Brazil’s Bolsa Família after the demise of the CPMF tax: extension rather than extinction

Bolsa Família is the Lula administration’s premier social justice program; from all sides it has been viewed as a huge success, having brought a surge of laurels for the Brazilian president. With over 36 million Brazilians suffering from poverty and malnutrition – whose daily caloric intake falls under the minimum 2,200 daily figure- Bolsa Família is meant to be a mainstay of the government’s anti-poverty program, Fome Zero. Bolsa Família is a social program that provides financial aid to indigent Brazilian families, with the condition that their children must attend school and be vaccinated. Several months ago a crisis emerged on how the Bolsa Famíilia program would continue to be funded, after the Brazilian Senate had voted against continuing the tax that largely financed the program.

On December 12th, the Senate’s vote against the renewal of the Provisory Contribution over Financial Movements tax (CPMF), created a $20 billion shortfall in the Lula administration’s expected budget for 2008 (Agência Estado, December 13, 2007). Key members of the government had warned that the end of the CPMF tax would be catastrophic for the country’s social justice programs, especially to the administration’s flagship initiative, Bolsa Família. Yet, to the surprise of many, just two weeks after the demise of the CPMF, President Lula issued a decree extending the Bolsa Família’s coverage to families with children as old as 17 years (MP no 411 of December 28, 2007). The million dollar question now is: how was Lula able to expand the Bolsa Família program at the same time that the program lost its main source of funding, the CPMF tax?

Either, Or
Regarding the end of the CPMF tax, state representative and former minister of national integration, Ciro Gomes, darkly forecasted that “to terminate the CPMF is to terminate the Bolsa Família; this is what they [the opposition] want but does not have the courage to say” (Jornal Hora do Povo, September 24, 2007). A similar position had been adopted by the country’s minister of social development and hunger, Patrus Ananias, who is in charge of the day-to-day management of the program. “If the CPMF ends, the Bolsa Família might end. … We would look for other sources, but we would certainly see a visible loss to the Bolsa Família” (Agência Brasil, September 4, 2007). The concerns held by Bolsa Família boosters were not unfounded; in 2007, $3.75 billion of the program’s total $4.3 billion budget, or 87 % of the program’s funding, was in fact derived from this tax, thus prompting the question of how can President Lula afford to increase the administrative costs of the Bolsa Família at the same time that the program has lost about 87% of its funding.

The most obvious answer to the budget problem, which in turn could seriously affect the Bolsa Família’s functioning, would be to raise other taxes. Lula went on to insist, after the CPMF had failed, there “aren’t reasons to announce new taxes” (Reuters, December 17, 2007). This promise, however, did not last long: just two days into the new year, both the Social Contribution over Liquid Profit (CSLL) and the Impost over Financial Operations (IOF) were raised. Finance Minister Mantega defended the President’s action by noting that what Lula had committed himself was “not to make changes in the tributary area in 2007, which he didn’t; we are making it in 2008;” (O Globo, January 02, 2008). Yet, these increases in imposts only generated an expected $10 billion gain, still well below the expected $20 billion lost after the termination of CPMF taxation. Therefore, with this tax raise, the administration could be expected to cope with only half of the budget’s losses due as a result of end of the CPMF (Agência Brasil, January 7, 2008). By itself, this is not enough to justify President Lula’s recent assurances that the funds required to underwrite the Bolsa Família program are secure and that the Bolsa Família could be expanded to include the families of older children (Café com o Presidente, January 07, 2008).

Locking up the Funding
The President’s confidence in securing the necessary funding needed not only for maintaining, but also extending, the Bolsa Familia appeared rooted in the fact that no Brazilian administration has ever collected as much revenue as was achieved by Lula’s in 2007. Moreover, 2008 holds prospects for a continued expansion of revenue, despite the end of the CPMF. According to the secretary of the Brazilian Internal Revenue Service (Secretaria da Receita Federal do Brasil) Jorge Rachid, the increase in revenues derives both from improvements in Brazil’s economic growth and from new policies raised against tax evasion (O Globo, January 18, 2008). While Brazil’s real GDP growth in 2007 was estimated as 4.7%, significantly above the 2.7% estimated figure between 2002 and 2006, the Brazilian Internal Revenue Service had screened 80% more individuals and enterprises in 2007 than in 2006 (The Economist Intelligence Unit, January 23, 2008 and O Globo, January 18, 2008). As a result, revenues in 2007 grew 11.09%, that is, $31 billion, almost double the tax collected under the CPMF.

Thus, there are sound reasons to believe that Lula’is content to back an increase in the Bolsa Família’s administrative cost through the mechanism of extending the program to older children, despite the loss of its main source of funding. This calculation may be based on an overall increase in existing revenues, rather than new forms of taxation. Still, as was previously examined in the author’s “Bolsa Família at Risk” piece, until the government starts to share the administrative costs of the Bolsa Família program with the private sector, (perhaps through incentives provided by microfinancing) political shocks, like the end of the CPMF, could bring on a continuing threat to the program’s existence.