Budgetary Solvency and the Efficiency of Public Services in Brazilian Municipalities

Solvência Orçamentária e a Eficiência dos Serviços Públicos em Municípios Brasileiros

ABSTRACT

Objective:  this study investigated the impact of budgetary solvency on the dynamic efficiency of health and education services in large Brazilian municipalities.

Theoretical approach:  there are questions in the literature regarding the existence of a relationship between the quality and efficiency of the provision of goods and services at local government levels and their sources of financing.

Methods:  efficiency scores for the health and education sectors were derived using SBM dynamic network data envelopment analysis. The generalized estimating equations method was employed in the second stage.

Results:  a significant positive relationship between budgetary solvency and the efficiency of health and education services was found, indicating that service efficiency in large Brazilian municipalities depends on government budgetary solvency.

Conclusions:  the findings reinforce the academic framework on financial condition and fiscal federalism theories in Brazil. This study supports social control, enabling society to demand better performance from public officials in healthcare and education service provision.

Keywords:
Public finance; Operational expenditure; Education; Health

RESUMO

Objetivo:  este estudo investigou o impacto da solvência orçamentária na eficiência dinâmica dos serviços de saúde e educação em grandes municípios brasileiros.

Marco teórico:  existem questões na literatura sobre a existência de uma relação entre a qualidade e a eficiência na prestação de bens e serviços estabelecida nos níveis de governo local e suas fontes de financiamento.

Método:  as pontuações de eficiência para os setores de saúde e educação foram derivadas usando a análise envoltória de dados de rede dinâmica SBM. O método de equações de estimação generalizadas foi empregado na segunda etapa.

Resultados:  foi encontrada uma relação positiva significativa entre a solvência orçamentária e a eficiência dos serviços de saúde e educação, indicando que a eficiência desses serviços em grandes municípios brasileiros depende da solvência orçamentária do governo.

Conclusão:  os achados reforçam a estrutura acadêmica sobre as teorias da condição financeira e do federalismo fiscal no Brasil. Este estudo apoia o controle social, permitindo que a sociedade exija melhor desempenho dos gestores públicos na prestação de serviços de saúde e educação.

Palavras-chave:
Finanças públicas; Despesas operacionais; Educação; Saúde

INTRODUCTION

In federalist states, institutional efforts for socioeconomic development and well-being are based on cooperation among different levels of government. The governmental spheres share political and administrative responsibilities, with national governments being responsible for distributive policies, while regional governments are tasked with providing goods and services to society.

Federalism theory highlights that these characteristics are fundamental for fiscal management and the division of tasks among federal entities (Matias-Pereira, 2018). The sharing of responsibilities becomes more efficient when carried out through decentralization, which seeks to increase the provision of public services at the local level and adapt them to residents’ preferences. This approach aims to establish a relationship between the cost of providing public services and the burden on citizens willing to pay for them (Tiebout, 1956).

In addition, financial condition theory states that local governments must: (1) maintain the current level of services provided to the population; (2) withstand disruptions in the local and regional economy; and (3) respond to population demands related to growth, decline, and change (Groves & Valente, 2003). This theoretical alignment between the decentralization strategy (the ability to gather information about local needs) and the capacity to finance goods and services may be suitable for promoting social engagement and achieving balance in the federal system (Oates, 1972, 2008).

Financial condition can be explained through four dimensions of solvency: (1) cash solvency: the ability to generate enough resources to cover short-term expenses; (2) budgetary solvency: the ability to generate revenue to cover the expenses of the budget cycle without incurring deficits; (3) long-term solvency: the ability to cover all costs, including annual budgets and those specific to each year; and (4) service-level solvency: the government’s ability to provide health, safety, and welfare services at the minimum quality desired by citizens.

Budgetary solvency is the short-term dimension of financial condition, defined as “the government’s ability to generate sufficient revenue to meet its expenses without incurring deficits, using financial reserves, or compromising liquidity” (Lima & Diniz, 2016, p. 74). In this sense, managing budgetary solvency allows local managers to understand existing social demands and ensure the allocation of resources for the operation of public services at the minimum required quality (Lima & Diniz, 2016). Thus, budgetary expenditures can have long-term implications for the quality of public services offered by local governments (Thompson, 2017).

In Brazil, local governments have fiscal autonomy. With varying individual capacities, the federal system results in vertical fiscal imbalances (VFI) and horizontal fiscal imbalances (HFI) in its administrative capacity to provide goods and services (Dantas & Diniz, 2022). Therefore, the decentralization of responsibilities among governments is unequal, as there are gaps between the resources generated by communities - comprising public revenues - and the specific needs of each locality, reinforcing structural and social inequalities among jurisdictions (Lima & Diniz, 2016).

In the public finance literature, Zafra-Gómez et al. (2010) discusses the alignment of perspectives related to the increase in responsibilities assumed by local jurisdictions, emphasizing operational efficiency in terms of municipal financial performance in developed countries. His findings reveal that more efficient municipalities are characterized by greater financial condition margins, performing better in terms of financial structure. This research theorizes that such a perspective aligns with the elements of budgetary solvency presented by Lima and Diniz (2016), which highlight the efficiency of public service delivery as resulting from: (1) the government’s ability to continuously maintain budget balance; (2) the government’s ability to build financial reserves to address emergencies; and (3) the government’s ability to maintain sufficient liquidity to meet its current obligations.

In this context, the dilemmas related to fiscal stress (Donato, 2020), budgetary constraints (López-Hernandez et al., 2012), and public costs (Zafra-Gómez et al., 2010) point to low local financial mobility, fostering dependence on higher levels of government and jurisdictional interference to finance goods and services. This research reflects on the need to consider that efficiency may be related to the local entity’s financial capacity to fund goods and services, highlighting that better indicators of budgetary solvency can encourage managers to maintain good efficiency practices. To address this research gap, we focus on health and education services in the Brazilian context, as these are areas that have historically faced challenges in improving efficiency indicators (Afonso & Fraga, 2024; Dufrechou, 2016). To achieve this goal, we apply the dynamic network DEA method, considering that the model stratifies efficiency by sector and overall for the local jurisdiction.

Thus, the objective of this study is to investigate the effects of budgetary solvency on the technical efficiency of health and education services provided by Brazilian municipalities.

According to a study by the Organisation for Economic Co-operation and Development (Organization for Economic Co-operation and Development [OECD], 2021b), titled “OECD Reviews of Health Systems: Brazil 2021,” only 10.5% of budgetary spending in Brazil is allocated to the health sector. These figures are below the OECD countries’ average of 15.3% in 2019. Regarding education, a similar OECD report on Brazil (OECD, 2021a) highlighted the underfunding of the basic education sector, while higher education received more resources and policies aimed at benefiting socioeconomically disadvantaged students.

These disparities in investment between the health and education sectors reflect the need to allocate more resources to these areas in order to ensure a quality healthcare system and equitable, accessible education for all citizens.

This study seeks to broaden the discussion within the public finance literature by exploring the theory of financial condition and fiscal federalism. It offers contributions that may guide governments, civil society, and other institutions interested in this topic. Moreover, it helps to understand that inadequacies in the health and education sectors may compromise development and the generation of social and economic well-being for citizens.

This study contributes to the Sustainable Development Goals established in Brazil (Grupo de Trabalho da Sociedade Civil para a Agenda 2030 [GTSC], 2024), specifically in: good health and well-being; quality education; sustainable cities and communities; and peace, justice, and strong institutions.

LITERATURE REVIEW

Fiscal decentralization, financial condition, and budget solvency

Initial discussions on fiscal federalism theory began with the publication of Samuelson’s (1954) work, which highlighted the existence of public goods and the necessity for the state to provide them, since they are characterized as non-excludable and non-rival goods. Fiscal federalism emphasizes the responsibilities of government entities at different levels of governance. This perspective points to the need for sources of funding so that subnational governments can operate efficiently.

In the pursuit of optimal balance, subnational governments are responsible for the decentralized provision of certain public goods at efficient levels, limited to consumption by residents, which could ensure that their preferences are adequately met (Oates, 2005). In fiscal decentralization, it is argued that delivery managed by government levels closer to the population may lead to potential gains in economic well-being and more efficient allocation of resources in the public sector. The rationale is that local authorities are better positioned to reflect the preferences and needs of citizens. On the other hand, governmental centralization tends to result in the provision of more uniform services to citizens, since central governments face challenges in identifying the specific preferences of each locality (Oates, 2008).

Although local governments are in a privileged position to address local dilemmas, there is a clear discrepancy between tax collection and the provision of public services by each federative entity (Dantas et al., 2019). It becomes evident that the difficulties inherent in decentralizing allocative functions and the capacity of local governments to manage goods and services may be linked to their financial and administrative conditions, affecting the budgetary management of public resources (Dantas et al., 2019). This interdependence reinforces that resource management can enable institutional responses aimed at meeting community needs. According to Lima and Diniz (2016), budget management may be associated with spending pressure and community demands. Thus, ensuring the necessary resources to finance public services requires a solid financial condition for government entities.

The financial condition refers to the government’s ability to provide goods and services adequately and continuously, address issues arising from economic cycles, and respond to demands of natural growth, decline, and change (Groves & Valente, 2003). In the search for efficiency during times of limited public resources, the study by López Hernandes et al. (2012) suggests that governments should implement structural changes in the management of local services. The management of public resources encompasses several elements, including those stemming from budgetary management. Budgetary solvency is understood as the capacity of local governments to generate sufficient tax revenue to cover their operations during the fiscal budgetary period (Groves & Valente, 2003). Therefore, the indicators of this dimension should reflect the results of budget execution, expressing the balance between revenue and operating expenditures during the fiscal year.

In this regard, Groves and Valente (2003) highlight that budgetary solvency can be understood through specific criteria that aim to contribute to the budgetary management of government entities: (1) a consistent pattern of operating deficits, indicating institutional incapacity to provide public goods and services; (2) depletion of reserves resulting from previously accumulated surpluses; (3) declining liquidity; (4) inefficient techniques for revenue and expenditure forecasting; and (5) ineffective budgetary control. Thus, understanding budgetary solvency reveals the status of the government’s operational position through budgetary balance, as reflected in the performance of planned versus executed results.

Efficiency in health and education

Brazil is a historically unequal country, culturally rich, and of continental dimensions. The provision of public goods and services meets the basic needs of the population, as reinforced by the Federal Constitution of 1988, which establishes access as a right for all and a duty of the state. To guarantee this access, collaboration among public institutions is necessary to achieve established goals and indicators, aiming to improve the population’s quality of life (Andrett et al., 2018).

In this context, efficient management of health and education services involves the government’s managerial capacity to determine the adequate quantity of services, assess costs, and understand the impact of the services provided while maintaining the required quality. Pursuing efficiency is an institutional role and a fundamental duty of the Brazilian state. However, this managerial model overlooks the marks of Brazilian federalism and its specific characteristics.

According to Wang and Tao (2019), each locality has specific needs, and health and education services are multidimensional, spillover-prone, and difficult to measure. The study by Abimbola et al. (2019) supports this argument by showing that wealthier cities maintain larger structures and more specialized services. This occurs because municipalities with better financing conditions attract more qualified professionals, benefit from more cost-effective procurement processes, and offer more specialized services.

In a country like Brazil, where a multitude of factors influence the provision of municipal services, the pursuit of efficiency becomes a normative and jurisdictional attempt to obtain competitive advantages in the allocation and optimization of material and financial resources (Liu et al., 2019). However, such normative criteria focus solely on managerial capacity to establish relationships between variables, disregarding that health, for instance, is comprehensive and multidimensional, being closely linked to the economy, population, and regional development. Moreover, it is necessary to consider the specific needs, quantities, and particular characteristics of each locality (Wang & Tao, 2019). Therefore, the efficiency scores derived from these variable relationships may be limited in adequately delineating the extent of public service provision.

According to Silva (2018), efficient management involves the government’s capacity to define the appropriate amount of services, manage costs, and evaluate the impact of the services offered while maintaining the quality expected by citizens. Although these criteria are easily measurable, they disregard nuances, particularities, and institutional, political, and social relationships. In other words, eventual costs and service quantities may be overlooked in the effort to preserve the public value of the services offered and ensure necessary maintenance, even if the optimal balance between cost and quantity is not achieved, as often occurs in Brazilian municipalities (Afonso & Fraga, 2024). Therefore, ensuring equitable access to health and education services requires continuous efforts to overcome regional and financial disparities, promote proper resource allocation, and strengthen health systems at all levels of governance.

In this regard, the World Health Organization (WHO) sets universal goals to be achieved by health systems, assigning governments the responsibility of defending, improving, and protecting people’s health. This involves promoting equity in health service financing, raising societal expectations regarding service quality, and strengthening health policies to reduce inequalities (WHO, 2017). Subjective measures (e.g., number of physicians and nurses, outpatient production, number of consultations, mortality rates, among others) can contribute to assessing efficiency in a way that values public institutions and their role in pursuing social well-being (Andrett et al., 2018; Brinckmann et al., 2019; Mazon et al., 2015; Ribeiro et al., 2020; Silva, 2018).

Accordingly, we develop the following research hypothesis:

H1: The better the budgetary solvency, the greater the efficiency of health services in large Brazilian municipalities.

In education, it is suggested that investing in the sector may contribute to building a developed society, as the formation of critical, skilled, and conscious citizens directly impacts economic, social, and cultural progress. Conversely, institutional neglect in this sector can compromise entire generations, deepen inequalities, and hinder other sectors of the country (Araújo et al., 2016). Thus, allocating resources to educational systems aims to promote economic growth, social development, reduction of inequalities, increased income, and social well-being (Mattei & Bezerra, 2018). Due to these factors, public debate on educational efficiency is highly intense among policymakers, educators, and other social and educational stakeholders (Witte & López-Torres, 2017). Typically, studies focus their discussions on economic aspects and the allocation of public resources in educational systems (Moraes, 2018). However, subjective measures - such as the number of teachers, students per classroom, distortion rates, approval rates, among others - can contribute to the improvement of public service delivery.

Based on this, we develop the following research hypothesis:

H2: The better the budgetary solvency, the greater the efficiency of educational services in large Brazilian municipalities.

Overall efficiency

In this study, we employ dynamic network data envelopment analysis (DEA). This statistical method enables the automatic generation of an overall efficiency score by linking the performance of health and education services. To support this approach, it is important to note that studies exploring the relationship between budgetary solvency and the efficiency of local services remain relatively scarce within the public finance literature (Cuadrado-Ballesteros & Bisogno, 2019). Drew et al. (2016), for example, investigated whether financially sustainable local jurisdictions were also operationally efficient. Their findings revealed that better financial conditions were not necessarily positively associated with government efficiency, suggesting that policymakers may have erred in assuming that improvements in operational efficiency would naturally lead to enhanced financial sustainability.

In this context, the study by Zafra-Gómez et al. (2010) aimed to examine the connection between financial sustainability and service quality in small Spanish municipalities. The results revealed disparities between small and large municipalities. Smaller jurisdictions faced higher costs in delivering essential public services, which meant they required proportionally higher revenues to maintain an acceptable standard of service delivery.

Further advancing this discussion, Cuadrado-Ballesteros and Bisogno (2019) analyzed the relationship between financial sustainability and efficiency by comparing two distinct national contexts - Spain and Italy. Their findings emphasized the importance of distinguishing between types of expenditures and their relevance to efficiency. According to their research, current expenditures are directly linked to public service provision, and jurisdictions that manage these expenditures efficiently tend to demonstrate better financial health and greater ability to fulfill both current service demands and future obligations. However, they also point out that more efficient investments do not necessarily translate into improved financial indicators.

In the context of federalism, evidence shows that local governments possess the autonomy to manage their budgets in a manner that reflects the structural inequalities among municipalities (Brusca et al., 2015). Larger municipalities tend to have lower debt levels and greater economic resilience to reverse negative financial outcomes. In contrast, smaller municipalities often struggle to maintain service provision without incurring deficits or increasing indebtedness (Dantas & Diniz, 2022). Brusca et al. (2015) also highlighted how the implementation of specific legislation in Spain and Italy was instrumental in responding to local financial difficulties while safeguarding the population’s needs.

The study by Vanneste and Goeminne (2018)reignited the debate on the relevance of fiscal variables for measuring efficiency. Their analysis found that while public funding allocations did not significantly impact efficiency, fiscal autonomy had a positive effect on the efficiency of local service delivery. Interestingly, higher levels of indebtedness were associated with greater overall efficiency, contradicting much of the existing literature. This suggests that highly indebted municipalities may become more efficient in managing their limited remaining resources due to increased financial constraints. On the other hand, per capita tax revenue had no significant effect on efficiency, and both budgetary issues and revenue derived from public assets were negatively associated with the capacity to deliver efficient services (Balaguer-Coll et al., 2013).

Adequate financing is essential for ensuring both efficiency and equity in access to public services. Reductions in public spending have significantly contributed to the deterioration of socioeconomic and well-being indicators, particularly in municipalities located in poorer regions (Richardson et al., 2020). Moreover, fiscal austerity has been linked to the emergence of serious social problems due to cutbacks in essential services, especially during periods of crisis (Toffolutti & Suhrcke, 2019). In developing countries, resource management challenges related to public policy financing have negatively affected the performance of local governments (Amos et al., 2021). Finally, Thompson (2017) highlights that reductions in public service spending may have long-lasting adverse effects on service quality across municipalities.

Based on these considerations, we propose the following research hypothesis:

H3: The better the budgetary solvency, the higher the overall efficiency of public health and education services in large Brazilian municipalities.

METHODOLOGY

Sample and data collection

The sample for this study comprises 250 municipalities considered large based on population figures reported by the Brazilian Institute of Geography and Statistics (IBGE) in 2019 (Instituto Brasileiro de Geografia e Estatística [IBGE], 2019), representing 4.5% of the total number of Brazilian municipalities. The selection of the largest 250 municipalities was made due to the quality and availability of information in official databases.

Availability is related to sources of scientific evidence, allowing for standardization, comparison, and validation among municipalities (Wang et al., 2007).

In these municipalities, 52.15% of the country’s population resided in 2019 (IBGE, 2019). The sampled municipalities represent all regions of Brazil, with 121 cities in the Southeast (48%), 50 in the Northeast (20%), 44 in the South (18%), 20 in the North (8%), and 15 in the Midwest (6%). Although it includes a population of a national metropolis, the city of Brasília was excluded from the sample due to its political-administrative characteristics. It is important to note that the selection of the 250 municipalities limits the generalization of the results to the reality of metropolises or large cities.

The period from 2011 to 2019 was chosen for several reasons: (1) convergence of procedures, practices, preparation, and disclosure of public sector financial statements with international accounting standards, as per Brazilian mandated adoption from 2010; (2) the availability and quality of data presented in the official government databases related to health and education; (3) the availability of financial and economic information; (4) difficulty in accessing data related to budgetary and financial execution of small municipalities due to the absence of official websites, outdated databases, or inconsistencies in the information; and (5) the atypical flow of revenues and expenses of local jurisdictions aimed at combating the SARS-CoV-2 pandemic in 2020.

The data were collected from the electronic database Finanças do Brasil (FINBRA), from the Brazilian Public Sector Accounting and Fiscal Information System (SICONFI), available on the website of the National Treasury Secretariat; from the electronic databases of DATASUS, maintained and organized by the Ministry of Health; and from the National Institute for Educational Studies and Research Anísio Teixeira (INEP).

Definition of variables of interest

Dependent variables - Network-structured dynamic DEA efficiency scores

The dependent variables in the study are related to the efficiency of health and education services. Health and education services were chosen for analysis because they are capable of promoting the socioeconomic development of the country and require strong interventions from the public sector through the budget (OECD, 2021a).

To measure efficiency, the SBM dynamic network DEA model (dynamic DEA with network structure) proposed by Tone and Tsusui (2014) was used. This model was chosen because it allows for the incorporation of the temporal dimension of decision-making unit efficiency, capturing the interdependence among the units within the network. The model offers comprehensiveness and accuracy by stratifying overall efficiency scores and using links, making it applicable across various sectors and contexts (Tone & Tsutsui, 2014).

The variables were selected based on: (1) availability of information about the variable during the analysis period; (2) correlation between output and input variables based on the assumptions established by Dyson et al. (2001) when choosing variables in a DEA model; and (3) categorization (input, output, link, carry-over, and non-discretionary link). Regarding the correlation of variables in the DEA model, Dyson et al. (2001) report that high correlation between two input variables or between two output variables does not imply that one of them should be eliminated from the model.

The procedure of eliminating variables on the pretext of high correlation should be avoided, as it can significantly impact efficiency scores. Therefore, correlation in the DEA model is only useful to test whether input and output variables are positively correlated. As seen in Table 1, all inputs and the carry-over variable in this study are significantly and positively correlated with the output variables. However, despite the variables ‘inversion of the distortion series’ and ‘approval rate’ not being significant concerning the number of teachers and enrollments in elementary education, it was decided to use them since these variables are the best among the set found in previous research.

Table 1
Variables of the dynamic network data envelopment analysis (DEA) model.

Dimension	Variable	Description	Orientation	Related studies
Health	Nursing professionals	Nursing professionals with administrative ties to the municipality	Input	Andrett et al. (2018); Brinckmann et al. (2019); Mazon et al. (2015); Ribeiro (2020); Silva (2018)
	Medical professionals	Medical professionals with administrative ties to the municipality
	SUS outpatient production	Outpatient production of the Unified Health System with administrative ties to the municipality	Output
	Mortality	Deaths in the period	Undesirable carry-over
Education	Teachers	Teachers available for elementary education activities under municipal administration	Input	Fiche and Leite (2018); Matias et al. (2018); Mattei and Bezerra (2018); Moraes (2018); Vitelli et al. (2018)
	Students per class	Total average number of students per class in the early and final years
	Percentage of teaching staff with higher education	Total percentage of teaching positions with higher education in the early and final years
	Inverse of grade distortion	Inverse of the grade-age distortion rate in the period	Output
	Passing rate	Students approved at the end of the school year in elementary education
	Enrollments in elementary education	Number of enrollments in elementary education	Non-discretionary carry-over
Population	Resident population	Resident population	Non-discretionary link

• Note. Elaborated by the authors.

Despite the predominance of Brazilian studies that use public spending as input to measure the indicators of the health and education sectors, as indicated above, this research chose to adopt input and output variables that could reflect the efforts made by local jurisdictions in the provision of public services (Oliveira, 2023).

For the measurement of efficiency, the SBM dynamic network DEA model (Tone & Tsutsui, 2014) was used. This choice was made because it allows for the incorporation of the temporal dimension of decision-making units’ efficiency, capturing the interdependence between units related in the network. The model provides breadth and precision in stratifying the overall efficiency scores and using links to make it applicable in various sectors and contexts (Tone & Tsutsui, 2014).

The analysis employed a Variable Returns to Scale (VRS) model, focusing on output optimization to achieve maximum efficiency (Lima & Bezerra, 2022). The findings regarding the first stage of the research are detailed in the following sequence.

Explanatory variable and control

For the independent variable representing budgetary solvency, this study adopted cost coverage, measured through the ratio of current revenues to current committed expenses, as determined by Brazilian budgetary law. The choice of this indicator is due to its extensive use in studies of financial condition to represent the dimension of budgetary solvency, demonstrating the ability of municipal governments to generate sufficient revenue in the normal budget cycle (short-term) to meet expenses and avoid deficits (Groves & Valente, 2003; Howell & Stamm, 1979; Lima, 2011; Lima & Diniz, 2016; Vieira, 2019). The variable has two limitations to be considered: (1) it used all available resources in the financial statement for the relationship between revenues and expenses; and (2) due to complexity, it disregarded potential specific fiscal decentralizations in the health and education sectors from the federal government to municipal governments.

The control variables that may have significant effects on the efficiency of health and education services arise from financial and environmental factors, specifically social, demographic, and economic factors: debt per capita, GDP per capita, population density, and municipality size.

The variable debt per capita was included in the model because debt can serve as a beneficial instrument for capital projects, providing greater flexibility to meet public needs, in addition to being a means to fulfill institutional demands through public spending without increasing the tax burden on residents. The GDP variable was included to represent the economic base of the municipalities, aiming to control for potential effects of wealth disparities among the federative entities during the study period. The variable population density was incorporated into the study to control for the effects of geographical space. The variable municipal size was included in the model as it reflects the population size of the municipality, helping to minimize differences between those with more than 500,000 inhabitants and those with populations between 90,000 and 500,000 inhabitants.

Correlation and empirical model specification - Second stage of dynamic network DEA

A longitudinal data regression, covering the years 2011 to 2019, was used to identify the relationships between the independent variable representing budgetary solvency-measured by the coverage of operating expenses-and the dependent variables representing overall efficiency in health and education services, as detailed in the methodological procedures of this study.

Kendall’s tau correlation was used, observing that the data did not meet the normality assumptions of the Shapiro-Francia test. In defining this method, preliminary analyses were conducted to assess the assumptions of autocorrelation, heteroscedasticity, and normality of errors (Fávero & Belfiore, 2017). It was observed that the normality of residuals assumption was not met, leading to the selection of the generalized estimating equations (GEE) regression technique. This approach, developed by Zeger and Liang (1986), is used to produce more efficient and unbiased regression estimates for the analysis of longitudinal or repeated measures in various fields of knowledge (Ballinger, 2004).

The efficiency indicators, which are dependent variables in the empirical models of the study, were obtained using the DEA SolverProTM 11.1. The results of the efficiency indicators were incorporated into the database, along with the budgetary solvency variable and representative control variables for the financial, economic, and social dimensions. Subsequently, the inference of the second-stage regression results was obtained with GEE.

To define the final models, in addition to using identity links, the Gaussian family, and independent correlation structure among the observations of the GEE models, procedures for multicollinearity and correlation structure were conducted through the variance inflation factor (VIF) test to identify the presence of multicollinearity among the independent variables. Furthermore, to select the most appropriate model for each dimension, the choice of the best correlation structure was based on the quasi-likelihood under the independence model information criterion (QIC) test, observing that a lower test result indicates a better model structure (Diniz, 2012; Lima, 2011).

Finally, it should be noted that the education sector efficiency model was presented with a lag of two periods. This approach was adopted to account for the lag effect associated with educational policies and interventions, as their outcomes often manifest over time. Additionally, this decision aligns better with the biennial assessment cycles conducted by INEP (Brazilian National Institute for Educational Studies and Research), allowing for a more accurate reflection of policy impacts on educational efficiency.

Therefore, the models to be tested in this study have the following specifications:

$GeneralEfficiencyScoreit=\beta 0+BudgetSolvencyit+Divpcit+GPDit+Densit+dmunit+\epsilon$

$Education\mathrm{Sec}torEfficiencyScoreit=\beta 0+BudgetSolvencyit―2+Debt\_pcpit―2+GPD\_pcpit―2+DemographicDensityit―2+MunicipalSizeit―2+\epsilon$

$Health\mathrm{Sec}torEfficiencyScoreit=\beta 0BudgetSolvencyit+Debt\_pcpit+GPD\_pcpit+DemographicDensityit+MunicipalSizeit+\epsilon$

Where: i - municipalities; t - period, with t - 2 for a two-lag gap; pcp - per capita; MunicipalSize is a dummy, with (1) for municipalities with a population above 500 thousand inhabitants; ε - error.

PRESENTATION AND DISCUSSION OF RESULTS

Analysis of the efficiency of health and education services

Table 2 presents the descriptive statistics of the variables related to overall efficiency and the efficiency of the education and health sectors.

Table 2
Descriptive analysis of dynamic network DEA results.

Efficiency	Statistics	2011	2012	2013	2014	2015	2016	2017	2018	2019
Overall efficiency	Mean	0.59	0.61	0.61	0.6	0.59	0.61	0.61	0.54	0.55
	Std. dev.	0.18	0.19	0.19	0.19	0.19	0.19	0.2	0.21	0.21
	Minimum	0.22	0.19	0.24	0.2	0.21	0.21	0.22	0.14	0.17
	Maximum	1	1	1	1	1	1	1	1	1
Education sector efficiency	Mean	0.88	0.89	0.9	0.91	0.91	0.91	0.92	0.93	0.93
	Std. dev.	0.09	0.09	0.09	0.08	0.08	0.08	0.08	0.07	0.06
	Minimum	0.62	0.61	0.62	0.54	0.68	0.7	0.69	0.74	0.73
	Maximum	1	1	1	1	1	1	1	1	1
Health sector efficiency	Mean	0.47	0.5	0.49	0.48	0.47	0.48	0.49	0.41	0.42
	Std. dev.	0.22	0.24	0.24	0.24	0.23	0.23	0.24	0.25	0.24
	Minimum	0.13	0.11	0.14	0.11	0.12	0.12	0.12	0.07	0.09
	Maximum	1	1	1	1	1	1	1	1	1

• Note. Elaborated by the authors.

According to the results, there is stability in the average overall efficiency, ranging from 0.54 to 0.61. However, an increase in the average efficiency of the education sector is observed, reaching 0.93 in 2018 and 2019, with low standard deviations in variations over the analyzed period. In the case of the health sector, there are significant variations between the minimum and maximum results. Furthermore, a significant decline in the average health sector efficiency of municipalities is observed in 2018 and 2019.

One possible explanation for the increase in education indicators may be the creation of the Fund for the Maintenance and Development of Basic Education and Teacher Valorization (FUNDEB) and other forms of public resource transfers to local governments (Diniz, 2012). These initiatives have led to increased investments in the educational sector, which can positively impact the quality of education (Agasisti, 2014). In addition, the implementation of an instrument for evaluating public policies, the Basic Education Development Index (IDEB), has allowed managers to access concrete data on school and student performance.

Based on this information, managers can take steps to improve the allocation of resources, directing them to priority areas, reducing school dropout rates, and enhancing student performance in institutional assessments conducted by the central government. These actions aim to raise the quality of education and promote educational equity throughout the country (Silva, 2018).

Therefore, it is possible to argue that the creation of FUNDEB, along with the implementation of IDEB, may have played a role in improving educational indicators by encouraging more efficient resource management and stimulating the pursuit of better results in the education system.

Table 3 presents the overall, health, and education efficiency scores of the municipalities by percentile.

Table 3
Cluster of efficiency scores for analyzed municipalities percentile.

Percentile	Overall efficiency	Health efficiency	Education efficiency
25%	0.4365	0.2887	0.852
50%	0.5654	0.4107	0.9298
75%	0.7197	0.5863	0.9908

• Note. Elaborated by the authors.

Based on the results, it is observed that the median of overall efficiency was 0.56 during the analysis period. This result is significantly different from what was found in the education sector, which had a median of 0.9298 for efficient municipal educational units during the same period, while the healthcare sector had a median of 0.4107 for efficient municipalities. Notably, the third quartile results for the healthcare distribution variable highlight the need to discuss and implement public policies for improving indicators in this area.

These findings align with the research conducted by Afonso and Fraga (2024), which places Brazil among the countries with the worst public health indicators in Latin America, alongside nations such as Bolivia, Venezuela, and Nicaragua. These findings may be attributed, in part, to underfunding in the sector, as highlighted in OECD (2021b), which indicates that the country allocates only 10.5% of its national wealth to healthcare, a value lower than that of other countries.

It is worth noting that simply increasing healthcare spending may not be the most suitable solution for improving efficiency, as demonstrated by the research of Kosor et al. (2019), which shows that even with increased healthcare spending in European countries, this did not necessarily lead to improved efficiency.

The results highlight relevant elements for the discussion of the public healthcare system in Brazil, emphasizing the need to enhance the provision of this service (Silva, 2018). The evidence from this research reinforces the discussions promoted by Andrett et al. (2018), Liu et al. (2019), and Abimbola et al. (2019) that healthcare, despite being crucial for promoting justice and social equity, requires institutional attention to address the challenges it faces.

Correlation analysis

Table 4 presents the correlation between all the study variables. The results indicate that higher budgetary solvency leads to better efficiency indicators in health and education services.

Table 4
Kendall’s tau correlation between study variables.

Description	Education efficiency	Health efficiency	Overall efficiency	Budgetary solvency	Debt per capita	GDP per capita	Population density	Municipality size
Education efficiency	1.00
Health efficiency	0.118	1.00
Overall efficiency	0.171	0.947	1.00
Budgetary solvency	0.063	0.034	0.038	1.00
Debt per capita	0.027	-0.037	-0.034	-0.014	1.00
GDP per capita	0.108	-0.05	-0.038	0.054	0.022	1.00
Population density	-0.005	-0.039	-0.04	0.022	0.031	0.007	1.00
Municipality size	0.007	-0.028	-0.026	0.117	0.007	-0.019	0.008	1.00

• Note. Research data (2023).

Regarding debt per capita, the findings show that, although debt can be a managerial mechanism for the continuity of public services, costs imposed on the population have a negative impact on efficiency. However, the results suggest that debt per capita has a positive correlation with efficiency in the education sector, indicating that public indebtedness contributes to the improvement of the education sector.

The wealth generated by the community shows a positive and significant association with the efficiency of the education sector, demonstrating that an increase in GDP per capita contributes to higher efficiency scores. In terms of population density, the results suggest that the pressure exerted by residents to obtain goods and services does not necessarily translate into higher efficiency in the provision of general services. Additionally, population density shows a positive correlation with debt per capita, indicating that municipalities with higher population concentrations have greater borrowing capacity.

Finally, the municipality size variable showed a negative and significant correlation with overall efficiency and health sector efficiency, revealing that municipalities with fewer than 500,000 inhabitants have worse efficiency indicators in providing public goods and services.

Regression results

Analysis of the results of the explanatory model for the overall efficiency of healthcare and education services

Table 5 presents the results of the general efficiency model for health and education services.

Table 5
Regression model to explain the overall efficiency of health and education services.

Description	GEE
	Estimate	p-value
Budgetary solvency	4.12	0.001***
Debt per capita	-0.04	0.047**
GDP	-0.06	0.004**
Population density	-0.05	0.017**
Municipality size	-109.07	0.001***
_Intercept	988.25	0.000***

• Note. n: 2.250; Wald chi²: 35,42; prob > chi²: 0.0000; quasi-likelihood test under the independence model information criterion (QIC): family(Gaussian) link(identity); variance inflation factor (VIF test) all equal or above 1.00. Source: Research results (2023).

The results obtained demonstrate that the financial dimension of governments has an impact on the efficiency of local governments in the provision of goods and services. In other words, the promotion of public policies requires adequate resources from governments to ensure the delivery of municipal services, especially in poorer regions (Richardson et al., 2020). In addition, fiscal austerity measures worsen social problems due to low access to public services and declining socioeconomic indicators (Richardson et al., 2020; Toffolutti & Suhrcke, 2019). The findings of this research converge with Vanneste and Goeminne (2018) due to the positive impact of current costs on service efficiency.

Regarding financial condition theory, it can be observed that budgetary solvency through fiscal revenue and expenses of the fiscal year is relatively consistent and has served as a basis for new discussions in the literature, since the proxies used to measure the previously defined concepts are subjective and specific to each country (Groves & Valente, 2003; Lima, 2011; Lima & Diniz, 2016). Furthermore, conceptually, financial condition expresses the entity’s ability to provide quality goods and services continuously, without incurring fiscal stress and economic disruptions (Lima & Diniz, 2016).

Within the scope of fiscal federalism theory, the results support the idea that the provision of public goods and services by levels of government closer to citizens promotes more adequate allocation of resources and results in gains in economic and social well-being (Oates, 2008). However, this dynamic depends on the existence of reductions in horizontal and vertical imbalances between municipalities and the guarantee of the availability of resources consistent with social demands (Dantas & Diniz, 2022). In this context, the ability of municipalities to play a key role in Brazilian federalism is highlighted, as they have the privilege of knowing the diverse preferences of residents, emphasizing their fundamental ability to respond to the population’s demands and promote general well-being (Chen, 2022). In other words, the decentralization of public policies to local levels, when done in a balanced manner and supported by adequate resources, can result in tangible benefits for society by allowing alignment between government decisions and the real needs of local communities.

Regarding the control variables, a significant negative relationship is observed between per capita debt and general efficiency. The result reinforces the discussions promoted by Lima (2011) by indicating that local indebtedness is associated with a decrease in the capacity to provide goods and services. Therefore, the empirical findings indicate that the higher the municipality’s debt levels, the lower the municipal efficiency indicators. In relation to per capita GDP, a significant negative relationship is observed, indicating that the resources produced by the community are not capable of contributing to improvements in the overall efficiency indicators of municipalities. Thus, despite wealth contributing to higher levels of public revenue, managerial and administrative choices can make a difference in the allocation of public resources and improvement in efficiency indicators (Agasisti, 2014). Regarding population density, a significant negative relationship is observed. The findings indicate that the concentration of more residents in the same community does not imply better managerial practices to achieve higher overall efficiency indicators. Finally, municipalities with a population below 500,000 inhabitants showed a significant negative relationship with general efficiency, while larger municipalities revealed a positive relationship regarding contributions to overall efficiency.

Analysis of the results of the explanatory model for healthcare sector efficiency

Table 6 presents the empirical findings based on the dynamic efficiency analysis of the health sector.

Table 6
Regression model to explain the efficiency of the health sector.

Description	GEE
	Estimate	p-value
Budgetary solvency	3.85	0.001***
Debt per capita	-0.04	0.031**
GDP	-0.08	0.000***
Population density	-0.05	0.015**
Municipality size	-117.49	0.000***
_Intercept	1004.67	0.000***

• Note. n: 2.250; Wald chi²: 41,65; prob > chi²: 0.0000; quasi-likelihood test under the independence model information criterion (QIC): family(Gaussian) link(identity); variance inflation factor (VIF test) all equal or above 1.00. Source: Research results (2023).

The results obtained show that budgetary solvency has a positive effect on the efficiency of health services provided by local jurisdictions. The findings align with Abimbola et al. (2019) regarding municipalities’ capacity to finance their current activities, impacting the attraction of more qualified professionals, the acquisition of cheaper inputs, and the provision of more specialized services. Furthermore, the results are consistent with Thompson (2017) in indicating that budget execution provides sufficient support for the quality of public services. Finally, the evidence found in this study coincides with the discussions promoted by Narbón-Perpiñá and De Witte (2018) in considering that financial variables are used to explain the efficiency of health services.

Within the scope of financial condition theory, the results indicate the institutional capacity to efficiently provide public goods and services through the appropriate allocation of the public budget, providing sufficient resources to maintain services continuously and with the minimum quality required by the population, which reflects the development and social well-being of the community (Donato, 2020; Lima & Diniz, 2016). Moreover, the presented evidence triggers localized dilemmas in the financial condition literature, as pointed out by Groves and Valente (2003), Gorina et al. (2018), Vanneste and Goeminne (2018), and Cuadrado-Ballesteros and Bisogno (2019), which highlight the importance of resource availability as a fundamental factor in promoting public access to goods and services.

Regarding fiscal federalism theory, it is observed that decentralization of public policies to the local level, when supported by adequate financial condition, results in welfare gains and more efficient allocation of resources in the public sector. This assertion is based on Oates (2008), indicating that decentralizing allocative activities to local jurisdictions reflects the preferences and needs of citizens. It also reinforces the discussions promoted by Dantas et al. (2019), pointing out horizontal and vertical imbalances in municipalities as obstacles in the context of Brazilian federalism to adequately meeting demands for public goods and services.

Concerning control variables, it is observed that debt per capita is negatively correlated, reinforcing the idea that debt has been used to cover budget deficits resulting from high community needs and low levels of public revenues (Lima, 2011). Furthermore, the results highlight the commitment of localities to honoring debt-related costs, suggesting a decrease in available resources to meet population health demands. Thus, it is emphasized, based on discussions by Brusca et al. (2015), that high levels of debt for larger jurisdictions are maintained because they consider a favorable economic and financial situation that allows the promotion of goods and services commensurate with the demands presented. Regarding the results obtained from GDP per capita, a negative relationship is observed. This reveals that community wealth, in general terms, does not necessarily influence the municipality’s ability to be more efficient in providing healthcare services. This result indicates that the ability to generate economic resources must also be accompanied by managerial and administrative practices by local jurisdictions (Andrett et al., 2018).

The results obtained from the analysis of population density reveal a negative and significant impact. These results indicate that the pressure exerted on healthcare services has a detrimental effect on the efficiency of these services, possibly due to increased demands and resulting complexity. Additionally, it is observed that municipalities with resident populations lower than 500,000 inhabitants show a negative and statistically significant effect. This result suggests that, when compared to larger jurisdictions, these jurisdictions face more significant challenges in achieving similar levels of efficiency in the healthcare sector.

Analysis of the results of the explanatory model for education sector efficiency

Table 7 presents the empirical findings based on the dynamic efficiency analysis of the education sector.

Table 7
Regression model with a lag of two periods to explain the efficiency of the education sector.

Description	GEE
	Estimate	p-value
Budgetary solvency	3.35	0.001***
Debt per capita	0.01	0.420
GDP	0.12	0.000***
Population density	-0.01	0.441
Municipality size	2.05	0.940
_Intercept	597.4	0.000***

• Note. n: 2.250; Wald chi²: 41,65; prob > chi²: 0.0000; quasi-likelihood test under the independence model information criterion (QIC): family(Gaussian) link(identity); variance inflation factor (VIF test) all equal or above 1.00. Source: Research results (2023).

Based on the presented evidence, a positive relationship is observed between budgetary solvency and the efficiency of education services. The results indicate that the capacity to generate current resources through tax revenues or transfers is associated with the increased ability of local jurisdictional units to finance their expenses. The reduction in current and capital expenditures, as well as the challenges arising from fiscal austerity, play a relevant role in determining the efficiency and quality of access to the services provided (Richardson et al., 2020; Thompson, 2017; Toffolutti & Suhrcke, 2019). Thus, the ability to properly manage current resources shows positive correlations with sustainable increases in teacher salaries (Agasisti, 2014) and efficiency gains in education services (Dufrechou, 2016).

In the context of Brazilian fiscal federalism theory, a relationship is observed between the institutional advancement of education in the country, the improvement of efficiency indicators, and the decentralization of activities to the local level when aligned with adequate financial conditions for the provision of this service. The results obtained in this research are in line with the views presented by Oates (2008), who points to the decentralization of public services as an effective mechanism to meet social demands, and with the discussions elaborated by Diniz (2012) in his theoretical framework when he reinforces the efforts of institutional cooperation between the central government and local governments through the allocation of resources from various sources with the aim of improving the results of the Brazilian educational system.

Regarding the control variables, it is observed that debt per capita, population density, and municipality size are not relevant in explaining the efficiency of the education sector. However, per capita GDP showed a significant and positive relationship with the efficiency of the education sector, demonstrating the capacity of per capita GDP to enhance public services in education. These findings demonstrate that communities that produce and distribute wealth can show better efficiency indicators in the field of education.

Based on the empirical and theoretical discussions of this research, there is a need to thoroughly analyze the established indicators. Limitations in own financial resources, as well as discrepancies between local units of the federation, can contribute to social development and socioeconomic transformations. Therefore, directing necessary resources and investing in public policies for education can result in better approval rates, reduced age-grade distortions, or even a reduction in dropout rates (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio Teixeira [INEP], 2022).

CONCLUSION

The aim of this study was to investigate the effects of budgetary solvency on the dynamic efficiency of healthcare and education services provided by Brazilian municipalities. In this way, this article sought to contribute to the literature on financial condition and fiscal federalism by examining the relationship between budgetary solvency and the overall efficiency of healthcare and education services offered by Brazilian municipalities.

The results indicated that, concerning overall efficiency, there is no rejection of hypothesis H1, given the positive and significant impact of budgetary solvency on overall healthcare and education services. In the case of sector-specific efficiency in healthcare and education, hypotheses H2 and H3 cannot be rejected, respectively, revealing the positive impact of budgetary solvency on the provision of these public services.

The results of this research underscore the need to strengthen managerial measures to ensure that resources are appropriately utilized for the provision of public services. In the case of the healthcare sector, it reinforces that underfunding and institutional deficiencies worsen the services offered. The Brazilian Constitution emphasizes that ‘health is a right for all.’ However, it is ineffective to use palliative measures to promote healthcare services, and actions must be proposed to ensure the achievement of goals and the optimization of allocated material and financial resources. In the case of education, assessment instruments and the allocation of linked resources have contributed to positive externalities in Brazilian federalism, but more in-depth evaluations are needed to achieve better results from the actions being implemented in the school environment.

The theoretical implications of this research reinforce the academic framework developed over the years regarding financial condition and fiscal federalism theories in the Brazilian context. On a social level, the repercussions of this study strengthen social control, providing society with the means to demand from managers, politicians, and other public agents that they identify possible challenges and deficiencies to achieve better results in the provision of healthcare and education goods and services. Political factors exert overlapping influences on resource allocation to enable the financing of healthcare and education. Thus, practical implications are associated with the revision of legislation and resource allocation, institutional plans for goal setting and achievement, increased mechanisms for social and institutional control in service delivery, and a review of the governance of decentralizing activities to local governments.

Based on the empirical results of this study, it is evident that budgetary solvency in large Brazilian municipalities directly supports the achievement of key Sustainable Development Goals (SDGs) of the United Nations 2030 Agenda, namely SDG 3 (Good Health and Well-being), SDG 4 (Quality Education), SDG 11 (Sustainable Cities and Communities), and SDG 16 (Peace, Justice, and Strong Institutions). Financially stable municipalities are better positioned to provide consistent and quality public health and education services, including broader access to outpatient care, better recruitment of healthcare professionals, improved school approval rates, and enhanced teacher qualifications. These outcomes collectively strengthen the continuity and quality of public services.

The continuation of this research is suggested to expand the scope to other Brazilian municipalities, including small and medium-sized local governments, which are particularly affected by the decentralization of competencies and the low mobility of their own resources, factors that can impact the provision of goods and services and, consequently, social well-being.

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• Funding
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  This content was evaluated using the double-blind peer review process. The disclosure of the reviewers’ information on the first page, as well as the Peer Review Report, is made only after concluding the evaluation process, and with the voluntary consent of the respective reviewers and authors.
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  Silva, Levy; Lima, Severino Cesário de; Barbosa, Alexandro; Esteves da Rocha Vieira, Luis Manuel, 2026, "Replication Data for: Budgetary Solvency and the Efficiency of Public Services in Brazilian Municipalities published by Revista de Administração Contemporânea", Harvard Dataverse, V1. https://doi.org/10.7910/DVN/WNY1MB
  RAC encourages data sharing but, in compliance with ethical principles, it does not demand the disclosure of any means of identifying research subjects, preserving the privacy of research subjects. The practice of open data is to enable the reproducibility of results, and to ensure the unrestricted transparency of the results of the published research, without requiring the identity of research subjects.
• Cite as:
  Silva, L. R. F., Lima, S. C., Barbosa, A., & Vieira, L. M. E. R. (2026). Budgetary Solvency and the Efficiency of Public services in Brazilian municipalities. Revista de Administração Contemporânea, 30(3), e240047. https://doi.org/10.1590/1982-7849rac2026240047.en
• JEL Code:
  H75, H76, H77.
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• 
  # of invited reviewers until the decision:
  

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  1st round
  2nd round

Edited by

• Editor-in-chief:
  Paula Chimenti (Universidade Federal do Rio de Janeiro, COPPEAD, Brazil) https://orcid.org/0000-0002-6492-4072

• Associate Editors:
  Marie Anne Macadar (Universidade Federal do Rio de Janeiro, COPPEAD, Brazil) https://orcid.org/0000-0003-2744-5352
  Fernanda Maria de Almeida (Universidade Federal de Viçosa, Viçosa, Brazil) https://orcid.org/0000-0001-9132-1552

Data availability

The authors claim that all data used in the research have been made publicly available, and can be accessed via the Harvard Dataverse platform:

Silva, Levy; Lima, Severino Cesário de; Barbosa, Alexandro; Esteves da Rocha Vieira, Luis Manuel, 2026, "Replication Data for: Budgetary Solvency and the Efficiency of Public Services in Brazilian Municipalities published by Revista de Administração Contemporânea", Harvard Dataverse, V1. https://doi.org/10.7910/DVN/WNY1MB

RAC encourages data sharing but, in compliance with ethical principles, it does not demand the disclosure of any means of identifying research subjects, preserving the privacy of research subjects. The practice of open data is to enable the reproducibility of results, and to ensure the unrestricted transparency of the results of the published research, without requiring the identity of research subjects.

Publication Dates

• Publication in this collection
  27 July 2026
• Date of issue
  2026

History

• Received
  20 June 2024
• Reviewed
  29 Apr 2025
• Accepted
  05 Feb 2026
• Published
  27 May 2026