Determinants of the indebtedness of Brazilian states in the period after the fiscal responsibility law

Abstract

The indebtedness of states is a key factor for financing and public investment. However, if used without limits, it can lead to fiscal imbalances, manifesting as higher taxation for the population or a reduction in the supply of public goods and services. In the context of worsening debt levels of subnational governments, institutional mechanisms were established to control public spending, such as the Fiscal Responsibility Law and Federal Senate Resolution n. 40/2001, which limited state debt. This context underpinned the objective of analyzing the determinants of the indebtedness of these public entities in the period from 2001 to 2020. For such purpose, panel data methodology was employed using a panel model with corrected standard errors. The results showed that election periods, current expenditures, interest rates, and inflation determine the dynamics of debt expansion. In turn, tax revenue, investment expenditures, and financial dependence on federal resources act as reducers of state debt formation.