Could Land-Based Financing Help Create Fiscal Space for Investment by Brazil’s Municipalities?

Within a framework of tight fiscal controls and fiscal discipline, could Brazil’s municipalities generate fiscal space for investment and provision of social needs by increased use of land-based financing? To address this question, we ask: How many Brazilian municipalities would be judged creditworthy by national and international creditworthiness indicators? What is the performance of municipalities ranking in the top quartile by their creditworthiness indicators? How much do municipalities in this top quartile invest? What is their fiscal effort on real estate taxes and fees? Have they passed the legislation necessary to more fully utilize the land-based instruments that help to create and capture real estate value? In summary, how much room is there for municipalities to increase their revenues from their real estate taxes and fees and other land-based instruments to create fiscal space to finance infrastructure, housing subsidies and other needs? Could a national program help to provide incentives for creating fiscal space at the municipal level?

To address these questions, we develop a database with financial and socio-economic variables for municipalities with 50,000+ inhabitants in 2008. We first rank municipal performance with a composite Creditworthiness Indicator, as it shows potential for creating fiscal space. Then, we focus on the municipalities ranking in the top quartile on creditworthiness, so that we can analyze the implications of a national program seeking to increase fiscal space at the municipal level. By using creditworthiness as a key eligibility criterion, such a program would be rewarding effective municipal financial performance, as well as providing a first step for developing modern credit market for municipal financing.

The results show that municipalities ranking in this top quartile often: Invest at low levels, show low fiscal effort with real estate taxes and fees, and have not passed the legislation necessary to use the land-based instruments. Simulations show that relatively small improvements in real estate taxes and fees could generate significant fiscal space.

Based on this, we argue that a national program allocating at least part of the annual allotment of municipal credit could provide incentives for increased generation of municipal fiscal space. For example, such a national or state program could finance the capital budgets of creditworthy municipalities that generate fiscal space by such measures as improved performance on real estate taxes and fees, effective use of the land-based instruments for value capture, or other measures. The credit could be disbursed as the municipalities effectively implement their capital budgets. As about 22 percent of the total population with incomes below the poverty line live in municipalities in this top quartile based on creditworthiness, this program would not be as regressive as it might appear.

Such a program could help municipalities to play a more entrepreneurial role in their development by helping to create real estate value through effective planning and capturing it with the land-base instruments now available. Development and timely publication of a database of the type employed here could stimulate informed debate on the above issues.