Sustainability of state government debts in Brazil

Purpose This paper evaluates the sustainability of subnational government debts in Brazil, with a focus on how borrowing costs compared to revenue growth and how fiscal policy contributed to debt dynamics from 2007 to 2022. Design/methodology/approach The study applies two tests derived from the intertemporal budget constraint using dynamic panel data models estimated via system GMM. The first test examines the stability of the debt-to-net current revenue ratio, while the second assesses the role of fiscal policy in ensuring sustainability, isolating the effects of primary balances and borrowing costs. Findings The results indicate that Brazilian states’ debt dynamics were slightly on the side of stability during the period analyzed. Fiscal policy, on aggregate, contributed positively to debt sustainability. However, sustainability increasingly relied on favorable conditions in the relationship between debt costs and revenue growth, rather than persistent primary surpluses. Originality/value This study advances the literature by offering a novel empirical approach that separates the effects of debt dynamics from fiscal behavior. It highlights the evolution of fiscal sustainability across different subperiods and provides a deeper understanding of the institutional and economic factors shaping state debt management in Brazil.