03.- Brasil - Selene Nunes

8/10/2019 03.- Brasil - Selene Nunes

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The case of the BrazilianFiscal Responsibility Law: rules,

results and challenges

Selene Peres Peres Nunes

Peru, Lima, February, 7th2008

Seminario Internacional Descentralizacin e

inclusin social en el marco de los procesos de

integracin regional

Brazil


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Seminario Internacional - Per

CYCLES OF INSTITUTIONAL REFORMS BEFORE FRL

90s:

State reform privatization in advanced stage;

inflation control (Real Plan);

changes on intergovernmental relations (expenditures competencies and debt

refinancing);public administration reform;

the last statesdebt renegotiation (30 years, 13% of month revenues, IGP-DI +

6% interest rate, most of state banks closed or privatized)

fiscal measures in the Federal Government in 1997 and 1998.1999 and on:Economic policy = floating exchange regime + inflation targets +

primary surpluses


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FRL: FULL RESPECT TO THE FEDERATION

2000: Fiscal Responsibility Law-FRL, new culturewithin a comprehensive concept: all the public administration, including funds,

foundations and state owned enterprises which depend on treasury resources.

The solution was to create limits that apply to all levels and branches but

maintain the budgetary process as autonomous ...

Same treatment to the Federal Government, each of the states and each of themunicipalities autonomy in the federation has been preserved

Specific limits for each of the Powers (personnel expenditures, amounts to bepaid on the end of tenure in office) independency among Powers has beenpreserved control depends on reports with individualizedresponsibilities


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The Fiscal Responsibility Law:

rules and transparency

S i i I t i l P


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WHAT IS THE FRL ?

It balances and consolidates different rules for public finance equilibrium

and organization A code of good fiscal practices that applies to:the 3 levels of government (Federal Government, States, Federal District

and all the municipalities)

the 3 branches (Executive, Legislative and Judiciary)

It is a mix of models based on rules and transparency to promote astructural fiscal change.

It has 3 levels of rules:

general rules;

harder rules for the end of tenure in office (political cycle);flexibility in special cases: deceleration of economic activity or negative

growth in GDP, state of war, internal disturbances or calamity and drastic

alterations in monetary and exchange policies.

S i i I t i l P


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In case of non-compliance, the FRL establishes:

compensation and deviation correction mechanismsinstitutional sanctions

individual penalty rules

Emphasis on inter-temporal variables ...

WHAT IS THE FRL ?

Fiscal targets

Compensation for tax breaks and obligatory permanent expenditures

Limits for personnel expenditures and public debt

Rules for intergovernmental relations

Rules for Amounts to be paid

S i i I t i l P


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FISCAL TARGETS (FEDERAL/STATE/MUNICIPAL)

1) PPA: multi-year plan (4 years), includes physical expenditure targets

2) LDO: annual law that establishes rules for the budget elaboration after FRL,it includes 3-year fiscal targets for revenues, expenditures, primary and nominalresults and public debt and also:

Report on the use of privatization resources

Financial and actuarial evaluation of social security and funds

Evaluation of fiscal risks contingent liabilities and other risks.

3) LOA: annual budget law elaborated in accordance with the targets previouslyestablished at PPA and LDO

Seminario Internacional Per


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TRANSPARENCY

AND

CONTROL

PPA

LDO

LOABUDGETARYAND

FINANCIAL

EXECUTION

AVALIATION

BUDGETARY CYCLE


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LIMITS FOR PERSONNEL EXPENDITURES BY BRANCH

Previous Law FRL

FEDERAL GOVERNMENT 50,0

50,0

Executive 40,9

Federal District

0,6

Others

3,0

Prosecutor`s Office

37,9

Legislative

2,5

Judiciary 6,0

STATES 60,0

60,0

Executive 49,0

Prosecutor`s Office 2,0

Legislative 3,0

Judiciary 6,0

MUNICIPALITIES

60,0

60,0

Executive 54,0

Legislative 6,0

GOVERNMENT LEVEL / BRANCH

as % of Net Current Receipts


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Stock/ NCR) 15 years reduction

STATES 2,0 Reduces 1/15 of the exceeding amount .

MUNICIPALITIES 1,2 Reduces 1/15 of the exceeding amount .

GOVERNMENT LEVEL

LIMITS FOR PUBLIC DEBT

Credit Operations/year

Debt ServiceARO's (credits on anticipated revenues)

Guaranties

16% NCR

11,5% NCR

7% NCR

22% or 32% NCR

They condition the analysis of credit operations by the National

Treasury Secretariatcomplete and up to date information is sent

only when states and municipalities ask authorization to the Senate.

STATES/MUNICIPALITIES FEDERAL GOV.

60% NCR

60% NCR



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Prohibited the granting of new credits of any component of the

Federation in benefit of any other one, even when such funds are

granted for purposes of renewal, refinancing or postponement of debt.

Monetary Financing: Prohibited any kind of financing of the Federal,

State and Municipal Governments, by the Central Bank.

State financial institutions can not grant credit to the component of the

Federation that controls them.

INTERGOVERNMENTAL RELATIONS



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Personnel expenditures:No act that increases them will occur 180 days

before the end of tenure in office.

Amounts to be paid:No financial obligation that can not be paid in the

same year can be assumed if there arentenough cash resources.

Credit Operations based on Anticipated Revenues:Prohibited during the

last year of the Executive Chiefsterm

RULES FOR THE END OF TENURE IN OFFICE



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FISCAL TRANSPARENCY: ACCOUNTING

Limits apply to accrued expenditures.

Social security receipts, expenditures and cash separated from those of

the Treasury.

Creation of a Council of Fiscal Management, for technical cooperation in

the federation.

Broad public access to all information, including through internet.

Public participation in the budgetary process.



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FISCAL TRANSPARENCY: REPORTS

1. RREO- Report on Financial Budgetary Execution

2. RGF- Report on Fiscal Management

3. NATIONAL ACCOUNTS CONSOLIDATION

No previous federal authorization or posterior audits by the Federal

Government are needed. The Federal Government establishes the patterns.

States and Municipalities:

issue publicly in the official newspaper and through internet;

send it to the External Auditing Authorities that will audit and judge the

accounts (except the Executive Chief's Accounts, which are judged by

the Legislative).



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RREO - Report on Financial Budgetary Execution

Each 2 months issued publicly up to 30 days after.

Contents:Budgetary Balance

Execution of Expenditures by Function and Sub function

Net Current Receipts

Social Security Receipts and Expenditures (General Regime and Public

Servants` Regime)Primary and Nominal Results

Amounts to be Paid by branch

Credit Operation Receipts and Capital Expenditures

Actuarial Projection of the Social Security Regimes

Privatization Receipts and Resources application

Receipts and Expenditures with Education and Health (Constitutional

limits)

Public Private Partnership.



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RGF - Report on fiscal management

Each 4 months issued publicly up to 30 days after.

Signed by each of the branch chiefs of the Federal Government, States

and Municipalities.

Contents:Confirms compliance with personnel expenditures and debt limitsor

justifies deviations and indicates corrective measures and the time

required for path correction.

Cash Availabilities and Amounts to be Paid.



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NATIONAL ACCOUNTS CONSOLIDATION

Municipalities consolidate their accounts until April 30;

States consolidate their accounts until May 31;

The Federal Government consolidates all accounts and publishes them

until June 30.

a portrait of Brazil in internet, broad public access to all information.

Contents:

Balance Sheet with all elements.

Historical series since 1998.



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FISCAL TRANSPARENCY: PUBLIC AUDIENCES

1. Public audience on fiscal targets: each 4 months, at each Legislative.

2. Public audience on Central Bank`s fiscal costs: each 6 months, in the

Congress.

Social control exerted by citizens, who are electors and

taxpayers + Legislative and Accounting Courts +

Prosecutor`s Office



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INSTITUTIONAL SANCTIONS

If there is not compliance with the rules, some sanctions apply:

federal and state voluntary transfers will be suspended;

new credit operations will be forbidden;

new federal and state guaranties will not be granted.



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INDIVIDUAL PENALTY RULES

(Other Law, October 20th)

All citizens are able to accuse, but baseless accusation is considered a

crime.

Reaches the responsible ones in each branch according to each person`s

individual responsibility.

Penalties: loss of position; loss of the right to exercise any function within

the public sector for 5 years and to be elected; arrest and fine.

In many cases, omission is punished more than actions.



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The Results and the Challenges


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Receipts: increasing more than expenditures (stabilized as %

of GNP) Better primary results, more explained by receipts

Personnel expenditures/NCR: decreasing, due to receipts

2000: 7 over the limit X 2006: none

Still poor nominal results

Debt/ NCR: decreasing, due to receipts 2000: 7 over the limitX 2006: two

FRL: STATES (2000 X 2006)



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Receipts and expenditures grow, but receipts grow more due to

economic growth and a structural change:

municipalities depend less on federal transfers

expenditures growth driven by public service decentralization,

specially on education and health the composition of public

expenditures has changed (more current expenditures and less

investments)Better primary and nominal results, more explained by

receipts

FRL: MUNICIPALITIES (2000 X 2006)


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Personnel expenditures/NCR:

Debt/ NCR: growth in the big municipalities, specially due to

So Paulo.

Only So Paulo (243.84%) has surpassed the debt limit; the

capitals media excluding SP was 24% NCR (X limit of 120%).

98.9% of the municipalities have reduced their debt.

Amounts to be Paid have been reduced in all types of

municipalities.

FRL: MUNICIPALITIES (2000 X 2006)



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1st challenge: There should be more debate about fiscal targets to

avoid pursuing only primary results and because better primary results donot guarantee better public expenditures.

CHALLENGES


CHALLENGES


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2nd challenge: As receipts depend on the economic growth:

Will the fiscal adjustment be sustainable ?

Will the economic growth be affected by the public expenditures pattern ?

Primary results did not affect the composition of expenditures between

current expenditures and investments, but investments are very low

States (2006): Investments = 0,94% of GNP x Current Expenditures

associated with personnel expenditures = 1,53 % of GNP

How to improve ? How to enforce better public expenditures ? Only through

ear-marked expenditures ? How to make room for infrastructureinvestments and social expenditures

CHALLENGES



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3rd challenge: treatment to Amounts to be paid: emphasis in payments

control and not in expenditures control, emphasis in cash and not in planning

potential risk to the rules implementation must be avoided

4th challenge:Increase the efficiency of the sanctions application

Implementation of institutional sanctions must be better integrated

(suspension of federal and state voluntary transfers and of new credit

operations)

CHALLENGES



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5th challenge:avoid creativeaccounting:

deductions of net debt are huge and some are not correct (uncertain future

debt receipts registered as net);

exclusion of retired people and pensioners from the personnel expenditures;

exclusion of federal taxes from the personnel expenditures;

payments decided by the Judiciary converted into debts are not registered.

CHALLENGES


C G S


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6th challenge:increase transparency

Tax breaks are high and not as transparent as they should be; there is no

publication pattern.

Publication in internet and open access to it must be increased.

Reports must improve in their transparency to the public: find the simple and

necessary information.

CHALLENGES



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Short run :Creation of Technical Groups to discuss the Reports Patterns and

the Accounting Patterns in the Federation

With the representation of several areas in the Federal Government, External

Auditing Authorities, Municipalities Associations, Federal Accounting Council,

among others

It will change the Reports Manuals.

POSSIBLE RESPONSES TO CHALLENGES


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Long run: Budgetary Reform (Review Law 4320/64 planning, budget,

accounting system, control towards better expenditures quality)

POSSIBLE RESPONSES TO CHALLENGES


RECOMMENDATIONS TO OTHER COUNTRIES


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Build credibility There is no much reliability in the beginning but it needs to

be obtained. Implementing with fairness as a factor of trust in the Federation to

stimulate the observance of rules.

The strength of an example.States and Municipalities tend to reproduce the

federal practices.

Focus on implementation The more complex rules are, the more they will

require administrative measures to be implemented: dissemination, capacitation,

regulation, software, procedures, national cooperation mechanisms, etc.



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Scope

Though it might be used in both countries, under a central authorityor not, reports might be a key to harmonize fiscal balance and governability in

decentralized countries.

Cultural change It is more difficult to make rules become effective than to

approve them. Do not underestimate the obstacles to change the behavior.

Transparency is more important than rules. The control must be prepared to react

to the attempts of fraud. Be aware of creative accounting practice (better choice:

simple rules, well-known accounting patterns, disclosure of information to citizens

to strengthen social control).



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ADDITIONAL INFORMATION

Selene Peres Peres Nunes

e-mail: [email protected] [email protected]

Suggested site:

http://www.stn.fazenda.gov.br
mailto:[email protected]:[email protected]:[email protected]:[email protected]

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03.- Brasil - Selene Nunes