Governance reform and institutional change in Brazil: fiscal responsibility and tax

This paper contrasts two processes of governance reform that occurred in Brazil in the 1990s, one in relation to fiscal responsibility, the other in relation to tax. It illustrates that the degree of institutional change possible depends on whether changes in the positions of actors and their relative powers have occurred to the extent that a new social pact can be built. Brazil’s Fiscal Responsibility Law of 2000 followed on from a series of subtle but significant shifts in the positions of actors and their relative powers, which produced a change in the social pact supporting federal relations. This shift in the social pact allowed for a wholesale change in federal institutions. Major changes in fiscal and administrative policy ensued, and the outcome is that federal institutions have been imbued with greater capacity and accountability. The process of tax reform was similar, in that it occurred slowly and gradually. But the social pact that supports the tax regime has changed only marginally. In this context, the scope for institutional change was limited within the boundaries of existing institutions. Policy changes that were implemented did lead to an increased tax take, but the tax system remains inefficient and inequitable. This paper highlights that although governance reforms can take multiple forms, wholesale institutional change was a necessary prerequisite for an increase in the capacity and accountability of government. Wholesale institutional change was only possible because of the articulation of a new social pact. Keywords: governance; fiscal policy; tax; institutions; Brazil.