Resource Windfalls, Fiscal Effort and Public Spending: Evidence from Brazilian Municipalities

Abstract

In 1997, Brazil approved a new law establishing the regulatory framework of oil and gas industry. One of the most important changes was the distribution of petroleum rents to states and Municipalities. The volume received by each municipality varies considerably, since it depends on a range of criteria that measure the impact of upstream activities on the specific municipality as well as the number of productive wells next to it. This paper aims at evaluating whether municipalities eligible to receive royalties exhibited a lower fiscal effort than the non-eligible ones. We use the local collection of Urban Property Tax (IPTU) as a measure of fiscal effort, after controlling for fiscal capacity of each municipality. We also assess whether municipalities are obeying requirements of spending oil rents, by measuring the impact of such rents on specific items of the budget, like personal, health, education and investment expenses. The data set comprehends about 4000 municipalities observed during seven years (from 1999 to 2005). We used the Arellano-Bond GMM estimator in a dynamic panel with fixed effects. Results allow concluding that windfall oil rents in fact reduces fiscal effort and increases the allocation of budgetary resources on investment, but the share of budget allocated on health, education, energy and housing expenses did not changed as consequence of oil royalties.

Keywords: fiscal federalism, windfall oil rents, fiscal effort, public spending

JEL Classification: H71, H75