The trade-off between income distribution and the capacity of governmental public investment in Brazil

Abstract

The free cash flow signals how much the state gives back or distributes to a society, without putting the capacity of investment in infrastructure at risk. The objective of this study is to evidence how the public administrators can demonstrate the amount distributed (income, benefits, and aids) to the society in order to fight the social inequality, without affecting its own capacity of making investments. We validated the analysis through the Chow test in the historical series from 1995 to 2010. The data are from the public finances in the counties of the state of Sao Paulo, Brazil. The results obtained suggest significant evidences that the 'Lei de Responsabilidade Fiscal Brasileira' (Brazilian Fiscal Responsibility Law) affected positively the cash flow available for the society, giving the state a greater income distribution potential without risking the capacity of making investments in infrastructure, signalling improvement in the quality of the Brazilian public expense.