Emergency income support has changed the way Brazilian society sees the welfare safety net
September 16, 2020
By Karina Toledo | Agência FAPESP – Brazil’s emergency income support program has reduced extreme poverty during the pandemic to the lowest level in 40 years, changed the way people perceive the welfare safety net, and taken the discussion of inequality to a higher level in Brazil.
This was one of the conclusions of the economists who took part in the webinar “COVID-19 Economic Recovery Strategies: Basic Income” held by FAPESP on September 2.
According to the researchers, the unconditional cash transfer of BRL600.00 (now just over USD100.00) per month extended to almost half the population of Brazil in the first few months of the pandemic cannot be made permanent without a veritable fiscal and legislative revolution. A return to the Bolsa Familia conditional cash transfer model in place since 2003 and suspended in March does not seem acceptable either. What is the best way forward? Is it time for the implementation of a universal basic income (UBI) program?
Naercio Menezes Filho, a professor at the University of São Paulo (USP) and INSPER business school, said targeting poor households with children would be a more effective and less expensive way to use income support to achieve equality of opportunity for future generations of Brazilians. Social inclusion in the early years of schooling should also be strengthened.
“If you’re born poor in Brazil, you have problems that accumulate throughout your life and make it very difficult for you to achieve your projects and dreams. That in turn discourages poor youngsters from doing well in school, going to high school and college, getting a formal job, and this affects productivity,” he said.
For Menezes Filho, Bolsa Família successfully reduced extreme poverty, assuring access to the minimum amount of calories needed to survive for a significant portion of the very poor, but it was not enough to lift people out of poverty, which includes lack of money to pay for clothing, transport, hygiene products, and other basic necessities. “Only 64% of the poor receive this income and half of these remain poor even after receiving it,” he said.
He proposed the use of the cell phone app developed for emergency transfers during the pandemic, with better targeting but broader coverage than Bolsa Família, to transfer BRL800.00 per month per child to all 3.62 million of Brazil’s poor households with children. He presented simulations showing that this would benefit more than 5 million children, cost BRL69.0 billion per year, and lift 93% of families with children out of poverty (as defined earlier).
Although the cost would be much less than the BRL50 billion per month spent on emergency income support during the pandemic, it would be more than double the annual cost of Bolsa Familia. The difference would be funded by “raising taxes on the rich”, Menezes Filho concluded.
A similar strategy was advocated by Rodrigo Orair, a researcher at the Institute for Applied Economic Research (IPEA), a Brazilian government think tank. “Here at IPEA we’re discussing a hybrid program that would focus on the poorest families, with a universal component per child and a targeted scheme that would be bigger than Bolsa Família,” he said. “This mixed solution could reduce more poverty more effectively than a UBI program.”
According to Orair, the transfer should be universal in the case of children for several reasons, including the fact that children are overrepresented in poor households and poverty is more frequent and pronounced among families with children.
“Maintaining emergency income support as it now stands would cost 7.5% of gross domestic product [GDP], which is unrealistic, but Bolsa Família has become too small for current needs, so how far can we go?” he asked. “We can opt for fiscal neutrality, and in this case, the new program cannot cost more than 0.8% of GDP. Or we can go for 2% or 3%, but what would the possible financing scenarios look like?”
Tax hikes are not feasible in the middle of an economic recession, but the tax base could be broadened by means of a tax reform to fill the gaps in the existing system whereby the rich pay much less tax than everyone else in proportional terms. “Simple measures such as taxing profit and dividends won’t work. We need to overhaul the entire system and in parallel introduce progressive taxation of income and wealth,” Orair said.
Utopia versus reality
The idea of a minimum subsistence income provided by the state to all citizens is over 500 years old and has recently come to the fore amid the world economic crisis caused by the pandemic. “Over 200 countries and territories have introduced social protection measures as part of their response to the pandemic,” said Ugo Gentilini, a senior economist at the World Bank, where he is head of social safety nets. Gentilini is the lead author of a widely cited book on UBI.
There are many different definitions and models of UBI, he noted. These vary depending on the purpose of the measure. Aims range from reducing poverty and combating hunger to stimulating the economy by boosting consumption or mitigating job losses in specific sectors, among others.
“There are different interpretations for the concept of universality,” Gentilini said. “It may mean simply pursuing a universal outcome, such as ensuring that all children can read.”
In an examination of 18 test cases, Gentilini pinpointed the Mongolian UBI program as the only one that entailed regular universal and unconditional cash transfers on a national scale. It was shut down after two years owing to “funding volatility”.
Rozane Bezerra de Siqueira, a professor at the Federal University of Pernambuco (UFPE), said implementation of a program of this kind in Brazil would yield many benefits. Besides eliminating poverty, it would foster equity, promote social cohesion, and make the state more legitimate.
Siqueira presented the results of simulations produced by her in partnership with José Ricardo Nogueira, a colleague at UFPE, to estimate the cost and effects of a UBI program transferring BRL406.00 per month on the basis of the 2017 Continuous National Household Sample Survey (PNADC) conducted by IBGE, Brazil’s census and statistics bureau.
One of the scenarios combined a universal transfer costing 11.5% of GDP (BRL758 billion in 2017) with a proportional tax on all other incomes at a flat rate of 37.5%, which would replace personal income tax and employees’ social security contributions. According to Siqueira, this would reduce Brazil’s Gini coefficient to 0.38, from 0.54 currently. The Gini coefficient or Gini index measures income inequality on a scale from 0 (all citizens earn equally) to 1 (only one earner).
According to a report published six months ago by the UN Development Program (UNDP), Brazil is the seventh most unequal country in the world, lagging only a number of African countries on this criterion.
“Important lessons can be learned from the crisis caused by the pandemic,” said Luiz Eugênio Mello, FAPESP’s Scientific Director, in his opening remarks to the webinar. “Most of the initial concern had to do with the development of vaccines and new drugs, but as time goes by we’re all starting to consider the additional consequences of the pandemic, including the starkly negative effect on economic activity.”
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