Indebtedness and investments of subnational governments in Brazil: an analysis by reaction functions

Abstract

The article investigates the solvency and sustainability of the investment policy carried out by subnational governments in Brazil between 2008 and 2016, limited by changes in public accounting that avoid the comparison of some items of the public revenue when including 2017. Regarding the methodology for assessing the payment capacity of the subnational governments in Brazil (CAPAG), an empirical analysis is conducted, adapting Bohn's proposal (1999 and 2007). The results in four specifications of fiscal reaction functions attest to the unsustainability of the fiscal policy of the states, an innocuous fiscal policy of the main cities when using the committed expenditures, but evidence of a solvent behavior in using the values settled by these administrations. Finally, for these two levels of government, the virtuous cycle of investments is verified, which confirm feasible increases in revenues that overlap the respective increases due to investments’ costing.