1 FEDERALISM, INTERGOVERNMENTAL RELATIONS AND SOCIAL POLICIES IN BRAZIL Marta Arretche (Political Science Department/USP – University of São Paulo) Text prepared for the International Seminar Comparative analysis of Intergovernmental Management mechanisms and formulation of alternatives for the Brazilian case. Brasília – September 17 and 18, 2003 Please do not quote or reproduce FEDERALISM, INTERGOVERNMENTAL RELATIONS AND SOCIAL POLICIES IN BRAZIL Marta Arretche Federal states are seen as inclined to produce relatively lower levels of social spending (Petersen, 1995; Banting, 2003) and to have a more limited reach and coverage of social programmes (Skocpol, Orloff, Weir, 1990; Pierson, 1996). They are also seen as tending to aggravate problems with co-ordinating policy objectives, generating competency overlap and competition among the different levels of government (Weaver and Rockman, 1993), given the negative relation between dispersion of political authority and internal consistency of collective decisions. However, concentration of political authority varies among federal states, depending on the way relations between the executive and the legislative branches of government are structured at the federal level (Stepan, 1999); and varies among policies, depending on how intergovernmental relations are structured in regard to specific policies. The purpose of this work is to demonstrate that the political institutions in Brazil concentrate authority in the federal government, facilitating functions of intergovernmental co-ordination of social policies. Approval of constitutional amendments is comparatively easier in Brazil than in other federations and the distribution of functions in the majority of social policies concentrates decision-making authority in the federal Executive. This work is divided into different sections. The first section provides a very brief description of the Brazilian tax and fiscal systems. The following section summarises intergovernmental distribution of functions in relation to a few selected social policies in order to highlight strategies and resources the federal government has to induce decisions by sub-national governments. Special attention is given to the municipalization of social programmes in the 90s – a sort of second round of the fiscal decentralisation of the 80s. Finally, some recommendations drawn from this analysis are presented. The Fiscal System From its origin in the Federal Constitution of 1891, the Brazilian federation adopted a system of separate tax sources, distinguishing taxes for which the states had the exclusive competence from those of the federal government. Municipal governments only acquired exclusive competence to implement taxes after the 1934 Constitution. Since then, the historical evolution of Brazilian tax structure has been characterized by slow gradual changes, with the two major breaks corresponding to the centralization imposed by the Tax Reform (1965-8) during the military regime and, in the following period, the fiscal decentralisation of the 1988 Constitution (Varsano, 1996; Affonso, 1999). In the current system, tax collection is very concentrated: the five main taxes are accountable for more than 70% of total tax collection – four of them are collected by the federal government. The most important tax is collected by the states: Imposto sobre Circulação de Mercadorias e Serviços – ICMS (State Value Added Tax) (Varsano et alii, 1998). The tax load increase of the last decade – from 25% in 1991 to 34% in 2001 (AFE/BNDES, 2002) resulted primarily from tax efforts by the federal government, complemented by municipal governments (Prado, 2001). In 2002, 70.1% of total tax collection was carried out by the Union; 25.5%, by the states; and 4.3%, by local governments (see chart 1).