Funding Bolsa Familia: Taxation and Loans

The launching of Bolsa Familia in 2004 was received with widespread support from the World Bank and the Inter-American Development Bank. Their political endorsement, which signified the wider support of the business community, was materialized in two loans for a total of US $2.57 billion that covered approximately 25 percent of total costs of Bolsa Familia in 2004 (Hall 2006, 698). First, the World Bank provided a US $572 million loan in June 2004. The funds were not mainly intended to be used for the cash transfers. Rather, its goals were to support (a) the consolidation of conditional cash transfer programs and reductions in gaps and duplications in coverage; (b) a strengthening of the system for identifying the target population; (c) the development of a monitoring and evaluation system; and (d) a strengthening of the basic institutional functioning of the program (The World Bank 2004a, 4; The World Bank 2004b, 6). Second, in December of the same year, the Inter-American Development Bank approved a loan of US $1 billion for Bolsa Familia, with the promise of up to US $2 billion (Inter-American Development Bank 2004b; Inter-American Development Bank 2004a).

Despite these sizeable inflows of foreign exchange, the Brazilian state financed most of the US $34 billion that Bolsa Familia has cost to date. In the decade since Lula came to power, the Brazilian state was able to increase revenues to finance increased expenditures. This was possible not because taxation rates rose (total taxation as % of GDP rose only slightly), but because the total revenue increased accordingly with the four-fold increase in GDP from 2003 to 2010. As many economists argue, economic growth, high productivity and improved competitiveness in global markets were the backbone upon which Lula’s social policies were enacted. But whose taxes financed Bolsa Familia?

While it is hard to trace the exact sources of the state’s fiscal revenue that directly funded Bolsa Familia, an examination of Brazil’s taxation system gives us some insights. As Figure 1 shows, indirect general taxes on goods and services (at about 13 percent of GDP in 2010) comprises the main source of tax revenue. This category of taxes includes value added taxes, which is considered to be highly regressive. Value added taxes impact working class peoples the most because they consume most of their income while having less savings and investments.

Moreover, Figure 1 also shows that taxes collected on the working class and the taxes collected on the income, profits and capital gains of the richest segment of the population have not changed dramatically during Lula’s administration. From 2003 to 2010, taxes on income, profits and capital gains timidly increased from 6.35 to 6.89 percent of GDP, while general taxes on goods and services barely increased from 12.02 to 12.89 percent of GDP.

These insights suggest that the increased public expenditures on welfare programs were not financed by an increased taxation on the rich. Rather, I suggest we are in the presence of an intraclass transfer of resources, rather than an inter-class transfer. In other words, the taxes paid by the working class matched the social expenditures directed toward it, making Bolsa Familia a self-financed program. While the evidence at hand does not prove this in a conclusive manner, case studies about welfare programs in the United States, Australia, Canada, Germany, Sweden and the United Kingdom show that intra-class transfers are the norm (Shaikh 2003, 537).

Further evidence of the self-financing nature of Bolsa Familia can be found in the reforms to the public pension system under Lula. In 2003, the state negatively readjusted the formula for calculating pensions, effectively reducing the amount received by all workers in the formal economy. In 2007, Lula extended pension benefits to informal workers who make up more than half of Brazil’s workforce. Therefore,“. . . while many formal workers had their pensions reduced, 28 million informal laborers who previously had no social security will now be entitled to pensions, which will largely be subsidized by the contributions of their formally employed counterparts” (Ansell 2011, 26).

If Bolsa Familia is indeed a case of self-financed welfare program, then this would explain, to a large extend, the positive reaction of the landowning, industrial and financial elites of Brazil towards Lula’s social policies. Ultimately, they did not see Bolsa Familia as a redistribution of resources from the rich to the poor, and therefore had little incentive to oppose the measure.