Fiscal Space of Brazilian States

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Aug 2013
We estimate the fiscal space of Brazilian States defined as the difference between a State's actual debt and the theoretical debt limit implied by the historical behavior of its policymakers. We estimate fiscal reaction functions and debt limits using publicly available data between 2000 and 2011 for the 26 Brazilian States and the Federal District. The results suggest that, after a decade of fiscal consolidation, a number of States have fiscal space but there remains significant heterogeneity across States. Going forward, enhancing the role of market incentives and strengthening rules-based approaches governing subnational debt build-up would contribute to a prudent and effective use of existing fiscal space.