FISCAL RULES & Public Expenditure Management

Transcription

1 MINISTÉRIO DA FAZENDA Secretaria do Tesouro Nacional FISCAL RULES & Public Expenditure Management Joaquim Vieira Levy Secretário rio do Tesouro Nacional Ministério da Fazenda Workshop on Fiscal Management in Disadvantaged States New Delhi -- January 2006

2 Summary I Importance of Subnational Governments II Macro Background for Fiscal Responsibility III Main Features of the Fiscal Responsibility Law IV Financial Programs between the Union and other Federative Units V Fiscal performance of subnational governments

3 República Federativa do Brasil Area: 8,5 million km 2 Population: 182 million President: Luis Inacio Lula da Silva ( ) 2006) States: 26 + Federal District Municipalities: 5,564 Autonomy: no unit, i.e., State or Municipality is subordinated: all are members of the Federation

4 The economy in a glimpse (2004) GDP Exchange Rate GDP Per Capita Inflation Exports Trade Surplus Primary Surplus Tax Burden Public Debt/GDP US$ 685,66 billion (5 % growth) R$/US$ 2,65 (dec) US$ 3,77 mil 7,6% (IPCA) US$ 96,5 billion US$ 33,4 billion 4,58% of GDP 36,74% of GDP 51% (dec)

5 Tax and Transfer Structure 1. Taxes Tax collection largely centralized (Federal level) Decentralized use of resources (health & other services) 2. Transfers Significant flows across levels of government Significant flows across regions (SE, SUL, NE, CO, NO) Social security benefits also showing flows across regions

6 Before- and After-transfer transfer Revenues ( % of total taxes) 100% 6,4 Municipal 18,5 90% 26,4 80% State 26,8 70% 60% 50% 40% 67,1 30% 20% Federal 54,7 10% 0% Antes das transferencias Após as transferencias União Estados e DF Municípios

7 Legal Bases and Types of Transfers 1988 Federal Constitution: Establishes rules for sharing revenue from selected taxes System includes transfers from Federal Government to states and municipalities, as well as from states to municipalities (e.g., of VAT, which is a state tax) Ample use of earmarking at all levels of government Types of Transfers: (i) Constitutional and Legal: e.g., sharing of oil tax and supplementary support for minimum school spending per child (ii) Health-care system SUS, with decentralized management (iii) Voluntary (e.g., construction of tourism infrastructure)

8 Intergovernmental Transfers (2004) Valores em R$ milhões Transferencias Estados Municípios Total FPE/FPM* IPI EXPORT.* ITR IOF OURO Desoneração ICMS* FUNDEF Complementação FUNDEF CIDE Salário Educação Royalties Petróleo Royalties Rec.Hídricos Royalties Mineração Transf. Voluntárias SUS Total Participação % 47,0 53,0 100,0 Fonte: STN/SIAFI *Valores já deduzidos de 15% para o FUNDEF About 5% of GDP

9 Social Security (geographical distribution of financial flow) 70,00 60,00 50,00 Percentage of Revenues and Benefits by Region 40,00 30,00 20,00 10,00 Revenue Benefit 0,00 North Northeast Southeast South Center April 2005 Benefits: R 11,3 billion April 2005 Revenue: R$ 9,2 billion

10 Federal Taxes & Intergov.. Transfers (geographical distribution;per capita) Taxes = US$ 765 Transfers = US$ 115 US$ < > 550 US$ < > 550

11 Growing Levels of Federal Transfers (at constant IGP-M M prices) COMPARATIVO RECEITA EFETIVA, TRANSFERENCIAS E ICMS ,00 170,00 160,00 Federal Transfers INDICE: 1998= ,00 140,00 130,00 120,00 Federal Revenue 110,00 100,00 State level VAT 90, Receita efetiva Transf Est DF Mun ICMS

12 I Importance of Subnational Governments II Macro Background for Fiscal Responsibility III Main Features of the Fiscal Responsibility Law IV Financial Programs between the Union and other Federative Units V Fiscal performance of subnational governments

13 Macroeconomic Overhang % Monthly Inflation 1976/2004 FIPE IPC (%) 90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0-10,0 abr/76 abr/77 Plano Cruzado Pré-fixação da correção monetária e câmbio abr/78 abr/79 abr/80 abr/81 Plano Bresser Plano Verão Plano Collor I Plano Collor II Plano Real abr/82 abr/83 abr/84 abr/85 abr/86 abr/87 abr/88 abr/89 abr/90 abr/91 abr/92 abr/93 abr/94 abr/95 abr/96 abr/97 abr/98 abr/99 abr/00 abr/01 abr/02 abr/03 abr/04 abr/ s: democratization and need to accommodate higher social demands sharp decline in GDP growth 1990s: price stabilization fiscal imbalances become evident, especially at state level Federal government refinances states and large municipalities 2000s: fiscal responsibility framework established and functioning

14 Fiscal Responsibility: cornerstone of economic policies % GDP 5,0 4,5 4,0 3,5 3,0 3,1 3,23 3,3 Primary Result IMF Target 3,46 3,35 3,64 3,75 3,89 4,25 4,25 4,5 4,61 4,80 General government: Primary surplus 2004 (% of GDP) 5,10 3,98 3,6 2,40 2,20 2,10 1,10 0,60 2, Feb-05 Indonesia Peru BB -0,20 Colomb Phillippin BB BB Russia Turkey BB- Brazil BB- BB- BBB- Mexico BBB- S.Africa BBB An effort shared by all levels of government 3,5 Governo Central Estatais Estados/Municípios 3,0 3,1 3,0 2,5 2,4 2,4 2, Public Sector Net Debt/GDP ratio % PIB 2,0 1,5 1,0 0,5 0,0-0,5-1,0 0,5 0,6 0,4 0,1 0,1-0,1-0,2-0,3-0,5-0,7-0,2-0,4 dez/95 dez/96 dez/97 dez/98 1,9 1,8 1,1 0,9 0,9 0,7 0,6 0,2 dez/99 dez/00 dez/01 0,8 0,7 dez/02 0,9 0,9 dez/03 0,6 dez/04 1,0 1,1 1,0 set/05 Net Debt/GDP (%) IPCA IER IGP-DI (*)

15 Steps for Fiscal Strengthening End of state financing by banks and recurrent help by Federal government: the 1997 renegotiation was accompanied by tight contracts requiring adjustment programs monitored by the Federal government; Closure or sale of state banks: financial support to clean up institutions (PROES): no more back-door financing by government banks; 2000 Fiscal Responsibility Law (for all levels & branches of government) prohibition of intergovernmental debt financing limits on total debt & personnel expenditure, compensatory measures for tax expenditure and new entitlements verifiable fiscal targets and transparency rules adjustment rules and institutional penalties 2003 reform of the Public Servant Social Security framework (for all levels and branches of government).

16 I Importance of Subnational Governments II Macro Background for Fiscal Responsibility III Main Features of the Fiscal Responsibility Law IV Financial Programs between the Union and other Federative Units V Fiscal performance of subnational governments

17 Building Blocks of the LRF operation Budget Planning PPA LDO LOA (fiscal targets voted) Rules Limits on Personnel, carry over of commitments, etc Correction Mechanisms Intra-year adjustments in expenditure, personnel management tools, borrowing limitations, targeted escape clauses Transparency and Control Publication of Reports & their presentation to Lawmakers at hearings Sanctions Institutional (suspension of transfers) and personal (criminal charges)

18 Rules that apply to all levels of government Rules that are structural I - limits of personnel expenditure as % of revenue and borrowing limits; II compensatory measures for tax expenditure and entitlements aimed at raising electoral accountability I no intergovernmental or government controlled bank lending II -- borrowing and expenditure limits for last year of government flexible: few and specific escaping clauses I - sharp economic slowdown II - drastic change in monetary/x-rate policies

19 Rules to LIMIT PERSONNEL EXPENDITURES BY BRANCH (% of Net Current Revenue) GOVERNMENT LEVEL / BRANCH Previous Law FRL FEDERAL GOVERNMENT 50,0 50,0 Executive 40,9 Federal District 3,0 Others 37,9 Prosecutor`s Office 0,6 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

20 Rules to LIMIT PUBLIC DEBT (as a proportion of net current revenue) GOVERNMENT LEVEL Limit (/ NCR) 15 years transition period from 2001 FEDERAL GOV. 3,5 (proposal) --- STATES 2,0 Reduces 1/15 of the exceeding amount. MUNICIPALITIES 1,2 Reduces 1/15 of the exceeding amount.? Defined by the Federal Senate from President`s proposal, as a proportion of net current revenue NCR? Transition period for those exceeding ceiling at the end of 2001? Same value for every municipality and every state? May be revised annually or at any time by a President`s proposal

21 Rules to COMPENSATE NEW TAX EXPENDITURE AND ENTITLEMENTS? Any bill that creates new expenditures has to show how these will be financed (the President can veto a law that fails this test).?any new tax expenditure or continued (+3 years) mandatory expenditure can be approved only if new tax revenues are secured or expenditure of similar nature are reduced? new tax revenues are those from tax rate increases, new taxes or permanent new revenues? Any new subsidy, guarantee or measure to benefit a particular group has to be approved by a specific law

22 Rules to FORBID INTERGOVERNMENTAL and BANK FINANCING No unit of the Federation can lend or otherwise provide credit to another unit, even with a view to renew, refinance or lengthen the payment of outstanding debt The Central Bank cannot finance Federal, State or Municipal Governments. Public financial institutions can not grant credit to those who control them. The Senate has to authorize any credit operation (upon recommendation of the National Treasury)

23 Rules for the LAST YEAR IN OFFICE Personnel expenditures: No act that increases these expenditure may occur on the 180 days before the end of the administration (e.g., no hiring or compensation increase). Floating over the year: Any financial obligation left for the following has to be backed by cash in the bank. Credit Operations based on Anticipated Revenues: No such operations can take place in the last year in office

24 PLANNING MECHANISMS PPA: multi-year plan (4 years) that includes ALL expenditure (including investment) on a consistent basis with fiscal targets No program can be funded in the annual budget, if not included in the PPA The PPA also aims at setting priorities, monitoring targets and evaluation procedures LDO: annual law that establishes rules for budget preparation 3-year fiscal targets for revenues, expenditures, primary and nominal results and public debt Other rules for the budget preparation and execution Financial and actuarial evaluation of social security and funds Evaluation of fiscal risks, e.g., from contingent liabilities. LOA: annual budget law prepared in line with the PPA and LDO

25 CORRECTION MECHANISMS: Personnel Expenditure and Debt While personnel expenditures are in excess of the prudential limit (95%): no wage increase or adjustment to civil servants can take place no new position can be created or overtime paid If ceiling is exceeded at the end of a quadrimester excess shall be eliminated in the next two quadrimester exceptional cuts in personnel can take place If debt ceiling is exceeded excess shall be eliminated in the next three quadrimesters failure to adjust forbids contracting any additional credit

26 CORRECTION MECHANISMS: Budget Execution In up to 30 days after the Budget is sanctioned, the government shall prepare a monthly disbursement schedule consistent with targets for quadrimesters ending on April, August and December Every two months, the government prepares a report stating whether there are risks to fiscal targets. If so, it has to present ent a new spending schedule with cuts in discretionary spending; Every four months fiscal performance and corrective measures are explained at Legislature hearings (Congress for Fed. Gov.) Adjustments can be delayed only according specific escape clauses (in the case of debt ceilings, upon Senate authorization) Within-the the-year adjustments strike a balance between over- cautious spending patterns and strict observance of fiscal targets ts

27 TRANSPARENCY AND CONTROL Social security receipts, expenditures and cash flow separated from those of the general budget (e.g., Treasury). Periodical publication of budgetary information in standard format on the press and internet National Treasury posts monthly report on States which debt exceeds the respective ceiling States and Municipalities send fiscal and financial data to National Treasury, which consolidates and makes them public on the Internet (NT does not audit those data) Public participation in the budgetary process and internet access to LDO, PPA, etc.

28 TRANSPARENCY AND CONTROL: How different reports work together Fiscal Target Reports: summary report every two months and full report and hearings to legislative houses every four months, with explanation of corrective measures already taken (it includes stateowned enterprises!) Fiscal Administration Report (Relatórios de Gestão Fiscal): summary report every two months and full report every four months, with detailed information on personnel expenditure and the public debt; theseare on accrual bases to ensure medium-term consistency. Consolidation of Subnatational Data FIMBRA DATABANK: 96% of States and 94% of citie sent data to the National Treasury in Reports are the main tool for periodical auditing by Audit Courts (Tribunais de Contas). Federal Government is working with State Audit Courts to enhance their operation and harmonize standards

29 SANCTIONS Sanctions can be Institutional and Personal Institutional sanctions affect the state or municipality Personal sanctions affect officials and can be administrative, electoral or crimminal Sanctions can be promoted by the Executive (institutional sanctions), Legislative (Audit Courts), or the Public Prossecutor, together with the Judiciary (e.g., personal criminal sanctions) Any citizen can bring suit, e.g., based on published reports or other findings

30 INSTITUTIONAL SANCTIONS and other control mechanisms Voluntary Transfers and Guarantees: Union can provide them only if other federation is complying with its debt service, revenue earmarking for health and education (within budgetary limits), and ceilings for personnel expenditure and debt. Credit operations: The National Treasury cannot recommend to the Senate any operation if debt is above limit or unit does not show ability to repay (according with previous and projected fiscal performance) Exception can be made to refinance (by third party) and operations to support reductions in personnel expenditure Also, the National Monetary Council has set caps for overall subnational lending operations and prudential limits for bank exposure to the subnational public sector (45% of bank capital)

31 PERSONAL SANCTIONS They apply to all responsible officials (elected or not) and cover actions as well as omission (e.g., not taking corrective measures) Criminal Component of LRF (Law /2000) Arrest ( 3 months to 2 years) or imprisonment (1-4 years) Fine of 30% of annual salary (for administrative faults pointed out by the Audit Court) More scope for applying existent legislation (DL 201/67) Arrest ( 3 months to 3 years) Removal from office Ineligibility to be appointed or run to office for 5 years

32 I Importance of Subnational Governments II Macro Background for Fiscal Responsibility III Main Features of the Fiscal Responsibility Law IV Financial Programs between the Union and other Federative Units V Fiscal performance of subnational governments

33 BASES AND FEATURES OF PROGRAMS - Adjustment programs underpin the debt refinancing occurred under Law n. 9496/97: - contracts enabled states to pay their debts with the private sector (high interest rates and short term), providing for more predictability (ceilings for debt service) and long-term payment schedules (30 years +) - Programs are a way to ensure consistent fiscal policies to facilitate the service of the rescheduled debt - Some contracts provide an allowance for new credit, which can be used only if programs are on track - Programs run for three-year periods, but admit revisions

34 PROGRAM CORE: Quantitative Targets Six targets,, of which first two are crucial: 1 Ceiling on Financial Debt; 2 Primary Surplus Target; 3 Ceiling on Civil Servants Expenditures; 4 Projected State s Tax Revenue; 5 Objectives for Reforms; and 6 Commitment toinvestiment Expenditures. Targets are agreed with Governor and reviewed every year Failure to meet targets may imply pecuniary penalties (acceleration of debt payment for six months) and restrictions on new credit operations

35 PROGRAM IMPLEMENTATION 1 Agreement with Governor, including: a) letter of intent and 5 annexes with macro and fiscal projections b) MOU with targets and Fiscal Appraisal by Treasury 2 Annual Review, based on a Technical Mission and the analysis of State General Balance and other data 3 Mission can face one of three possibilities: a) all targets are met, and review can be completed b) some targets other than 1 and 2 are not met, which still allows Treasury to complete the review c) targets 1 or 2 are not met, and review cannot be completed 4 In case (c), a waiver will only be granted by the Minister of Finance upon Treasury recommendation, usually at the heels of a strengthening in the program

36 REFINANCE CONTRACTS WITH MUNICIPALITIES Based on Provisional Act (MP) nº 1.811, of Feb/25/1999; update of certain rules by MP nº of 2001 Cover around 90 municipalities, which makes impractical to have individual adjustment programs In absence of yearly programs, rules are more stringent: No new credit operation before debt/real revenues is below 1.0 Automatic penalty of raising debt service ceiling by 4 percentage points above standard 13% of net real revenue in case: Ceiling on civil servant pay is exceeded; Pension outlays, obligations or provisions deviate from parameters in MP n ; Any provision in the contract is breached

37 I Importance of Subnational Governments II Macro Background for Fiscal Responsibility III Main Features of the Fiscal Responsibility Law IV Financial Programs between the Union and other Federative Units V Fiscal performance of subnational governments

38 IMPACT OF LRF + PROGRAMS ON FISCAL PERFORMANCE State ceilings on personnel expenditure (50% of current revenue): 6 states complied in 1996; 18 did in 2000; all have done since 2001 Debt: 5 states still above ceiling of 200% of revenues, owing to 2002 currency devaluation 92% of municipalities below ceiling of 1,2 times revenues (only a handfull of large municipalities have real problems with their debt) Primary surplus: Ten states were still in deficit by 2000; all were in surplus by 2004 Primary Surplus as a proportion of GDP Consolidated Public Sector -0,01% 3,19% 3,46% 3,64% 3,89% 4,25% 4,58% Subnational Governments -0,29% 0,21% 0,69% 1,18% 1,05% 1,15% 1,12%

39 IMPACT: Steady Strengthening of State Finances # of States with Program AGGREGATE FISCAL RESULTS % OF GDP DISCRIMINATION Debt Service \1 2,6 2,4 2,3 3,0 2,4 1,4 1,1 1,3 1,1 1,1 Financing Sources Primary Surplus -0,7-0,4-0,4-1,0 0,2 0,5 0,5 0,6 0,8 0,8 Sale of Assets 0,0 0,3 1,3 1,1 0,8 0,6 0,2 0,1 0,1 0,0 Credit Operations 2,3 2,3 1,8 2,3 1,3 0,3 0,2 0,3 0,2 0,1 Arrears 0,9 0,2-0,3 0,7 0,2-0,1 0,3 0,3 0,1 0,1 Total 2,6 2,4 2,3 3,0 2,4 1,4 1,1 1,3 1,1 1,1 % of Debt Service Debt Service \1 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Financing Sources Primary Surplus -25,7-15,1-18,6-34,3 6,7 37,8 47,1 45,5 69,1 74,7 Sale of Assets 1,6 11,5 54,3 35,5 32,4 44,4 13,8 6,7 5,0 2,3 Credit Operations 90,8 96,4 77,5 75,1 51,7 24,6 15,2 25,2 13,7 12,9 Arrears 33,3 7,3-13,2 23,7 9,2-6,8 23,8 22,6 12,1 10,2

40 Federal Government support to LRF Implementation by Municipalities (Art. 64) 1 Manual of the Fiscally Responsible Manager: CD presenting in plain language all the do and don t for time-consistent, effective, lawful municipal administration. It also provides all pertinent legislation, rules, norms and manuals for preparation of the Budget, Fiscal Reports & Intergovernmental Transfers Applications 2 Fiscal Management Computer Tool: reads FIMBRA fiscal statistics for municipality of interest ( ), provides rules to complete data for 2004, and helps project revenues for The Computer Tool allows mayors and city managers to evaluate whether their government plans will be fiscally consistent, e.g., by satisfying the LRF ratios throughout the government period Prepared by the National Treasury and distributed to Municipalities in 2005

41 Thank you! The Brazil we all know and the Brazil we are building For more information, visit our web site tesouro.fazenda.gov.br

42 Main Constitutional Transfers FPM and FPE (Fundo de Participação dos Estados e Municípios pios; ; art. 159): shares the revenues from the Income Tax (47%) and the IPI Federal l VAT on industrial goods (53%) FUNDEF (Fundo de Manutenção e Desenvolvimento do Ensino Fundamental e de Valorização do Magistério; art. 212 and law 9424/96): provides for the financing of the 8-year basic education, particularly teacher compensation The main sources of revenues are shared taxes, with the earmarking of 15% of FPE/FPM In addition, the federal government makes up funds in the poorest states to ensure a minimum level of spending per student Part of the Salário-Educação levied from firms (art and law 9766/98) CIDE (Contribuição de Intervenção no Domínio Econômico; art º and art.159 III): transfers 25% of the petrol tax to finance transport infrastructure

43 Other Constitutional and Legal Transfers Oil & gas royalties and participation (art. 20 and Laws 7990/89 and 9478/97): gives 5% of oil revenue (royalties) and a share of windfall gains (participação especial) to states and municipalities Royalties for water resources used for power generation (art. 20 and Law 7990/89): 6% of electricity revenue for states and municipalities with associated rivers and lakes Royalties on mineral resources (Law 8.001/90, art 2) IOF Financial tax on gold transactions (Law 7766/89) Grants for exporting states,, after selected exports were exempt from VAT, which is a state tax (Enabling Laws 87 and 115/2003)

44 Other Transfers Health-care care: : SUS is a single provider system, which reimburses public and private providers Resources are distributed among states and municipalities on a formulabased system Responsibility for specific resource allocation has been gradually transferred to states and municipalities Voluntary Transfers: : current or investment spending through cooperation agreements, or other type of financial support of states and municipalities Shared management of Social Programs: e.g., cash transfers for the very poor/fome Zero, although formula-based, are managed with a strong municipal participation The Federal Government is forbidden from lending municipalities to states and

45 Significant dependency on Transfers (Federal Transfers as % current revenues ) GRAU DE DEPENDENCIA DOS ESTADOS DAS TRANSFERÊNCIAS FEDERAIS GRUPO I- ALTA DEPENDENCIA GRUPO II-MEDIA DEPENDENCIA GRUPO III-BAIXA DEPENDENCIA Estados States Transf FPE/RCL União/RCL( (%) %) FPE/Transf (%) Municípios Nº de Municípios Transf União/RC (%) FPM/RC (%) FPM/Transf (%) GRUPO 56,22 52,89 94,08 GRUPO ,11 34,22 69,68 AP 71,90 68,89 95,81 RR 14 65,59 45,51 69,38 PI 68,06 59,10 86,83 PI ,06 40,04 71,41 RR 66,10 65,62 99,28 MA ,94 35,26 64,17 MA 66,21 58,14 87,81 PB ,61 40,06 74,72 AC 62,36 62,05 99,50 AL ,81 35,65 70,16 TO 53,72 53,16 98,96 TO ,34 42,53 87,98 AL 49,11 47,13 95,97 AP 8 47,59 37,61 79,01 SE 44,44 43,37 97,60 AC 21 44,25 39,15 88,47 PB 42,11 40,23 95,52 PA 98 43,28 24,92 57,59 SE 70 43,15 30,70 71,15 RN ,13 31,77 73,67 GRUPO 27,27 21,51 78,88 GRUPO ,30 22,10 70,60 PA 40,67 32,19 79,16 CE ,62 28,80 69,20 RO 40,55 36,61 90,28 PE ,58 29,17 73,69 RN 38,97 35,79 91,84 RO 46 37,99 24,66 64,91 CE 36,99 30,91 83,58 BA ,65 29,41 78,13 PE 28,58 24,26 84,87 GO ,41 23,30 69,75 BA 26,12 20,90 80,00 MG ,10 22,96 69,37 MT 23,03 15,98 69,36 MS 75 32,61 19,57 60,02 AM 22,35 17,72 79,28 MT ,56 19,63 64,24 ES 16,94 8,05 47,53 PR ,97 18,22 67,57 MS 18,39 11,10 60,35 SC ,79 18,96 70,78 GO 16,18 11,57 71,47 AM 57 25,39 18,14 71,44 ES 77 24,78 17,19 69,39 RS ,79 17,31 72,77 GRUPO 11,17 2,71 24,26 GRUPO ,48 12,39 89,46 SC 15,22 4,44 29,18 RJ 82 15,36 4,44 28,90 DF** 14,92 3,91 26,19 SP ,12 7,95 60,56 MG 14,69 6,44 43,89 PR 13,87 5,53 39,87 SP 11,49 0,49 4,29 RS 10,89 4,10 37,67 RJ 4,62 1,62 35,02 19,52 12,25 62,73 BRASIL ,18 17,35 66,27 BRASIL * Exceto royalties. Fontes: SIAFI e balanços de Estados e Municípios Municipalities Transfers/ Current Rev Above 40% Avg > 55% 15%-40% Avg around 25% Below 15% Avg > 10%

46 Municipalities are key partners for development and depend on transfers Share of Municipalities in GDP (2003) Expenditure: 7,95% Investments: 0,87% Education Spending: 4,22% Faixas populacionais Share of Transfers in Revenues (2003) Receitas Despesas Próprias IPTU ISS Transferências FPM SUS/FUNDEF Pessoal Investimento % RECEITA BRUTA Dívida TOTAL 35,4 7,9 9,2 64,6 13,7 17,8 45,8 10,6 47,4 POP > ,9 13,4 16,7 48,1 3,5 14,0 46,7 10,7 122, > POP > ,1 9,2 10,0 59,9 6,9 19,0 47,0 8,8 27, > POP > ,9 5,8 6,6 68,1 13,2 19,5 45,5 11,6 12,8 POP < ,9 2,4 2,4 84,1 30,9 20,0 44,2 10,4 3,5

47 Next Challenge: improving the quality of spending Transfer Rules (minimum conditions to receive voluntary transfers): (i) States and municipalities need to raise certain taxes on their own ; (ii) A budget allocation specifying use of resource is required; (iii) Transfers cannot support personnel expenditure; (iv) Documentation regarding compliance of tax, social security, labor obligations, and debt service is to be provided; (v) Previous transfers ought to be ready for auditing; (vi) Earmarking to Health and Sanitation is observed (LRF); (vii) Limits for personnel expenditure and debt ceiling are observed; (viii) There are counterpart resources in the beneficiary budget; Counterpart for Municipalities 5% -10%, for municipalities with up to habitants; 10% - 20%, for other municipalities in SUDAN/SUDENE/CO regions; 10% - 40%, for voluntary Health transfers (e.g., to local clinics); 20% - 40%, all other. Counterpart for States: 10% - 20%, for states in SUDAN/SUDENE/CO regions; 20% - 40%, for all other

48 Toward Improving the Quality of Spending Strengthened targeting and evaluation mechanisms for public expenditure (i) (ii) Increasing monitoring by CGU internal audit unit is helping improving record on use of FUNDEF and Bolsa Familia resources, especially in small towns; SUS transfers follow federal guidelines; despite participation of stakeholders in the process, more accountability and cost/benefit selectivity can be achieved (iii) Public expenditure on education is among the highest in the world, and FUNDEF has helped increase school enrolment; less rigid, better-monitored transfers might help raise productivity (e.g., more country-wide tests); (iv) Transfer formulas are set in the Constitution, and are updated using IBGE statistics bureau data; some may be reviewed, rebalancing flows;

49 Enforcing Mechanisms Regarding Transfers and other Financial Flows to State and Municipalities Voluntary Transfers: Federal government can make voluntary transfers only to states and municipalities that comply with their debt obligations, tax payments, transparency requirements, earmarking obligations to Health and Education, as well as LRF limits on debts and personnel expenditure Credit: Only those bodies observing debt and other LRF ceilings can contract new debt. All operations need authorization by the National Treasury and to satisfy requirements similar to those applying to transfers Guarantees: Federal government can provide guarantees (e.g., for external debt) under conditions similar to those applying to voluntary transfers Note 1: regarding debts and guarantees, Treasury works as an agent of the Senate, as the Constitution requires all credit operation to be approved by the Senate Note 2: municipalities are required by LRF to send fiscal data to FIMBRA databank (above 90% compliance so far), in addition to publish reports in the internet and newspapers

50 Thank you! The Brazil we all know and the Brazil we are building For more information, visit our web site tesouro.fazenda.gov.br