Fiscal rules for a federation: the case of the Brazilian Fiscal Responsibility Law

Transcription

1 Brazil Conference on Fiscal Responsibility and Intergovernmental Finance Fiscal rules for a federation: the case of the Brazilian Fiscal Responsibility Law Selene Peres Peres Nunes India, Hyderabad, June, 23 th 2005

2 CICLES OF INSTITUTIONAL REFORMS BEFORE LRF 60 s: reform of public countable system (law defining structure of countable plans, concepts and accrual basis) 80 s:? countable system for the federal government (SIAFI);? concepts of net debt and primary result; separation of fiscal and monetary accounts (National Treasury and Central Bank);? New Constitution, including budgetary reform (PPA > LDO > LOA);? changes on intergovernmental relations (revenues transfers).

3 90 s: Institute of Socioeconomic Studies CICLES OF INSTITUTIONAL REFORMS BEFORE LRF? State reform > privatization in advanced stage;? inflation control (Real Plan);? changes on intergovernmental relations (expenditures competencies and debt refinancing);? public administration reform;? the last states debt 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 and on: Economic policy = floating exchange regime + inflation targets + primary surpluses

4 23 States and 5,561 Municipalities are politically, administratively and financially autonomous, according to the Constitution one of the more decentralized federations of the world:? democratic political system (Executive and Legislative elected in all levels) and independent branches;? own taxes locally administrated (13% to 80% of total revenues);? constitutionally guaranteed transfers;? own planning and budget;? own administration; BUT ALSO A COMPLEX INSTITUTIONAL FRAMEWORK? own control institutions.

5 NUMBER OF MUNICIPALITIES Population (1000 hab.) Northeast North Cent.West South Southeast Brazil Up to * 1 * More than Total ,3% number > 50% Hab. Source: IBGE Censo Demográfico * Means no municipalities in this cathegory.

6 WHAT MEANS High personnel expenditures in all levels; High tax burden (34% GDP); Fiscal war among States; High and persistent deficits in all levels; High public debt in all levels and a historic of debt renegotiation by the Federal Government.

7 LRF: FULL RESPECT TO THE FEDERATION? 2000: Fiscal Responsibility Law-FRL, new culture? 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 the municipalities autonomy in the federation has been preserved Specific limits for each of the Powers (personnel expenditures, amounts to be paid on the end of tenure in office, reports with individualized responsibilities) Independency among Powers has been preserved

8 The Fiscal Responsibility Law

9 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) within a comprehensive concept: all the public administration, including funds, foundations and state owned enterprises which depend on treasury resources

10 WHAT IS THE FRL? It is a mix of models based on rules and transparency to promote a structural fiscal change. It has 3 levels of rules: general rules; harder rules for the end of tenure in office (political cicle); 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.

11 WHAT IS THE FRL? In case of non-compliance, the FRL establishes: compensation and deviation correction mechanisms institutional sanctions individual penalty rules Emphasis on inter-temporal variables...

12 Fiscal targets KEY-CONTROL VARIABLES Compensation mechanism for tax breaks and for the creation of obligatory permanent expenditures Limits for personnel expenditures and public debt Rules for intergovernmental relations Rules for financial and asset management: Credit operations based on anticipated revenues Granting of guaranties Amounts to be paid

13 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, includes 3-year fiscal targets for revenues, expenditures, primary and nominal results 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 previously established at PPA and LDO

14 BUDGETARY CICLE PPA AVALIATION TRANSPARENCY AND CONTROL LDO BUDGETARY AND FINANCIAL EXECUTION LOA

15 FISCAL TARGETS (FEDERAL/STATE/MUNICIPAL) Report on Financial Budgetary Execution: published each 2 months. Automatic cross the board cut: if it is estimated that the primary or nominal results will be less than those forecasted, it is obligatory the budgetary and financial cut. Except ear-marked expenditures, how to cut (including by branch) is an autonomous definition of each LDO. The compensation mechanism assures compliance with the fiscal targets and disincentives bad planning (overestimated receipts or underestimated expenditures)

16 LIMITS FOR PERSONNEL EXPENDITURES BY BRANCH 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 as % of Net Current Receipts

17 LIMITS FOR PERSONNEL EXPENDITURES BY BRANCH While personnel expenditures are in excess of the prudential limit (95%), it will be prohibited: any wage increase or adjustment to civil servants; creation of new positions; payment of overtime. Permanent rule: If the maximum limit is surpassed at the end of a quadrimester, the excess is to be eliminated during the 2 following. Adaptation rule: 2 years after FRL is in place ( at least, 50% during the first year)

18 LIMITS FOR PUBLIC DEBT GOVERNMENT LEVEL Limit (/ NCR) 15 years reduction FEDERAL GOV. 3,5 --- 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 according to a President`s proposal, as a % of net current receipts - NCR? Applied equally to each component of the federation at each governmental level? May be revised annually or at any time by a President`s proposal

19 Debt Limits (Senate Resolution 43) Credit Operations/year Debt Service 16% da NCR 11,5% da NCR ARO's (credits on anticipated revenues) Garantees 7% da NCR 22% da NCR They condition the analysis of credit operations

20 INTERGOVERNMENTAL RELATIONS 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.

21 RULES FOR THE END OF TENURE IN OFFICE 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 aren t enough cash resources. Credit Operations based on Anticipated Revenues: Prohibited during the last year of the Executive Chief s term

22 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.

23 FISCAL TRANSPARENCY: REPORTS 1. Report on Financial Budgetary Execution 2. Report on fiscal management: issued each 4 months, signed by each of the branch chiefs of the components of the Federation, confirms compliance with fiscal limits or justifies deviations and indicates corrective measures and the time required for path correction 3. The Ministry of Finance will monthly publish in internet the list of non compliance with the debt limits.

24 FISCAL TRANSPARENCY: REPORTS 4. Annual report: municipalities and states consolidate their accounts until April 30/ May 31; Federal Government consolidates all accounts and publish until June 30 a portrait of Brazil in internet. No previous federal authorization or posterior audits are needed; the Federal Government will only consolidate and make the national accounts public.

25 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

26 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.

27 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.

28 The Results and the Challenges

29 PUBLIC SECTOR RESULTS - % GDP - up to March 2005 PRIMARY SURPLUS NOMINAL DEFICIT 6,0 5,0 4,0 3,0 2,0 1,0 0,0-1,0-2, % 12% 10% 8% 6% 4% 2% Source: Min. Palocci, Senate, 31/5/05 Central Bank

30 PRIMARY SURPLUSES BUT...NOMINAL DEFICITS Nominal Result Federal Government States Municipalities State-owned enterprises Nominal Interests Federal Government States Municipalities State-ow ned enterprises Primary Result Federal Government States Municipalities State-ow ned enterprises Huge interest payments!

31 REAL INTEREST RATE OF PUBLIC DEBT BONDS(%) 35,3 22,6 23,4 25,1 26,7 Emergent countries: 1.5% p. a. 11,2 16,3 18, prev 15,3 10,8 9,0 5,9 12,9 8,1 10,6 Developed countries: 1.0% p. a. international media: Brazil leads the ranking with 12 times above the 12.3%.

32 NET AND GROSS DEBT Huge and growing internal federal debt! R$ billion % GDP Federal Government States Municipalities State-owned enterprises Total Net Debt Internal Foreign Total Gross Debt 1, GDP Huge deductions!

33 BETTER PRIMARY RESULTS, WORSE NOMINAL RESULTS

34 HEALTH AND EDUCATION EXPENDITURES More resources for: Health Education IN MUNICIPALITIES Half of the municipalities budget is spent in education (27%) and health (22%) = most of them achieve LRF limits Investments Invest R$ 7.5 bi = 52% of federal investment (and only 5,59% are financed by credit operations): save to invest Essential condition for better public expenditures

35 PERSONNEL EXPENDITURES AND DEBT LIMITS: STATES (2004) (% NCR ) dec/04 (% NCR ) dec/04 State PE /NCR State DEBT /NCR 1 Roraima 29,86 1 Roraima 4,24 2 Rio de Janeiro 31,25 2 Amapá 13,20 3 Distrito Federal 32,35 3 Amazonas 25,39 4 Espírito Santo 33,09 4 Distrito Federal 27,28 5 Amapá 36,18 5 Tocantins 34,84 6 Rondônia 37,07 6 Rio Grande do Norte 37,91 7 Mato Grosso do Sul 37,22 7 Pará 60,43 8 Mato Grosso 37,25 8 Acre 62,09 9 Tocantins 39,64 9 Sergipe 64,71 10 Ceará 40,09 10 Espírito Santo 73,04 11 Amazonas 40,32 11 Ceará 92,24 12 Bahía 41,29 12 Paraná 96,22 13 Maranhão 42,13 13 Pernambuco 103,77 14 Sergipe 42,95 14 Rondônia 106,27 15 Goiás 43,04 15 Paraíba 107,63 16 Rio Grande do Sul 43,28 16 Bahía 141,90 17 Pará 43,30 17 Piauí 143,15 18 Santa Catarina 43,85 18 Santa Catarina 162,66 19 Pernambuco 44,55 19 Maranhão 173,84 20 São Paulo 44,60 20 Mato Grosso 175,56 21 Rio Grande do Norte 46,57 21 Rio de Janeiro 204,33 22 Paraná 46,89 22 Goiás 221,38 23 Minas Gerais 48,33 23 São Paulo 222,98 24 Acre 48,58 24 Minas Gerais 224,39 25 Piauí 48,73 25 Mato Grosso do Sul 232,69 26 Alagoas 49,64 26 Alagoas 265,26 27 Paraíba 50,98 27 Rio Grande do Sul 282,70 Média 41,59 Média 124,45

36 LRF: MUNICIPALITIES (2004 X 1999)? Personnel expenditures/ncr: growth of 3%? Debt/ NCR: growth in the big municipalities, specially due to São Paulo.? Only São 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.

37 RENEGOCIATED DEBT INDICES AFTER LRF Accumulated variations after LRF /05/00 31/12/00 31/12/01 31/12/02 31/12/03 31/12/04 IGP-DI+9% a.a Selic IPCA+9% TJLP

38 SÃO PAULO s DEBT AFTER LRF São Paulo Debt/NCR Simulation 2,36 2,17 2,04 2,00 1,99 1,84 1,79 1,60 1,59 1,46 31/12/00 31/12/01 31/12/02 31/12/03 31/12/04 Contract (IGP+9%) 2,04 1,84 2,00 2,36 2,17 IPCA+9% 1,99 1,74 1,74 2,05 1,79 TJLP 1,99 1,60 1,46 1,59 1,25 Contract (IGP+9%) IPCA+9% TJLP

39 OTHER PROBLEMS IN THE RULES IMPLEMENTATION? Some creative countability in some States: 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.? Tax breaks are not as transparent as they should be; there is no publication pattern.? Publication in internet and open access to it must increase.

40 OTHER PROBLEMS IN THE RULES IMPLEMENTATION? Implementation of institutional sanctions still subjected to political decisions (suspension of federal and state voluntary transfers and of new credit operations) information not as public as it should be.? There should be more debate about fiscal targets (and interest rates) primary result myopia? Emphasis in payments control and not in expenditures control (Sao Paulo s risk)? Emphasis in cash and not in planning

41 MISSING LRF REGULATION Federal Government does not have a debt limit yet Fiscal Council for the federation Rules for public audiences and public participation in the budgetary process

42 FORTHCOMING? Budgetary Reform (Review Law 4320/64 planning, budget, countable system, control)???? Political Reform???? Transfers System Reform????Systems SIAFI and SIGPLAN Opening to the public towards more transparency and better public expenditure (make room for infrastructure investments and social expenditures)

43 ADDITIONAL INFORMATION Instituto de Estudos Socioeconômicos SCS, Quadra 8, Bloco B-50, salas 431/441, Ed. Venâncio 2000 CEP: Brasília - DF - Brasil Tel: 55(61) Fax: 55(61) selenenunes@inesc.org.br