Non-linear tax reaction function: debt limit, fiscal space and debt sustainability for Brazilian federative units

Abstract

The present study estimates the debt limit and fiscal space of Brazilian states, beyond which, without corrective changes, the debt will be considered unsustainable. For this, panel data for the period between 2000 and 2016 are used in a fiscal reaction function that allows fiscal fatigue. The debt limits of Brazilian federative units are quite heterogeneous, ranging between 0.00% and 23.61%, with an average of 5.46% of their respective GDPs. The results show that 18 of the 27 Brazilian federative units have a fiscal gap, with a negative highlight for the states of Minas Gerais, Rio Grande do Sul, Rio de Janeiro and São Paulo, where their debt/GDP stocks are 21.37%, 20 .87%, 16.29% and 13.40% respectively beyond the maximum debt level.