Permanent Fiscal Austerity Policies in Brazil and the United Kingdom: What are the consequences for local public investment?

Prof. Ursula Dias Peres
Dr. Fábio Pereira dos Santos

Inspired by proposals such as the New Zealand Fiscal Responsibility Law passed in 1994, Brazil developed fiscal reforms in the 1990s. After a period of economic growth, in which fiscal control and transparency of public accounts were associated with increase in public investment, Brazil is facing a deep economic (and political) crisis. Brazilian GDP experienced a fall of about 7% in 2015 and 2016 and grew 2.2% in the accumulated of 2017 and 2018. The approval of Constitutional Amendment 95/2016, which freezes the real value of federal primary spending in the next 20 years (until 2036), and other measures taken in recent years, have drastically reduced public investment. In the United Kingdom, which has a GDP per capita almost three times higher than Brazil, the governments that took over in 2010 and 2016 have implemented permanent fiscal austerity policies, which produced a reduction in budget investment volume of over 20%, largest reduction since the 1920s, affecting the areas of health, education and social protection, known as pillars of the British welfare state. Fiscal austerity measures have resulted in a significant reduction in local government budgets, subject to a strong top-down fiscal adjustment, both for Brazilian municipalities (autonomous units in the federation) and local governments in the United Kingdom. The objective of reducing the fiscal deficit so far is not assured, as the economic contraction makes it difficult not only for investment but for the budget equilibrium itself. The purpose of this paper is, starting from the theoretical debate on policies of permanent fiscal austerity, to confront these policies with the investment consequences of local governments in Brazil and the United Kingdom, and to examine the practical effects of this centralized process of adjustment regarding policies of transparency and social control of public spending. The study will be conducted through assessment and comparison, in time series, of the budget and statistical data available in The Blue Book Time Series for the United Kingdom and the Accounting and Tax Information System of the Brazilian Public Sector (SICONFI).