FEDERATIVE ARRANGEMENTS AND FISCAL FEDERALISM: A PROPOSAL FOR MUNICIPAL MERGER IN BRAZIL

Dantas Junior, Amarando Francisco; Diniz, Josedilton Alves

doi:10.12660/cgpc.v30.92857

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FORUM - PUBLIC BUDGET AND FINANCE IN CONTEMPORARY BRAZIL: DIAGNOSES AND CHALLENGES • Cadernos Gestão Pública e Cidadania 30 • 2025 • https://doi.org/10.12660/cgpc.v30.92857.87681 linkcopy

FEDERATIVE ARRANGEMENTS AND FISCAL FEDERALISM: A PROPOSAL FOR MUNICIPAL MERGER IN BRAZIL

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

The Brazilian three-tier federative model has presented two issues that have been aggravated since the 1988 Federal Constitution: low fiscal effort in revenue collection and horizontal fiscal imbalances at the municipal level. International experience shows a relatively common approach to addressing these problems. However, it is a solution rarely discussed in Brazil: federative rearrangement through municipal amalgamations - that is, the systematic merger of municipalities. This article proposes municipal amalgamations that simultaneously increase operational self-sufficiency and reduce horizontal imbalances. The study analyzes the effects of fiscal effort on the self-sufficiency of municipalities when a merger model is applied to maximize the average municipal fiscal effort. The results point to a new scenario: a 70% reduction in the total number of municipalities, a 40% increase in collection effort, and a 36% increase in operational self-sufficiency.

Keywords:
fiscal federalism; merger of municipalities; fiscal effort; amalgamation; self-sufficiency.

VARIABLES	PERIODS	TOTAL OBSERVATIONS	METRICS	TOTAL SAMPLE
OPSELF	2013-2021	49,209	Median	5.567
FCE	2013-2021	49,077

FCC	2013-2019	38,970
POP	2021	5,567	Absolute value

ACRONYM	NAME	DESCRIPTION	CALCULATION FORMULA	SOURCE
OPSELF	Operational SelfSufficiency	Ratio of Own-source Revenues Directly Collected (OSRDC) to the funding needed for the municipality’s operational activities.	OSRDC Operating Expenditure	Bird and Tarasov (2004); Lima and Diniz (2016); Di Liddo et al. (2016).
FCE	Fiscal Collection Effort	Proportion of Tax Revenue Directly Collected (TRDC) relative to the municipality’s operating revenues.	RTDA Operating Revenue	Bird and Tarasov (2004); Lima and Diniz (2016).
FCC	Fiscal Collection Capacity	Sum of all final goods and services (GDP) per capita for the fiscal year. A proxy control variable for local economic development and the municipality’s FCC.	GDP Population	Vergolino (2013);
POP	Population	Estimated population of the municipality.	-	IBGE
OSR	Own-source Revenue	Total of the municipality’s operating revenues from contributions, property tax, agricultural tax, industrial tax, service tax, and other sources.	-	STN
TR	Tax Revenue	Sum of the municipality’s tax revenues (only taxes, fees, and improvement contributions).	-	STN
OR	Operating Revenue	Sum of the municipality’s operating revenues, including current transfers.	-	STN
OE	Operating Expenditure	Sum of the municipality’s operating expenditures. Measures the level of spending required to maintain the operational structure and the provision of local public goods and services.	-	STN

VARIABLES	MEAN	STANDARD DEVIATION	MINIMUM	MAXIMUM
OPSELF	0.1509	0.1194	0.0062	0.8769
FCE	0.0693	0.0618	0.0031	0.5045
FCC	20,857.6	20,397.3	3,574	513,142
POP	37,755.3	220,576.2	771	12,396,372
Observations				5,567

OBSERVATIONS	MICRO		SMALL SIZE		MEDIUM SIZE		LARGE SIZE
OBSERVATIONS	≤ 4,9	5 TO 9,9	10 TO 24,9	25 TO 49,9	50 TO 99,9	100 TO 249,9	250 TO 499,9	≥ 500
			Fiscal Collection Effort
5,567	3.90%	5.15%	6.20%	8.56%	12.23%	16.25%	22.50%	27.42%
			Operational Self-sufficiency
5,567	9.05%	11.56%	13.45%	18.33%	25.19%	33.65%	42.15%	45.59%
			Fiscal Collection Capacity
5,567	21,956	19,064	17,855	21,326	25,447	30,615	36,477	36,102
Population
5,567	1,249 (22.4%)	1,201 (21.6%)	1,675 (30.1%)	763 (13.%)	354 (6.4%)	210 (3.8%)	67 (1.2%)	48 (0.9%)
∑ pop	22.4%	65.4%			10.1%		2.1%

VARIABLE	QUANTILES
AUTOP	.01	.05	.10	.25	.50	.75	.90	.95	.99
EFA	0.94***	0.91***	0.90***	0.85***	0.77***	0.61***	0.51***	0.46***	0.37***
CFA	0.07***	0.08***	0.10***	0.12***	0.18***	0.26***	0.28***	0.37***	0.33***
POP	0.01**	0.01***	0.01***	0.02***	0.05***	0.05***	0.01	-0.00	-0.00
Intercepto	-0.86***	-0.90***	-1.10***	-1.38***	-2.20***	-3.09***	-2.98***	-3.06***	-3.30***
Pseudo R²	65%	63%	61%	59%	54%	47 %	43 %	41%	36 %
Obs.									5,567

GROUP		OBS.	MEAN	STANDARD ERROR	STANDARD DEVIATION
OPSELF post-amalgamations		1,656	0.20371	0.00334	0.13629
OPSELF Pre-amalgamations		5.567	0.15097	0.00160	0.11943
diff			0.0527	0.00345
	diff = mean (post-amalgamations) - mean (pre-amalgamations)					t = 15.2566
	H₀: diff = 0					Graus de liberdade = 7.221
	Ha: diff < 0 Ha: diff != 0					Ha: diff > 0
	Pr (T < t) = 1.0000 PR(\|T\| > \|t\|) = 0.0000					Pr(T > t) = 0.0000

	PRE-AMALGAMATION	POST-AMALGAMATION	∆
Mean	15%	20.4%	36%
Standard Deviation	11.9%	13.6%	14.28%
Ymax	87.6%	77.2%	-11.8%
Ymin	0.62%	2%	222.5%
Coefficient of Variation	79.3%	66.7%	-15.4%
Ymax/Ymin	141.2	38.6	-72.6%

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Fundação Getulio Vargas, Escola de Administração de Empresas de São Paulo Cep: 01313-902, +55 (11) 3799-7898 - São Paulo - SP - Brazil
E-mail: cadernosgpc-redacao@fgv.br

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[1] Note: Statistical significance levels:

[TFN4] ^***
,

[TFN5] ^**
, and

[TFN6] ^*
correspond to p-values ≤ 1%, 5%, and 10%, respectively. Dependent variable: OPSELF = Operational self-sufficiency of the municipality. Variable of interest: FCE = Fiscal collection effort of the municipality. Control variables: FCC = Fiscal collection capacity of the municipality; POP = Population of the municipality. All variables are transformed into natural logarithms.