cases.
Source: Sen A. and S. Wallace (2022), “The Revenue Productivity of India’s Subnational VAT”, National, Tax Journal, vol. 75, n0 4; OECD (2019c), “OECD Economic Survey of India”; PWC: https://taxsummaries.pwc.com/india/corporate/other-taxes
The adoption of a unified value-added tax instead of the current multiple consumption taxes will align Brazil with OECD best practices and reduce distortions. The benefits of a well-designed VAT include its neutrality for production and sourcing decisions as long as the VAT is guided by the destination principle. Current discussions should avoid replicating a regime of broad exemptions over a long period, which would undermine the expected gains from the reform. Moreover, using new digital payment and identification systems could be explored to include a targeted social benefit dimension in the reform. For instance, low-income households and the beneficiaries of social transfers could be granted a reduced VAT rate for limited purchases of essential goods using a combination of identification instruments, including the PIX payment system.
Beyond consumption taxes, there is also scope to reform income taxes. A current personal income tax deductibility of expenditures for private health and education expenses has regressive distributional effects, as 90% of Brazilians have incomes below the threshold where they would pay income taxes and only 25% of Brazilians are subscribed to private health plans, while most of the population relies on the public health system. Phasing out these deductions could save 0.3% of GDP.
In the area of corporate taxes, Brazil’s transfer pricing rules for affiliated of multinational enterprises have been aligned with the OECD transfer pricing standards as the result of a joint project between the OECD and Brazil’s tax authorities.
A targeted corporate tax regime for small and medium enterprises called Simples Nacional combines a lighter tax burden with a simplified calculation of tax liabilities based on turnover, replacing up to 9 separate taxes. The eligibility condition for the simplified regime is to have revenues below approximately USD 1 million, which is high in international comparison and discourages firms to grow beyond the threshold. Being based on revenues rather than income, it also discourages sourcing intermediate inputs from potentially more efficient external providers. For very small firms, the easier compliance may outweigh these considerations. However, with its high participation ceiling, the regime is currently used by 74% of Brazilian firms and could be much better targeted, including by reducing the participation threshold. Especially once the VAT reform reduces the cost of compliance with the general regime, the case for maintaining this special regime in its current size will become much weaker. Filing as a corporate entity under Simples Nacional has also become a preferred choice for high-income professionals, as this can reduce the effective tax burden from almost 50% to as little as 11.5% for those with few deductible expenses (Appy, 2017). Brazil also has the smaller Microempreendedor Individual programme, with a ceiling of USD 16,000 in turnover. At significantly lower fiscal cost, this programme has contributed to lower informality among low-income entrepreneurs, especially women (OECD, 2012). Going forward, Brazil should evaluate the design of its presumptive tax regimes and align it with international good practice (OECD, 2023).
Taken together, subsidies and tax expenditures amounted to 3.8% of GDP in 2021 (DEAP, 2022), or 4.9% of GDP at the federal level when including the simplified SME tax regime. The economic case for reconsidering many of these is strong, but the political economy is not easy. This said, a reduction of subsidies and tax expenditures on the order of 2% of GDP appears feasible (OECD, 2020).
Table 1.5. Past OECD recommendations on tax policies
Fighting corruption and tax avoidance will increase tax collection
Raising the efficiency of public spending will not be possible without further improvements in the fight against corruption and economic crimes. Corrupt practices and kick-backs waste public resources, increase the perception of political and litigation risk, deteriorate the investment climate of a country, and exacerbate income inequalities by allowing relatively prosperous public officials and businesspeople to divert taxpayer resources. Comparative indicators of corruption perceptions point to significant challenges in economic governance (Figure 1.16). Beyond perceptions, systematic evidence with respect to high-level corruption is scarce with the exception of a few high-profile cases that have emerged since 2014. Economic crimes have surfaced in the context of public procurement, including by state-owned companies or tax expenditures to the benefit of specific companies and sectors.
Brazil has made some progress in fighting corruption and money laundering and has strengthened its institutions to combat corruption over the past two decades. The National Strategy to Combat Corruption and Money Laundering (ENCCLA) is the main network involving approximately 90 public institutions, as well as the Public Prosecutor's Office. It oversees updating the strategy to combat corruption, develops training and guidance, and monitoring the development of corruption practices. Each year, ENCCLA defines action plans to tackle new roads of corruption and has proposed laws, decrees, and normative instructions to improve corruption prevention and detection.
Figure 1.16. Corruption indicators in international context
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy
Project, V-Dem Dataset v12.
Regular audits and strict control mechanisms are key instruments to avoid the diversion of public funds from their public-interest objectives. Brazil’s practice of budget amendments for individual parliamentarians, for instance, allocates federal funds to members of Congress for projects in their constituency, with little de facto oversight or audits. This practice creates rooms for political or electoral considerations to prevail over a consistent prioritisation of spending needs (World Bank, 2017). Budget amendments for parliamentarians represented about one-quarter of Brazil’s discretionary federal budget in 2022, at a time when the need for fiscal consolidation, together with increasing mandatory spending, had already left limited fiscal space for public investment (Figure 1.17). These budget amendments should be limited and systematically audited for more transparency, as recommended in previous OECD Economic Surveys of Brazil (OECD, 2020a). A recent Supreme Court decision to improve the transparency of these budget amendments is a step in the right direction.
Figure 1.17. Budget amendments for parliamentarians have gained importance in recent years
Allocations in budget amendments for parliamentarians
Source: Portal da Transparência, Controladoria-Geral da União (CGU).
Large-scale public procurement, including in the context of infrastructure projects and the operation of state-owned companies, are typically among the government activities most vulnerable to governance challenges and corruption, and also present risks of collusion among bidders in public auctions (OECD, 2016). These challenges, partly addressed by a new Public Procurement Law of 2021, will be discussed in Chapter 2 of this report, which is dedicated to infrastructure investment.
A string of prominent corruption cases has been uncovered based on whistle-blower reports. Brazil has made progress in protecting whistle-blowers, including civil servants, involved in anti-corruption investigations against the criminalisation of and retaliation for their activities. Some recent progress in 2018 and 2019 strengthened transmission channels and protections for whistle-blowers. In 2021, a new Anti-crime Law protecting whistle-blowers entered in force. It applies to whistle-blowers reporting public corruption and any fraud related to government procurement and contracts and SOEs. The federal whistle-blower protection system includes a national computerised system for receiving complaints with built-in identity protection mechanisms, as well as a centralisation of channels for receiving complaints through public ombudsperson offices. The identity protection is meant to safeguard whistle-blowers against retaliation and improve incentives for coming forward.
Most OECD countries have dedicated whistle-blower protection laws, like the one implemented by Australia in 2019. However, the new law on the abuse of authority is unnecessarily vague (OECD, 2019a), leaving room for retaliation from powerful suspects by allowing prosecution of officials if they prosecuted a case “without just cause”, though there has been no retaliation case so far. The proposal from ENCCLA of improvements in public programmes for reporting corruption and to increase trust and engagement of citizens in reporting channels, including issues related to gender, as well as identifying technological initiatives should be implemented.
On the revenue side of public accounts, a strong tax administration is key to collect revenues. This is also important for ensuring equal treatment across taxpayers, as those with higher incomes can often identify more opportunities to avoid paying taxes owed. Brazil’s tax administration has made progress in digitalisation and automation. For instance, automatic letters are sent to taxpayers in self-assessment where there are divergences on the declared values from the data held. Electronic compliance checks are used to detect tax under declaration or mistakes. In 2021, 40,000 taxpayers, totalling BRL 7.4 billion in amounts subject to self-assessment were summoned thanks to electronic compliance checks (OECD, 2022a). Brazil has also started to apply behavioural analysis to tax data to better target messages to different groups of taxpayers (OECD, 2022a).
However, Brazil has around 7.3% of 2022 GDP in outstanding administrative court tax appeals (OECD, 2022a). It takes about six years for an appeal ruling and the number of outstanding appeals is constantly rising. Increasing the number of independent reviews of audits of taxpayers before litigation procedures would strengthen the efficiency of tax collection, as internal audits of taxpayers’ cases are relatively infrequent (Figure 1.18, Panel A). The dispute resolution mechanism could also be improved (Figure 1.18, Panel B). The effectiveness of Brazil’s judiciary is hampered by an extensive array of appeal possibilities that creates court congestion (OECD, 2020a). As disputes can be resource-intensive processes, preventing them is the most effective strategy, and a key element in the dispute prevention framework is the provision of guidance and advice to taxpayers. Many administrations offer specific dispute prevention mechanisms. For example, the Review and Dispute Resolution (RDR), an independent unit within the ATO, is responsible for the objection and litigation functions of the Australian Taxation Office. The RDR offers an independent review of the technical merits of an audit case prior to the finalisation of the audit. It aims to encourage early engagement to resolve disputes (OECD 2022a, Australian Taxation Office, 2022 and OECD, 2019).
Figure 1.18. Performance indicators of the tax administration
Note: PIT: Personal income tax; CIT: corporate income tax.
Source: OECD Tax Administration 2022.
A well-functioning justice system is fundamental for fighting corruption, but also for improving the enforcement of contracts. Enforcing contracts through the judicial system is lengthy and the outcome is often uncertain due to the significant discretionary power of judges. The cumbersome procedures of dealing with courts can substantially add to firms’ costs and reduce their productivity. Enforcing a standard debt contract takes significantly longer than in regional peers (OECD, 2018a). The time and value losses resulting from inefficient processes of resolution of contractual conflicts and insolvency situations are a key constraint for the investment climate (Canuto, 2016). Measures to enhance the efficiency of the judicial system adopted across OECD countries include reorganising courts, implementing electronical judicial files and promoting out-of-court solutions to conflicts. Increasing competition in the legal profession can also induce lower litigation and hence have a positive effect on the efficiency of the system.
Table 1.6. Past OECD recommendations on corruption
Re-organising social protection programmes could strengthen spending efficiency
Social policies have played a key role for reducing poverty and inequality in the last decades. Brazil has a sophisticated array of social protection instruments, with the co-existence of different benefits sometimes conflicting with spending efficiency. Brazil’s flagship anti-poverty programme Bolsa Família covers more than 21 million households and has been a key instrument to support those most in need (Box 1.5). By making means-tested cash transfers conditional on children’s school attendance and basic health check-ups, it also lays the foundations for families to move out of poverty over time.
To mitigate the impact of inflation on low-income households, and in line with recommendations in previous OECD Economic Surveys of Brazil, the government permanently raised the minimum cash transfer value of Bolsa Família in early 2023, from BRL 400 to BRL 600. The minimum benefit, which had already been temporarily raised during the pandemic to address massive income losses (Box 1.5), now represents about 45% of the minimum wage. This measure will have a manageable fiscal impact of 0.5% of GDP in 2023, raising the total cost of the programme to around 1% of GDP (IFI, 2022).
Enhanced cash transfers will help to address new surges in poverty and inequality. They were effective in alleviating poverty during the first year of the pandemic (Figure 1.19). However, as much of the additional benefits were withdrawn in 2021, poverty reached a 10-year high in that year (Box 1.5). Pending the release of full household data for 2022, early evidence based on a smaller sample suggests that poverty has fallen again in 2022, relative to the peak in 2021 (Duque, 2023).
Box 1.5. Recent developments in Brazil’s flagship anti-poverty programme Bolsa Família
Brazil’s flagship anti-poverty programme is known as Bolsa Familia. Based on a fairly complete nationwide registry of poor households and their living conditions, the programme has proven a powerful and well-targeted tool to reduce poverty. Its main principle is to define a maximum eligibility income, and all households with children and with incomes below that threshold can benefit from a cash transfer that will lift their incomes above this level. Eligibility is therefore not limited to formal workers.
The attached conditionalities of Bolsa Família regarding school attendance and medical check-ups also help to reduce inequalities with respect to education and health, which further strengthens future economic opportunities for those living in poverty. The programme has had well-documented positive impacts on schooling, health and social mobility.
Between 2014 and 2019, the programme’s budget declined by 13% in real terms. Regular readjustments of benefit levels were halted, and the average monthly benefit plummeted 20% at a time when poverty and inequality increased (Barbosa et al, 2020). Some adjustments took place in 2016 and 2018, but they were insufficient to replace the real losses and the average benefit level at the end of 2019 was 16% below the historical peak in real terms.
To address massive income losses during the pandemic, the government launched the Auxílio Emergencial programme in April 2020. An original government proposal for a monthly BRL 200 benefit was raised to BRL 500 by Congress and finally defined at BRL 600 in an agreement between both. The 13 million beneficiaries of the Bolsa Família programme were automatically eligible but had to substitute one benefit for the other. The programme remained in place throughout 2020, with benefit levels being halved in the last months of the year, when they were temporarily interrupted, before being re-instated with a slightly different design between April and September of 2021.
When the Auxilio Emergencial ended in October 2021, the Federal Government renamed the Bolsa Família programme to Auxílio Brasil. The new programme’s eligibility line was slightly increased from BRL 178 to BRL 210. Changes also included new additional bonuses, but a lesser role for the conditionalities related to school attendance and healthcare. Further temporary bonuses then took the average benefit level of Auxílio Brasil to around BRL 400.
In early 2023, the government reinstated Bolsa Família, discontinuing Auxílio Brasil and permanently increasing the cash transfer value to BRL 600. The original conditionalities related to school attendance and healthcare were fully re-established in the new Bolsa Família design.
Source: Barbosa et al. (2020), “Income Distribution in Brazil during the 2010s: A Lost Decade in the Struggle Against Inequality and Poverty”, Commitment to Equity (CEQ) Working Paper 103, CEQ Institute, Tulane University; OECD (2020), OECD Economic Surveys: Brazil 2020.
Income inequality followed a similar pattern as poverty until 2021 when calculated on the basis of household data. However, combining these with tax data, which allow a better coverage of high-income households, suggests that income inequality is not only much higher, with a Gini coefficient exceeding 70, but also does not appear to have declined during the pandemic (Neri, 2023).
Figure 1.19. Poverty and inequality have increased again in the last years
Source: World Bank based on IBGE: Pesquisa Nacional por Amostra de Domicílios.
Beyond Bolsa Família, there is scope to consolidate various social protection programmes to reduce duplication and save resources that could be redirected to protect the most vulnerable. Brazil’s overall public spending is higher than the Latin American average (Figure 1.20, Panel A) and social spending is the highest expenditure category (Figure 1.20, Panel B).
Figure 1.20. Public spending is high compared to peers
Source: IMF; Central Bank of Brazil; National Treasury; and OECD calculations.
Unemployment benefits for formal sector workers, for instance, present scope for reforms that could improve spending efficiency. Two separate social protection instruments serve essentially the same purpose of providing resources to dismissed formal-sector workers (OECD, 2020a). Seguro Desemprego, with a fiscal cost of about 1% of GDP, pays up to two minimum wages for a period of 3 to 5 months and is financed through earmarked resources from a turnover tax on firms. FGTS (Fundo de Garantia do Tempo de Serviço) is an individual unemployment account paid upon dismissal, based on contributions from the employer and the Federal government, with a fiscal cost of about 0.3% of GDP. More recently, annual withdrawals have become an option, but workers who exercise it have no further withdrawal available in case of dismissal, which defies the purpose of the scheme.
The two schemes could be merged, which would reduce public spending on unemployment insurance by approximately 0.6% of GDP (World Bank, 2017). These savings would allow a reduction in mandatory social security contributions, as recommended in previous OECD Economic Surveys of Brazil (OECD, 2020a). In fact, non-wage labour costs in the formal sector currently exceed 35% of wages for minimum-wage earners, creating incentives for evasion through the creation of informal jobs.
Around 40% of active Brazilians still work in the informal sector, less than in many other Latin American countries, but more than the average in the OECD. Informal workers are not currently covered by any of the unemployment benefit programmes, although they are probably the ones most in need of protection. For informal workers, Bolsa Família is currently the only programme that can protect them against unexpected income losses from dismissals, but that would require making benefit disbursements more responsive to changes in beneficiaries’ personal situation by speeding up processing of benefit claims. Currently, these can take months or more, while dismissed workers need immediate income support.
In the medium-term, Bolsa Família could become the basis for a universal means-tested and tax-financed basic social safety net that would pay benefits to all those with incomes below the poverty line, including formal workers who lost their jobs. For formal-sector workers earning more than the minimum wage, contribution-based unemployment insurance, with progressive contribution and benefit levels, could top-up this basic safety net to achieve a higher replacement rate. Formal workers earning around the minimum wage could be exempt from these contributions. Such a reorganisation would shift part of the financial burden of unemployment protection to general tax revenues and would allow lower social security contributions for workers earning close to the minimum wage. This would reduce non-wage labour costs and strengthen formalisation incentives in the most relevant income range for fostering the transition from informal to formal jobs.
Additional programmes for formal-sector workers include the Abono Salarial and Salário Família. Abono Salarial is a wage subsidy granted to all formal workers earning between one and two minimum wages per month. The Salário Família benefit, in turn, is a wage subsidy to formal workers with children below the age of 14 and earning up to 1.35 minimum wages. Given that at least 60% of Brazilians have per-capita incomes below one minimum wage, the beneficiary income ranges of these programmes are considerably above the median income (Figure 1.21). As a result, these benefits are not well targeted and could be reconsidered.
Figure 1.21. Social benefits tied to the value of the minimum wage are not well targeted
Note: Extreme poverty is defined as earning less than 2.15 USD 2017 PPP per day. Poverty is defined as earning less than 6.85 USD 2017 PPP per day.
Source: IBGE (PNAD Contínua) and Banco Central do Brasil.
Old-age pensions have achieved almost universal coverage in Brazil through a combination of contributory and non-contributory pensions. Current public spending on pension is 10.4% of GDP, which is high relative to the share of the elderly in the population (Figure 1.22, Panel A). Pension expenditures will continue to rise as Brazil’s population is one of the world’s fastest ageing (United Nations, 2015). Life expectancy at birth has increased by almost 6 years since 2000, reaching about 76 years in 2021, 80 years for women and 72 for men (OECD, 2021a).
The 2019 pension reform marked an important step to contain future increases in pension costs and strengthened the system’s sustainability. It introduced a general minimum retirement age of 62 years for women and 65 for men, raising the effective retirement age to levels closer to the OECD average (Figure 1.22, Panel B). It is estimated that the 2019 pension reform will generate savings of about 10 percentage points of GDP over 10 years (OECD, 2020a; IFI 2019). Further reforms may become necessary to stabilise pension spending in the coming years as it is projected to increase again from 2028 onwards, reaching 12.46% of GDP in 2060 (MTP, 2022).
One further reform option would be to reconsider the current indexation of pension and other formal-sector benefits. Currently no old-age pension benefit can be lower than a full minimum wage, whose real value has increased by 33% over the last 15 years and is now between the 60th and the 70th percentile of the income distribution. This strong effective indexation explains Brazil’s high pension replacement rates (OECD, 2021b) and has mostly benefited households with above-median incomes, exacerbating income inequality. Adjusting social security benefits, including pensions, in line with inflation could free up resources to finance the higher level of Bolsa Família and reallocate social spending towards those that need it the most. Removing the automatic link between pensions and the minimum wage would generate savings of about 6.1 percentage points of GDP by 2050 (Cuevas et al., 2019).
Figure 1.22. Despite improvements since the 2019 reform, spending on pensions is still high
Note: The net replacement rate is the individual net pension entitlement divided by net pre-retirement earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners.
Source: OECD pensions at a glance 2021; World Bank; Tribunal de Contas da União; and OECD calculations.
Table 1.7. Past OECD recommendations on social policies
A reform of the public administration could create additional fiscal space
Brazil’s public sector wage bill for current and retired civil servants is high in international comparison, including when compared with emerging economies and Latin America (Figure 1.23, Panel A). Most of public employment is concentrated in subnational governments, where the wage bill is now well above half of the primary expenditure (Figure 1.23, Panel B). Containing the growth of the wage bill, by strengthening links between pay and performance instead of seniority, will be key to comply with fiscal rules and ensure fiscal sustainability, while also bringing positive benefits for productivity. In fact, the significant space taken by staff costs limits other productive spending, such as public investment (see Chapter 2). Congress is currently discussing a reform proposal aimed at modernising public administration management. The proposal seeks to introduce regular and systematic performance evaluations of civil servants, particularly during the probationary period. If approved, this reform could bring fiscal savings of up to 8% of GDP in ten years (IPEA, 2020). The Federal government is currently working on a parallel proposal to enhance the efficiency of the public administration.
Figure 1.23. Brazil’s public sector wage bill is high in international comparison
Note: In panel B, "lowest", "median" and "highest" refer to the state with the lowest, median and highest wage bill as a % of primary current expenditures in 2021, respectively.
Source: IMF Government Finance Statistics; National Treasury of Brazil; and OECD calculations.
Table 1.8. Fiscal impact of recommendations
Note: Numbers in this table are estimates and some are subject to uncertainty. Implementation would take several years.
Additional reforms will be crucial to boost productivity and living standards
Productivity is the principal source of long-run growth in most economies and provides the basis for better material living standards and reductions in poverty and inequality, but productivity growth has been weak over the last decade. Structural reforms have significant potential to unlock stronger productivity growth. Burdensome regulations, market entry barriers that hamper competition, a heavy labour tax burden, and poor educational outcomes can all be obstacles to productivity growth. Structural reforms that increase labour mobility and support firms in becoming more dynamic, innovative, and greener can boost potential growth.
Efforts to lower regulatory barriers to domestic competition should continue
Brazil has long been characterised by stringent regulations and high administrative burdens on markets for goods and services, which have often ended up restricting competition and new entry. Recently, there have been significant efforts to reduce unnecessary bureaucracy and to simplify existing regulations (Vitale et al., 2022a). In 2019, Brazil conducted a full Regulatory Review at the federal level, analysing over 74 000 pieces of legislation, of which more than 31 000 were revoked for being outdated or overlapping with other texts (OECD, 2022b). Authorities also reviewed existing licences and eliminated explicit approval requirements for all but a few high-risk activities. Opening a business can now be done in one day in about 96% of the cases (OECD, 2020a). Consequently, Brazil’s position compared to OECD countries in the economy-wide Product Market Regulation indicator, is likely to have improved since 2018, although the full-fledged update of Brazil’s indicator value is still ongoing, in collaboration with the OECD (Figure 1.24). Further plans to simplify the regulatory environment include the creation of an oversight body to implement good regulatory practices in all government instances and allowing for multiple products and services to operate under the same licence.
Figure 1.24. Brazil has improved significantly in the OECD Product Market Regulation indicator
Index scale from 0 to 6, from most to least competition-friendly regulations
Note: The 2023 PMR value for Brazil is still preliminary and pending discussion with the Brazilian authorities. The PMR value for all other countries in the figure has not been updated yet and reflects the regulations in place in 2018. The PMR methodology has changed in 2023 and the PMR values in 2018 and 2023 are not directly comparable. The PMR value in 2018 using the 2023 methodology has been added to the figure to provide a time perspective for Brazil.
Source: OECD PMR database.
Brazil has also approved new sector-specific regulatory frameworks that lower the regulatory burden for the private sector. New regulatory frameworks have been introduced in the telecommunications sector, with the 2019 Broadband Law and the withdrawal of restrictions on foreign capital in 2021, in the water and sanitation sector in 2020, in the oil and gas sector in 2021, in the railway sector in 2021, and in the aviation sector in 2022. These reforms have addressed some of the regulatory weaknesses highlighted in the 2018 PMR results, namely in the energy sector, and more specifically in the natural gas segment (Vitale et al., 2022a). The new gas law opened the way for separating the activities of gas production and gas distribution, to increase the number of market participants and reduce natural gas prices. However, the multi-level regulatory governance of the natural gas sector, involving the federal government and subnational governments, can be an obstacle to achieve the objectives of the new gas law. Moving forward, it is important to harmonise regulations across different states (Vitale et al., 2022b).
Regulatory impact assessments have become a powerful tool for reform but could be strengthened further. Ex-ante Regulatory Impact Assessments (RIA) became mandatory in 2021 for all federal entities, before enacting new secondary regulations that could have economic impacts, including on competition, but the resulting recommendations are non-binding. The government should require a systematic follow-up to monitor whether solutions have been implemented, as recommended in the 2020 OECD Economic Survey of Brazil (OECD, 2020a). In addition, exemptions to the ex-ante RIA obligation should be progressively removed, so the practice becomes even more widespread. In the longer-term, mandatory Regulatory Impact Assessments should also be required for primary legislation.
Barriers in services sectors are still higher than the OECD average and could be lowered (OECD, 2022b). The provision of services by accountants, architects, engineers, lawyers, notaries, and estate agents is still subject to a range of regulatory constraints that limit competition and increase service cost. For example, these specialists need to be part of a professional association and the accreditation procedures are lengthy. Exclusive rights for certain ancillary tasks should be withdrawn, as recommended previously (OECD, 2020a).
Brazil’s autonomous competition agency, the Administrative Council for Economic Defence (CADE), lacks sufficient budget and staffing as well as its own civil service career path, which limits its ability to recruit and retain staff. This has made it difficult to clear the backlog of investigations and reduce their length, some of which have taken up to a decade (OECD, 2019b). Further resources should be allocated to the competition authority, in particular to prevent bid-rigging and other anti-competitive practices in procurement processes. CADE should have a more active role advising the government on public procurement procedures, especially for strategic, complex, and high-value infrastructure projects (OECD, 2022c).
There is scope to boost competition in key infrastructure sectors. CADE, in cooperation with the OECD, conducted a competition assessment review to identify regulations that may hinder the competitive and efficient functioning of markets in the civil aviation and ports sectors. The assessment resulted in 368 recommendations that, if implemented, could generate savings between BRL 700 million to BRL 1 billion, each year, increasing the efficiency of public investment (OECD, 2022c). The OECD Competition Assessment Toolkit could be used in other economic infrastructure sectors, such as railways and telecommunications, for example. The OECD Competition Assessment Review has been extensively used in other countries, such as Romania in the construction, transport, and food processing sectors, Greece in the food processing, retail trade, building materials and tourism sectors, or Mexico in the medicine and meat sector.
Fostering trade integration and foreign competition would bring substantial benefits
With exports and imports below 40% of GDP over the last decade, Brazil remains significantly less integrated into international trade than other emerging market economies of similar size. Stronger trade integration would provide Brazilian companies with greater access to intermediate inputs and technology at internationally competitive prices. By reducing the cost of capital goods, it would spur much-needed investment and boost productivity, employment, and wages. To mitigate the labour market effects of the resulting structural shifts, stronger trade integration should be accompanied by policies to help workers cope with the reallocation of jobs across firms and sectors (OECD 2018a; 2020a; Bueno et. al, 2021).
Integration into Global Value Chains (GVCs) remains concentrated in commodities. While forward participation increased in recent years, backward participation remains below most emerging economies (Figure 1.25). This means that Brazilian imports are mainly for domestic consumption, not to add value to exports. At the same time, Brazil is a global supplier of intermediate inputs, with low levels of processing and few ties with the domestic industrial sector, such as mining, basic metal, food, mineral products, paper, and wood. GVC-related trade brings benefits that go beyond those associated with international trade in final goods, such as learning externalities and technology spill overs (Ignatenko et al., 2019). These benefits are generally higher for activities positioned at higher-value stages of the global production chain and Brazil has scope to engage in higher value-added activities in GVCs.
Figure 1.25. Brazil’s backward participation in Global Value Chains remains below peers
Note: Forward participation provides the share of exported goods and services used as imported inputs to produce other countries' exports. This indicator gives an indication of the contribution of domestically produced intermediates to exports in third countries. Backward participation measures the value of imported inputs in the overall exports of a country (the remainder being the domestic content of exports). This indicator provides an indication of the contribution of foreign industries to the exports of a country by looking at the foreign value added embodied in gross exports.
Source: OECD Trade in Value Added (TiVA) database 2021.
Deeper integration into GVCs is hampered by many trade barriers. Average import tariffs, for instance, are about eight times higher than in Mexico. Import tariffs are particularly high for capital goods and intermediate goods (Figure 1.26). To avoid getting stuck in low-value activities and to reinvigorate its industrial sector, Brazil needs to increase its capacity to use imports to promote the competitiveness of its own exports. In a welcome move, applied tariffs were cut permanently by 10% in 2021, and then again by 10% for 87% of tariff lines in May 2022, although on a temporary basis until December 2023. Some IT and capital goods saw even higher tariff reductions of 20%. The unilateral permanent cut led Mercosur partners to agree to a 10% cut of the Mercosur common external tariff in July 2022. However, the future of the second and temporary cut is still unclear. The authorities should consider a comprehensive tariff reform, starting with making permanent the most recent tariff cut.
Progress in multilateral trade agreements would also help Brazil become more integrated into the global economy. Brazil is a member of the Mercosur customs union, comprising Argentina, Brazil, Paraguay, and Uruguay. However, Mercosur is still far from its initial ambition to become a common market and its members have not participated in major agreements with other regions, unlike members of the Pacific Alliance. Mercosur has negotiated an agreement with the European Union/EFTA. Integrating with a large market would bring an immediate boost to competition, and significant benefits. Brazil should therefore continue its efforts to conclude the EU-Mercosur agreement and its attempts to reform Mercosur’s external tariffs.
Figure 1.26. Trade tariffs are higher than in most emerging economies
Effectively applied weighted average, %, 2020 or latest
Source: World Integrated Trade Solution database (WITS).
Mercosur could also continue to negotiate bilateral agreements, which are far less than those signed by countries such as Chile, Peru, Mexico and Colombia, all members of the Pacific Alliance. In 2020, Brazil and the United States signed a new protocol updating the 2011 Agreement on Trade and Economic Cooperation, including new provisions on customs procedures, transparent regulatory practices, and anti-corruption policies. The protocol was ratified by Congress and entered into force in February 2022. Similarly, bilateral negotiations with Canada, Singapore, and South Korea have been taken up and should continue.
There may also be a case for reviewing widely used non-tariff barriers (Figure 1.27), including several binding local content requirements. Recent progress includes the elimination of approximately 700,000 automatic and non-automatic import licensing requirements per year for more than 500 products, and the acceleration of import and export processes. A new type of licence, called “licença flex”, was introduced to replace hundreds of documents, reducing costs, and increasing flexibility to export and import. Since March, Brazil started issuing certificates of origin with an electronic signature and a QR code for exports of poultry into the EU and the UK. The new certificate can replace the paper format certificate with a handwritten signature and a stamp, reducing exporting costs and delays.
Figure 1.27. Non-tariff barriers are also an obstacle to Brazil’s integration in international trade
Note: Coverage ratio refers to the value of imports of commodities subject to non-tariff measures as a percentage of total imports. Frequency ratio accounts for the presence or absence of a non-tariff measure, and indicates the percentage of traded products to which one or more non-tariff measures are applied.
Source: World Integrated Trade Solution database (WITS).
Table 1.9. Past OECD recommendations on product market regulation policies and trade
Labour market policies should facilitate worker reallocation
The pandemic has left Brazil with a lower labour force participation rate, particularly for older workers, and a higher number of long-term unemployed, augmenting the risk that even more workers become discouraged and, eventually, exit the labour force (Figure 1.28, Panel A). The pandemic also disproportionately affected the employment of women, whose employment share in the domestic services sector was significantly higher than men (IADB, 2022; CEPAL, 2021). Mobilising currently underutilised labour resources is key to sustain stronger long-term economic growth, along with the product market reforms mentioned above.
An effective way of doing this would be to improve female labour market participation and employment, which are about 20 percentage points lower than for men (Figure 1.28, Panel B). Men earn on average 27.3% more than women in Brazil, compared to a gender gap of about 11% in the OECD (Schymura, 2022; OECD, 2023b forthcoming). When controlling for education, experience, occupation, industry, and type of employment, the gender wage gap in Brazil increases to 34.1% (Schymura, 2022).
Figure 1.28. Labour resources are underused, lowering potential growth and inclusion
Source: IBGE; ILOstat; OECD labour market statistics; and OECD calculations.
A new 2023 law prohibits gender-based wage discrimination between women and men exercising the same function. An inter-ministerial working group has also been created to address equality of opportunity and pay between men and women in the labour market. Among the measures that should be considered, female labour force participation and employment would greatly benefit from expanding access to early childhood education, as recommended in previous OECD Economic Surveys of Brazil (OECD, 2020a). Only about a third of all children under the age of three in Brazil have access to day care (Anjos Couto and Sousa, 2022). Lack of accessible childcare has forced many women to leave the labour force. Furthermore, there are large differences in access to day care across municipalities and regions, and depending on socioeconomic status, contributing to perpetuate inequalities (Anjos Couto and Sousa, 2022). Low-income women and single mothers should have a prioritised access to childcare.
Brazil should also encourage a more flexible and equal use of parental leave. Mothers are entitled to four months of parental leave, while fathers are only entitled to five days. Uneven parental leaves tend to slow women’s career progression (OECD, 2023d). Many OECD countries have introduced paid leave of several weeks for fathers that cannot be transferred to the mother. In Spain, for example, fathers are entitled to the same number of weeks as mothers (OECD, 2023b forthcoming; OECD, 2023d).
Building a more inclusive labour market also requires tackling labour informality, which remains high at around 40% (Figure 1.29, Panel A). Informality does not only imply a lack of social protection, but firms employing informal workers also tend to be less productive. Moreover, they compete on an uneven playing field with firms that are fully compliant with labour regulations (Amin et al., 2019). Informality has many reasons, but one likely key determinant is the cost difference between informal and formal employment contracts (Levy and Cruces, 2021; Firpo and Portella, 2021). Brazil’s labour tax wedge of 35% for minimum-wage earners is high in comparison with other emerging economies, raising the cost of formal job creation (Figure 1.29, Panel B). Reducing tax wedges for low-skilled workers at risk of informal employment would strengthen formalisation incentives, as argued in the section on social protection above and in previous OECD Economic Surveys of Brazil, (OECD, 2020a).
Figure 1.29. Informality remains high, partly explained by the significant labour tax wedge
Note: For panel B, 2021 data for OECD countries and 2019 data for non-OECD countries. Tax wedge computed for a single individual without children, earning the average income.
Source: ILOstat; OECD Taxing Wages 2022.
Stringent labour market regulations also add to the cost differential between formal and informal work. A major labour market reform in 2017 significantly modernised labour market regulations. Recent research shows that by reducing legal uncertainty and labour litigation costs for employers, the 2017 reform contributed to increase formal employment and economic activity (Corbi et al., 2022). Further changes to the labour legislation could be considered, in particular to accommodate and regulate online platform-mediated work, which has gained even more importance in Brazil during the COVID-19 pandemic (Miguez and Menendez, 2021).
Workers in platform markets often face low entry barriers and flexibility, which can facilitate the labour market integration of underrepresented groups and the reallocation of workers towards sectors in high demand (Lane, 2020). Moreover, transactions in online labour platforms are digital and traceable, with positive implications in terms of tax compliance and labour formality. In 2020, the Brazilian Statistical Institute (IBGE) estimated that more than five million Brazilian workers derived their main source of income from digital platforms and that at least 17 million were getting some occasional income through such platforms. However, there have been rising concerns about working conditions for digital platform workers regarding low pay, long working days, and a lack of access to social protection (Abilio et al., 2021).
Platforms could be required to introduce a working hour limit and a minimum hourly wage, for example. Some digital platforms in the transportation sector are already imposing resting times in some states. The Federal government could regulate platform markets to harmonise requirements across states and players in the market, ensuring minimum working conditions. Even if workers are paid per task, the platforms could also be required to compensate workers if the average hourly pay falls below the minimum wage (Lane, 2020). For example, BigBasket, a platform that has a significant presence in India, instituted a “Gig Workers Payment Policy” to guarantee at least the national minimum hourly wage after all work-related costs are accounted for (OECD, 2023c; Fairwork, 2021). New York City has imposed a minimum wage for Uber and Lyft drivers (Lane, 2020).
Strengthening active labour market policies would complement the recent labour market reform in facilitating the reallocation of workers towards more productive jobs and firms. Spending on active labour market programmes in Brazil is close to the OECD average (Figure 1.30, Panel A). However, it is mostly focused on supporting self-employed workers and employment subsidies, which are less effective in improving employability (Figure 1.30, Panel B; OECD, 2021c). Shifting spending towards high-quality targeted reskilling and upskilling programmes would better support return to employment. Professional training programmes, such as the short-term professional courses with low entry requirements targeting displaced workers ("Cursos de formação inicial e continuada”), which closely respond to labour market needs have proved quite effective in the past and should be expanded (OECD, 2018a; OECD, 2020a; Bueno et al., 2022).
Figure 1.30. Spending on active labour market policies and training is low
Source: OECD labour market programmes database; ILO (2016), What works: Active labour market policies in Latin America and the Caribbean, International Labour Office, Geneva.
Table 1.10. Past OECD recommendations on labour market policies
Spending on education could be more effective and more equitably distributed
Equal access to quality education is key for raising social mobility, which has been particularly low in Brazil compared to OECD countries (Figure 1.31). Improving the quality of education and widening its access would also raise human capital, boosting productivity growth and incomes. In the last decades, participation in education has expanded in Brazil and younger generations entering the workforce have been better educated than their parents. However, student performance is still behind the OECD average and some Latin American countries, such as Mexico, Costa Rica, and Chile (OECD, 2021d). Moreover, the correlation between educational attainment and socio-economic background, including race and regional differences, are stronger in Brazil than in many comparable countries (OECD, 2021d).
Figure 1.31. Social mobility is low in Brazil compared to OECD countries
Global social mobility index, 0 (worst) - 100 (best)
Note: The index is a composite indicator of 51 measures covering health, education, technology access, fair work opportunities, social protection, and inclusive institutions.
Source: World Economic Forum (2020), The Global Social Mobility Report 2020, Geneva.
Unequal access to quality education has been exacerbated by the COVID-19 crisis, which disrupted traditional schooling during 2020 and the first half of 2021. Lack of access to basic material and educational resources at home and differences in parents’ capacity to provide support were a considerable barrier for learning, especially for students from disadvantaged backgrounds and young children. Between 2019 and 2020, the drop-out rate among students aged 5 to 9 increased from 1.4% to 5.5%, undoing 14 years of progress in bringing drop-out rates down (Neri and Osorio, 2022). In 2021, the 5–9 years old drop-out rate was still 4.3%, much higher than before the pandemic.
As early childhood education, including pre-primary school, sets the foundation for later learning outcomes, stronger investments in this earliest part of education could be particularly effective to prevent irreversible damage and decades of progress from being reversed (Heckman and Masterov, 2007; UNICEF, 2019). Prioritising educational investments in early years of schooling would likely be the most equitable and cost-effective parts of education spending. Access to quality early education should be expanded further, prioritising children from disadvantaged socio-economic backgrounds and single-parent families. Recent increases in public investment in pre-primary education are steps in the right direction.
A stronger focus on early education would help to get more out of current public spending on education, which is well above the Latin American and OECD averages but have not necessarily translated into better educational outcomes (Figure 1.32; OECD, 2021c). Currently, resources are not always targeted towards reducing inequalities. Brazil invests relatively more per student than OECD economies in non-compulsory tertiary education than in compulsory lower educational levels (Figure 1.33, Panel A), while completion rates in tertiary education remain lower than the OECD average (Figure 1.33, Panel B).
Students from wealthier backgrounds are more likely to progress to advanced levels of education and benefit from fully subsidised higher education (OECD, 2021d). One reason is that public universities do not charge tuition fees, but the competitive entry exams make it easier for students from high-quality private secondary institutions to access public universities. The introduction of specific quotas for students from minority or socially disadvantaged backgrounds, however, has significantly improved this situation over the last years.
Figure 1.32. Public expenditure on education is high in international comparison
% of GDP, 2021 or latest
Source: World Bank.
To improve equality of opportunity, Brazil should consider introducing means-tested tuition fees for public universities along with targeted subsidies for disadvantaged students. Public universities in three-quarters of OECD countries charge annual tuition fees (OECD, 2022d). Means-tested tuition fees, combined with grants for students coming from low-income households, can help to meet the increased demand for higher education, promote equity, while sharing the costs of higher education between the state and students. In Italy, for example, full-time undergraduates are required to contribute with an income-dependent annual tuition fee. In France and Germany, the government meets the balance of tuition costs with income-dependent grants, covering proportionately more of those costs for students from lower income families.
Figure 1.33. Higher public spending on tertiary education has not improved outcomes
Note: 1. Full-time bachelor’s students. 2. Average of countries for which data are available.
Source: OECD education at a glance database; and OECD calculations.
Increasing opportunities to enrol in advanced technical programmes with professional training content, both at the upper secondary and post-secondary level, would help increase the labour market focus and could strengthen students’ engagement. Professional tertiary programmes, including professional bachelor qualifications, are well suited to ensure a smooth entry into the labour market (OECD, 2022e). They provide an alternative to academic higher education for those who want to acquire more specific technical skills and to quickly enter the labour market. In Brazil, participation in vocational education programmes remains limited by international standards (Figure 1.34). Post-secondary vocational education opportunities are extremely limited.
Brazil is currently reforming its Vocational Education and Training (VET) system. The reform aims at expanding enrolment by making vocational education an optional component of upper secondary programmes. It also intends to increase the diversity of options students can choose from and the flexibility for schools to adapt their programmes and curricula to local needs. However, states and municipalities in charge of delivering public vocational education have been implementing the reform at different speeds (OECD, 2022f; Salas, 2021). The government should provide adequate support to subnational governments to accelerate the reform implementation, including for example, organising workshops and seminars sharing positive experiences and good practices. Local partnerships between schools and employers in defining Vocational Education programmes’ curriculum could also facilitate subsequent work-based placement.
Beyond the smooth integration of young workers in the labour market, local partnerships between schools and employers in defining Vocational Education curriculums would bring broad-based benefits for employment and incomes. OECD research shows that training programmes disconnected from local demand were largely ineffective in the past. On the contrary, training programmes designed to meet local skills demand were effective in reverting the negative effects of trade opening on employment growth between 2013 and 2018, particularly among low-skilled workers (Bueno et al., 2022).
Work-based learning should become a systematic part of Vocational Education and Training programmes. In fact, workplace training is a cost-effective way of familiarising students with modern technologies and working processes, as well as helping them develop soft skills. Many OECD countries make work-based learning a mandatory part of Vocational Education programmes.
Figure 1.34. Enrolment in vocational education is lower than most Latin American countries
Share of vocational students over all upper secondary students, 2020
Source: OECD education at a glance database; and OECD calculations.
Table 1.11. Past OECD recommendations on education policies
Greening growth requires reining in deforestation and reforming agriculture
Brazil's greenhouse gas (GHG) emissions decreased between 2004 and 2009, along with the reduction of deforestation. Between 2018 and 2021, the last year for which data are available, greenhouse gas emissions increased in line with rising deforestation (Figure 1.35) This increasing trend in deforestation has reverted since 2023, in the context of stronger policy efforts to halt illegal deforestation (INPE, 2023). Emissions from agriculture, the second-largest contributor, have been constant in recent years. In 2023, Brazil renewed its nationally determined contributions (NDCs), in the context of the Paris accord, including cutting GHG emissions by 48% of 2005 emissions by 2025 and by 53% by the year 2030. Achieving these commitments will imply strong changes in policies and practices in the three largest emission components, namely, land use and forestry (38%), agriculture (28%) and energy (23%).
Brazil has recently designed a comprehensive strategy to reduce GHG emissions, beyond the remarkably clean energy mix, and to adapt to climate change (see Chapter 2). The Ecological Transformation Plan, announced in August 2023, is meant to mainstream climate policies across ministries and aims to reduce the country’s environmental footprint, increase productivity, and improve equity (Box 1.6). The plan has also been aligned with the government’s Growth Acceleration Programme, as a further step to integrate the conservation and sustainable use of biodiversity across different sectoral policies. Tackling the main sources of GHG emissions (land and forestry uses, agriculture and energy) while developing alternative sources of energy and revenues, and new technologies, will be key for decarbonising the economy. Better targeting current subsidies and tax instruments, for instance in the agriculture sector, is a first step to drive changes in production technologies and energy sources. Furthermore, there is room to mobilise green financing at the local and international levels to accelerate the green transition (see chapter 2).
Energy-related per-capita emissions are approximately one third of those in the European Union, and one seventh of those in the United States as 48% of overall energy use comes from renewable sources compared to a world average of approximately 15%. Nonetheless, there is room to further reduce energy-related emissions.
Developing market mechanisms could provide guidance and incentives for the reduction of GHG emissions. Brazil already has a voluntary carbon market in which firms emit carbon reduction credits. The Ecological Transformation Plan encompasses a regulated carbon market (cap-and-trade) with a primary focus on sources emitting more than 25,000 tons of CO2 equivalent. A draft law has been submitted to Congress. This is a useful first step. However, including the forestry sector and parts of agriculture - the two major sources of carbon emissions - could boost incentives for carbon sequestration and the restoration of pastures. In addition, the government could consider developing a carbon pricing mechanism for emissions of sectors not covered by the carbon trading market. A progressive introduction of a carbon pricing mechanism -following the example of South Africa- can create incentives to adopt low-emission technologies and production processes with little impact on firms’ competitiveness (OECD, 2022g).
Box 1.6. The Ecological Transformation Plan
The new policy plan is meant to guide the green transition of Brazil’s economy. Prepared under the leadership of the Ministry of Finance, it will be implemented across departments and subnational governments. The main axes of the plan are:
Promoting sustainable finance, including a regulated carbon market (cap-and-trade), a national sustainable taxonomy, sustainable sovereign bonds, and decarbonising financial regulations.
Promoting the technological consolidation of the productive sector, including the redesign of R&D policies, use of public procurement for innovation and training of qualified labour.
Promoting the bioeconomy, involving measures to boost biotechnology activities, use of low-carbon agricultural techniques, forestry concessions and payments for environmental services.
Promoting the energy transition, including the expansion of renewable sources, the electrification of the transport fleet, the use of new fuels from biomass and energy storage and transport solutions.
Promoting the circular economy, which includes solid waste treatment (especially via recycling and biodigesters), sewage treatment and reverse logistics actions.
Promoting new green infrastructure and adaptation, including a public works programme in areas most affected by climate change as well as new infrastructure with a reduced environmental footprint.
Source: Communication from the Ministry of Finance.
Figure 1.35. Greenhouse gas emissions have been increasing in recent years
Million tonnes of CO2eq (GWP-SAR)
Source: Observatório do Clima (SEEG), http://plataforma.seeg.eco.br/total_emission. Brazil's NDC submitted to UNFCCC as of 21 March 2022.
Further developing biofuels to reduce transport emissions
Brazil has also been an early developer of biofuels technology, which plays a significant role in the reduction of transport emissions. Brazil has managed to cover 20% of the energy consumption in the transportation sector from ethanol derived from sugar cane, in addition to the 5% from biodiesel derived from soy and cattle by-products. Biofuels play a role in reducing transport emissions both through mandated mixing of typically low shares of biofuels into regular fuels and through engines that can run entirely on biofuels. Brazil has been a pioneer on both fronts. This has kept a lid on transport carbon emissions despite a large expansion of the car fleet, which more than doubled in the last two decades following the growth in income per capita (EPE, 2020). Regular gasoline is mandated to contain 27% ethanol, while diesel is mandated to contain at least 10% of biodiesel, following temporary reduction of biodiesel obligations from 13% to 10% in response to a spike in biodiesel prices, largely on account of rising prices for the soybeans that are used to make biodiesel (IEA, 2021). Further increasing the biofuel content of regular gasoline will boost biofuel production while reducing transport emissions, in line with a recent draft law submitted to Congress.
Brazil’s new national biofuels policy, RenovaBio, introduced a market mechanism, with the aim to further stimulate biofuel production and is expected to reduce fuel emissions by 10% by 2030 (OECD/FAO, 2021). Based on long-term national targets, the government sets annual mandatory carbon emission reduction targets to individual fuel distributors, which can be met by acquiring decarbonisation credits, CBIOs, emitted by certified producers and importers of biofuels. The credits started to be traded on the stock exchange in 2020 and the market is set to gain traction soon through a strengthening of the targets. The logic is to reward the most efficient ways of reducing carbon emissions and biofuel producers that can demonstrate stronger emission reductions will reap greater financial rewards. The national development bank, BNDES, has also boosted the policy by introducing an ESG credit line of BRL 1 billion for biofuel producers under the RenovaBio policy, expected to be implemented in 2022. However, Brazil does not levy an explicit carbon price. Fuel excise taxes, an implicit form of carbon pricing, cover 5.9% of emissions in 2021 (OECD, 2022h). Increasing fuel excise taxes will incentives car makers and users to opt for biofuel cars and boost Brazil’s lead in this area.
Reining in deforestation
Most of the gross emissions in land use, land use change and forestry – 90% on average in the past decade – are the result of deforestation (OECD, 2023c). Brazil made considerable progress during the first decade of the millennium in reining in deforestation and reducing related emissions, driven by strong and deliberate policy efforts. Between 2018 and 2021, however, this trend reversed and annual gross GHG emissions from deforestation rose again, reaching as high as 70% above their 2010 level in 2019. Preliminary data for 2023 suggest that deforestation is now declining again, likely related to stronger enforcement efforts (INPE, 2023). Most of the deforestation takes place in the Amazon biome, driven mainly by illegal deforestation associated with a complex cycle of land grabbing of public land (Hanusch, 2023).
Brazil has a strong legal protection framework in the form of its 2012 Forest Code and well-developed designated natural reserves and indigenous areas that limit legal deforestation (OECD, 2015). Since 2012, almost all deforestation has been illegal. Deforestation has risen significantly from 2019, mostly in the form of forest fires (Figure 1.36; Barlow et al., 2019). This increase has driven the recent rise in GHG emissions (Figure 1.35) and was favoured by weaker enforcement of the Forest Code, including budget cuts for the main agency in charge of forest management and protection (IBAMA). In the Amazon region, this trend reversed in the period from January to July 2023 with a 45% drop, which resulted in an aggregate drop of 7%, compared to the same period in the previous year (INPE, 2023). Moreover, an estimated 12 million deforested hectares in the Amazon region are completely unused, often leading to soil degradation.
Brazil has a wide array of policy instruments to combat illegal deforestation. Command-and-control policies have been successful in the past to counter illegal deforestation. The first phase of the Action Plan for the Prevention and Control of Deforestation in the Legal Amazon (PPCDAm) reduced deforestation drastically through real-time satellite detection of deforestation, capacity building at the national environmental protection agency IBAMA and better coordination across ministries and different levels of government in implementing the plan (Assunção et al., 2022; Assunção et al., 2019). In addition, improved territorial management also contributed to reducing deforestation by expanding the protected forest area by over 50% and improving land tenure (Assunção, Gandour and Rocha, 2019.; Assunção et al., 2022). A strengthening of the legal framework for investigating and punishing environmental violations translated into wider and faster sanctioning. The deployment of fines, embargos, seizure of production inputs, imprisonment, and prohibition of lending to those non-compliant with environmental laws significantly raised the expected costs of engaging in illegal deforestation (Assunção and Bragança, 2018 and 2015 ; Assunção, Gandour and Rocha, 2019).
Moreover, an important innovation was the introduction of a priority list for deterrence efforts. Through this policy, municipalities with higher deforestation rates were subjected to more rigorous monitoring and enforcement by IBAMA and to stricter administrative surveillance of land titles, local plans for sustainable production and concessional credit lending. The prioritisation strategy is estimated to have reduced deforestation by 40% (Assunção et al., 2022). Completing the mapping and designation of all undesignated public rural lands and reforming agrarian settlements will reduce illegal occupation of land and deforestation. Restoring the priority interventions in municipalities with the highest deforestation rates would limit illegal deforestation and avoid the expansion of the deforestation frontier.
Finally, restoring the enforcement of the environment protection law and Forest Code will be key to counter deforestation, although it allows for legal deforestation. The resurgence of deforestation since 2019 coincides with some elements of institutional weakening and tighter funding constraints. From 2017 to 2020, spending by the Ministry of Environment and its affiliate institutions was halved in real terms (Observatório do Clima, 2021). Enforcement staff at IBAMA has decreased by 55% since 2010, as retirement-related vacancies have been left unfilled. However, in 2023, a new recruitment process has started. Enforcement instruments contained in the PPCDAm have been employed less, which may have affected the threat of prosecution as perceived by those responsible for deforestation and wildfires. Since 2023, important policies contained in the PPCDAm and its sister programme for the Cerrado biome, the PPCerrado, have been gaining momentum. The launch of the new PPCDAm for 2024-2027 in June 2023 is an important step in the right direction. The new plan contains a pledge to achieve net zero deforestation by 2030 and a fivefold increase in surveillance efforts in illegally deforested areas. Restoring adequate funding for IBAMA is essential to ensure strict enforcement of the Forest Code.
Deforestation in officially recognised indigenous lands has been historically low, particularly if compared to adjacent lands. Brazilian legislation establishes strict protections for indigenous lands, including restrictions on land uses and mandatory consultations with local communities. These areas have come under pressure since 2016, as enforcement weakened, new legislation to relax restrictions was proposed, and no new indigenous lands were recognised. This trend has been recently reversed. In January, the government launched a multi-ministerial operation to expel illegal miners and loggers from the Yanomami land and improve the health condition of the Yanomami people. In September, the Supreme Court ruled against an interpretation of the Constitution that would have implied more strict conditions for recognition of indigenous lands. A new Ministry of the Indigenous People has been created and is in the process of recognising at least two new indigenous lands.
In addition to prohibition and sanctions, developing the forest economy in association with communities around would create incentives and market-based mechanisms that reduce deforestation. For instance, the payment for environmental services has been efficient for the reduction of emissions from deforestation and forest degradation (Amazon Fund project). Support for other than wood forest products, fisheries, and agroforestry by developing market access, improving logistics and facilitation of private community partnerships in the Amazon will provide a sustainable income to communities as an alternative to illegal exploitation of natural resources (Hanusch, 2023). Developing the traceability of legal forest products could be an argument to promote their access to foreign markets.
Figure 1.36. Recent increases in deforestation seem to be reversing
Note: Data refer to the legal definition of the Amazon region, comprising the states of Acre, Amapá, Amazonas, Pará, Rondônia, Roraima and Tocantins, most of Mato Grosso and the western part of Maranhão.
Source: Prodes, Instituto Nacional de Pesquisas Espaciais (INPE), http://www.obt.inpe.br/OBT/assuntos/programas/amazonia/prodes.
Greening agriculture
The agriculture sector is the second-largest direct source of GHG emissions in Brazil (Figure 1.35). With the largest cattle herd in the world, two thirds of direct agricultural emissions come from livestock natural emissions, most of which from enteric fermentation (Figure 1.37). The increase of agriculture emissions is lower than the growth of agriculture production, suggesting significant efficiency improvements and advances in low-carbon agriculture (OECD, 2020a). The Plan for the Consolidation of a Low Carbon Economy in Agriculture, the ABC Plan, implemented from 2010 to 2020, was the main instrument to ensure the continuous improvements in agricultural practices that reduced greenhouse gas emissions.
The ABC plan targeted efficiency improvements in the use of natural resources, better adaptation to climate change in the agribusiness sector and the adoption of specific technologies, such as degrade pasture recovery, crop -livestock-forestry integration and agroforestry systems, no-tillage practices, and biological nitrogen fixation. It also included technical training of farmers and stakeholders and financial support and monitoring of carbon capturing activities. The ABC plan is deemed to have been successful, despite further scope for improvement in the training, research and financial support components (World Bank, 2022; Piao et al., 2021). The ABC plan should be scaled up to enhance existing incentives, R&D and technical assistance. It should also be tailored to benefit different biomes and farm sizes. Supporting farmers to register in the Rural Environmental Registry (Cadastro Ambiental Rural – CAR) is an important complementary measure to help them in adhering to the Forest Code and to access climate-smart rural credit facilities.
Figure 1.37. Direct GHG emissions from the agricultural sector are driven by cattle emissions
Kg CO2eq
Source: Emissões de GEE por Subsetor, Ministério da Ciência, Tecnologia e Inovação; and Estimativas Anuais de Emissões de Gases de Efeito Estuda no Brasil (6ª Edição), Ministério da Ciência, Tecnologia e Inovação.
Complementary options to green the agriculture sector include the restoration of pastures, development of carbon sequestration and scaling-up climate smart agriculture. The restoration of pastures in the country, which comprises 40 million hectares of degraded pasture, would increase beef production from 30kg/ha per year to 180 kg/ha, and decrease the pressure on expanding agriculture into the Amazon area (Piao et al., 2021). Financial public support to the agriculture sector could be linked to compliance with the Forest Code.
Brazil has an important potential to abate or sequester carbon from the atmosphere using natural climate solutions. These solutions involve the preservation and restoration of biomes and the improved capture of carbon in the soil by agriculture.
Finally, improving the implementation of innovative solutions for climate-smart agriculture will improve the productivity, efficiency, and climate resilience of the sector. Consolidating and increasing the research and services of EMBRAPA (the agriculture innovation agency) will be key for the adoption of innovations in integrated agro-sylvo-pastoral systems, agroforestry, and reduction of methane emissions from cattle. Increasing the diffusion of these innovations towards a wider range of farmers, notably family farmers, would be key for scaling-up climate-smart agriculture through more efficient extension and technical assistance services. Technical assistance and effective extension services can also help leverage private investment.
Table 1.12. Past OECD recommendations on green growth
Table 1.13. Policy recommendations from this chapter
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