Impact of Brazil’s decentralized financing system on subnational spending and education outcomes

for them to retrench when there is an economic crisis or a decrease in the number of students. most subnational governments allocate between 25 percent and 35 percent of their net revenues to education, with some exceeding 35 percent. many of them spend more than 25 percent of their revenues because their spending is linked to the economic cycle. many municipalities that spend almost R$10,000 or more per student are close to the 25 percent, suggesting that the rule is causing generally unplanned increases in salaries. At the same time, there are some municipalities that need to spend more than 35 percent of their net revenues to achieve a minimally adequate level of per student spending.

IMPACT OF BRAZIL’S DECENTRALIZED FINANCING SYSTEM ON SUBNATIONAL SPENDING AND EDUCATION OUTCOMES

Impact of FUNDEB and FUNDEF transfers on education spending

FUNDEB and its predecessor FUNDEF have made significant contributions to raising student enrollment and financing. Access, completion, and learning have increased substantially at all levels of preuniversity education, particularly in primary and lower secondary education. FUNDEB considerably reduced the gap in per student spending between rich and poor states and municipalities, but significant differences remain among municipalities. Average per student spending is relatively high, but many states and municipalities are spending well below the average; other municipalities have spending levels comparable to those of OECD countries but produce education results that are no better than Brazil’s other school networks. This indicates there is substantial room for improving quality through increased efficiency.

FUNDEF created incentives for municipalities to increase student enrollment. By 2000, access to education for children aged between 7 and 14 years was universal. The North and Northeast regions experienced the steepest growth between 1997 and 2000, with 10 and 16 percentage point increases, respectively. Besides increasing overall enrollment, FUNDEF caused a shift of primary students from state-run schools to municipal schools, because it granted to municipal governments the financial means to afford education provision. Between 1997 and 2000, primary and lower secondary enrollment in municipal school networks increased by 4.3 million students. Although 2.1 million of the new students were new enrollees, the remaining 2.2 million students came from state school networks, for a 34.5 percent increase in municipal enrollments.

FUNDEF and FUNDEB have increased total expenditures on education, particularly in poorer regions, which have had a substantial increase in per student spending. Between 1996 and 2000, per student expenditure increased by approximately 40 percent. Figure 8.15 shows the distribution of per student spending in Brazilian municipalities both with and without FUNDEB and clearly shows how FUNDEB has helped to raise per student spending in the poorer municipalities, thus reducing regional spending inequity. moreover, at the municipal level, overall net transfers are strongly and positively correlated with per student spending and mainly benefit smaller Brazilian school networks (see figure 8.17).

Empirical evidence suggests that educational transfers have a greater impact on education spending than general intergovernmental transfers. Table 8.4 presents our results from different statistical models in which the log of per