On the size and priorities of the State – 25/09/2021 – Arminio Fraga

In a magna lecture given in January at the annual meeting of the American Economic Association (and published in a periodical), Professor Emanuel Saez (UC Berkeley) graphically presented the evolution of the tax burden for some countries in Europe and the United States from 1870 onwards. . It also presented, for a group of European countries, a breakdown of public spending by category, both as a percentage of GDP and taken from the book “Ideology and Capital”, by Thomas Piketty.

The data presented consolidate the State’s expenditures as a whole, that is, they include the three Powers and the central, state and municipal governments. In Europe, until the beginning of the 20th century, tax revenues did not reach 10% of GDP and supported what he calls the “royal” state —in the sense of royalty or sovereign.

This “minimal” state’s expenditures included administrative items, law and order, defense and infrastructure. They did not cover social expenses, being, therefore, a small state.

In the beginning of the 20th century, public spending began to grow and with it the tax burden. It was the birth of the welfare state, or social welfare. By 1970 average public spending in Europe had risen to somewhere around 45% of GDP, 40% in the UK and more than 50% in Sweden and France. It is interesting to note that in the United States this number was around 30%. Since then these percentages have changed little.

In the words of Saez: “The growth of government in the 20th century is almost entirely explained by the growth of the welfare state, which provides education, support for child care, healthcare for the sick, retirement for the elderly and income for the disabled, unemployed and poor”.

Its origins include voting and voice for more and more people, the perception of social security as an efficient risk-sharing instrument and a desire for greater social mobility, all having Rawls’ “veil of ignorance” as a principle of coexistence and social organization (think about the question: how would you design the distribution rules of the welfare state if you didn’t know which family you would be born into?).

The dispersion in the size of the State among advanced countries is quite relevant and reflects cultural and historical differences. For example, the United States has always exhibited a degree of distrust of the state. It is not surprising, therefore, that today they are the only advanced country that does not offer universal health coverage (a 10% of the population remains to be included).

Economists and other social scientists are divided on the origins and consequences of the welfare state for each country’s income level. Saez convincingly argues that Europeans chose to work less.

Other studies show that productivity per hour worked in Europe is similar to that in America. In one way or another, they all achieved high standards of living, which suggests that in each case the political system has produced an effective and, by historical standards, a large state.

How does Brazil fit in this context? In the 1988 Constitution, a clear option was made for the welfare state. Important advances have taken place since then.

Public spending has grown a lot and is around 35% of GDP, a high level for a middle-income country. However, about 40 years ago our per capita income stopped approaching that of the more advanced countries, and inequality remains very high and much higher than theirs. There is much to be done, but the current public debate is lacking in hope.

I have argued here that the Brazilian State has a lot of room to increase its productivity. An indication of this is that almost 80% of public spending goes to payroll and Social Security, a percentage much higher than that of countries comparable to Brazil.

Our State is medium to large in size, but it does not seem to be minimal in the strict sense of the word, as it is not the smallest possible to fulfill its role. A good reform of the State’s HR is urgent and essential, but apparently it will remain for a while.

There is additional room for savings in the pension system as well as through the elimination of the relevant regressive aspects of taxation.

Once the savings are achieved, it would be desirable and possible to redefine priorities for public spending. To do so, it would not be enough to take into account only the funds allocated to the ministries — it would also be necessary to consider the expenses of the other units of the federation.

Saez presents a breakdown of European consolidated state spending into broad categories. Something like this is needed for Brazil. The closest I found (thanks to Pedro Herculano de Souza, to whom I am grateful) was the valuable National Public Sector Balance Sheet (National Treasury Secretariat, base year 2019), which has limitations, but gives an idea of ​​the magnitudes.

Based on the data obtained there (p. 22), I recreated the main categories for Brazil, which I list below, with the value of their respective expenditures, in percentage points of GDP.

Total Spending 35, Minimum State 9, Education 5, Health 5, Welfare 13, Spending and Social Transfers 3. A decomposition like this, in a little more detail, should inform the design of a development strategy worthy of the name.

In addition to setting spending priorities, the exercise runs into issues related to the federation’s architecture and the size of the state. Too much subject for a short article, but the record remains.

Without clarity about the destination of public resources, which explains the choices that necessarily have to be made, it is difficult to imagine a better future for the country.

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