Table 2. **Composition of public social spending, 2002** In per cent of GDP

||Total|Cl<br>Level|s of gove|rnment|
|---|---|---|---|---|
|||entra<br>government|States|Municipalities|
|Total public social spending|24.4|13.3|5.8|5.2|
|Social asistance|0.9|0.5|0.1|0.2|
|Social security|10.7|9.2|1.2|0.3|
|Health care|4.7|1.9|1.3|1.5|
|Sanitation|0.4|0.0|0.2|0.2|
|Labour|0.7|0.6|0.0|0.0|
|Education|5.4|1.0|2.6|1.8|
|Culture|0.2|0.0|0.1|0.1|
|Civil rights|0.2|0.0|0.1|0.0|
|Housing|0.1|0.0|0.1|0.1|
|Urbanisation|1.0|0.0|0.1|0.9|
|Land reform|0.1|0.1|0.0|0.0|

_Source_ : Ministry of Finance.

21. The municipalities are becoming more active in the provision of social services. This is essentially the case of health care, with the decentralization of the national health system (SUS) in the early 1990s, and education, particularly after the implementation of FUNDEF in 1997-98 (Box 2). These two functions accounts for almost one-half of municipal spending, but outlays are financed predominantly through revenue sharing and earmarked revenue. In some cases, municipal governments are also involved in the provision of conditional income transfers to poor households, a social expenditure more often financed by the central government.

# **Box 2. FUNDEF**

FUNDEF is a fund (created in 1996 and implemented in 1997-98) to finance sub-national spending on primary and lower-secondary education. While primary spending is assigned to the municipalities by the Constitution, the states were the main providers of services until the late 1990s. FUNDEF changed the mechanism for financing subnational spending on education in two main ways. _First,_ a national spending floor was introduced per student enrolled in primary and lower-secondary education (1<sup>st</sup> to 8<sup>th</sup> grades), coupled with a framework for the allocation of funds between the state and municipal public school networks. _Second,_ FUNDEF requires the federal government to top up spending in those states that cannot afford the national spending floor. Since 2000, different floors have been set for primary education (1<sup>st</sup> to 4<sup>th</sup> grades) and for lower-secondary education (5<sup>th</sup> to 8<sup>th</sup> grades), at 5 percent above the value for primary education.<sup>1</sup> FUNDEF is financed by earmarking 15 percent of i) the state and municipal allocations in the revenue-sharing funds with the federal government, ii) revenue from the state value-added tax (ICMS), iii) revenue from the federal value-added tax levied on exports (IPIexp), and iv) federal transfers to the states associated with ICMS revenue insurance ( _i.e.,_ a mechanism for compensating the states for the revenue losses associated with the exemption of value added tax on the exports of primary and semi-manufactured goods). FUNDEF resources are allocated within each state according to the number of students enrolled in the state and municipal public school networks. At least 60 percent of FUNDEF allocations must be spent on personnel, with the remaining share being spent on operations and maintenance. Within FUNDEF, the municipalities are required to spend at least 25 percent of their revenue on education (at least 15 percent on primary education).

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