by Joaquim Levy
BWC Multilateral Reform Working Group Co-Chair, Joaquim Levy, had the following article published on the role of digital infrastructure in the effective delivery of fiscal policy. The piece was originally published in Portuguese, please find an English translation below.
Digital infrastructure and fiscal balance
Although Social Security spending as a proportion of GDP in 2023 (8.3%) will be lower than in 2019 (8.5%), the federal government faces a fiscal challenge as a result of various structural legislative measures taken in recent years. Of particular note are the expansion of the Bolsa Família in 2022 (+R$ 100 billion), parliamentary amendments (+R$ 40 billion), transfers to Fundeb (+R$ 25) and coverage of sub-national obligations, such as the floor for nurses (+R$ 10 billion) and municipal contributions to the INSS (+R$ 10 billion). In addition, there are persistent distortions, such as the peculiar way in which rights are constituted in rural social security.
It is not feasible to tackle fiscal challenges simply by addressing tax benefits or liberalities decided by the courts since 2017. That’s why the recent successes in favorably ending disputes such as lifetime pensions, the levying of Pis-Cofins on some activities and FGTS remuneration are noteworthy. Defeats there could have cost the public coffers hundreds of billions of reais.
Reaching the recurring surplus of 1% of GDP required for the Fiscal Framework (LC 200-2023) to allow for a reduction in public debt represents an effort of R$120 billion and will have to rely on improvements in three areas. The first is to pursue a GDP growth rate of at least 2.5% to generate revenue without new taxes, with the help of microeconomic reforms, regulatory clarity to take advantage of Brazil’s advantages in the energy transition, and macroeconomic management favorable to private investment. The second is the rationalization of tax benefits, including those included in the VAT Tax Reform.
The third pillar of fiscal strengthening is to align the expansion of public spending with the prescription of the Framework. This alignment requires discipline not to invent new programs, especially before evaluating and adjusting existing ones, and information to improve the targeting of public spending. This is where the governance of public digital infrastructure plays a crucial role.
Digital infrastructure is increasingly essential for the functioning and transformation of governments and society, as emphasized by India during its presidency of the G20 and is beginning to be discussed, for example, by the Bretton Woods Committee in the context of the reform of multilateral institutions. In Brazil, we have examples in PIX, payment of Bolsa Família and other benefits, income tax returns, and e-government, including e-social. Good governance of this infrastructure can strengthen fiscal management without affecting people’s privacy or rights. With the right tools, it can also be used to evaluate the end result of programs (spending analysis) and not just compliance with the law.
An example of digital infrastructure governance is the cross-referencing of Bolsa Família beneficiary data. This became key when the program’s rules were loosened in 2022, which increased the number of single-person families and injected distorted incentives into the system, which were later corrected. Noiselessly, the government has screened millions of families over the last 15 months, stopping millions of single-person benefits, which has allowed the Bolsa Família queue to be attended to using the same budget. This work is not finished and must be accelerated, not least so that Bolsa Família can absorb the Pé de Meia program, which currently has a precarious source of funding.
Digital governance is indispensable in the Social Security system so that, for example, speeding up the granting of sickness benefits translates into better quality for the beneficiary, without an explosion in spending. It must be strengthened to deal with the growing litigation and judicialization of demands for social security and welfare benefits in the post-2017 period. Today there are tools that make it easier to identify patterns, whether legitimate or not, that can be worked on to direct resources to those who are entitled, without spending leaks. There is an urgent need to intensify the use of these tools and the exchange of information between ministries, including the Federal Attorney General’s Office, so that the recent leap in benefits is transitory and social security and welfare spending (BPC) does not overload the framework.
Digital governance goes beyond the issue of transfers, as illustrated by the monitoring of forests, which, together with the coordination of resources, has made it possible to reduce deforestation in the Amazon by 50% in the last year and a half. The integration of databases, including registry offices and Incra, can stimulate investment in the Amazon, with land regularization. The same goes for tracking cattle, which is essential for preserving foreign markets. If the methodological changes to e-social are better understood by economists, it could also help shed light on the labor market, with RAIS eventually allowing for longitudinal studies and other analyses.
Although still far from the market’s radar, strengthening the governance of our public digital infrastructure, including the regulated availability of data to the public (and companies) can improve the quality of public policies and the satisfaction indicators of the people they cover, with benefits for fiscal dynamics, private investment and people’s security and well-being.
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