Fiscal limits and local public expenditure in Brazil

This article analyzes the implementation of fiscal limit targets and their influence on government size and productivity of public expenditures in Brazilian municipalities between 2005 and 2016. For this purpose, a panel data model was estimated, using the differences in differences empirical strategy and applying the Fiscal Responsibility Law (FRL), subdivided into three categories as the main interest variable, in order to identify the municipalities that have complied with the payroll limit; those who met the public debt limit; and those who met both limits. Results obtained demonstrated that the adoption of fiscal targets positively affected public finance management through the compliance with public debt limits, as this promotes a reduction in government size. Besides, municipalities that abide to the FRL reduce their government size, whereas their GDP per capita, improves. On the other side, when the municipal manager belongs to same party as the state governor there is an increase in the government size. In view of the results, it is recommended that stricter measures be adopted in the application of the Fiscal Responsibility Law, in order to provide greater efficiency in the management of public spending − smaller government and productive spending −, especially in election years.