the case of the brazilian fiscal responsibility law: rules ... brazilian_ bra… · Öfinancial and...

The case of the Brazilian The case of the Brazilian Fiscal Responsibility Law: rules, Fiscal Responsibility Law: rules,

results and challengesresults and challenges

Selene Peres Peres NunesPeru, Lima, February, 7th 2008

Seminario Internacional “Descentralización e inclusión social en el marco de los procesos de

integración regional”

Brazil

Seminario Internacional - Perú

CYCLES OF INSTITUTIONAL REFORMS BEFORE FRL

60’s: reform of public accounting system (law defining structure of accounting plans, concepts and accrual basis)

80’s:● accounting 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 (revenue transfers).


CYCLES OF INSTITUTIONAL REFORMS BEFORE FRL90’s:

● 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 1998.

1999 and on: Economic policy = floating exchange regime + inflation targets + primary surpluses


26 States, a Federal District and 5,563 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 tendency to present high personnel expenditures;● own taxes locally administrated (13% to 80% of total revenues) “Fiscal war”among States;● constitutionally guaranteed transfers;● own planning and budget;● own administration; ● own control institutions.● 34 External Auditing Authorities, all autonomous.

A COMPLEX INSTITUTIONAL FRAMEWORK

High and persistent deficits and a historic of debt

renegotiation by the Federal Government up to 2000.


FRL: FULL RESPECT TO THE FEDERATION

●● 2000: Fiscal Responsibility Law2000: Fiscal Responsibility Law--FRL, new cultureFRL, new culturewithin a comprehensive concept: all the public administrationwithin a comprehensive concept: all the public administration, including funds, , including funds,

foundations and state owned enterprises which depend on treasuryfoundations and state owned enterprises which depend on treasury resources.resources.

●● The solution was to create limits that apply to all levels and bThe solution was to create limits that apply to all levels and branches but ranches but maintain the budgetary process as autonomous ...maintain the budgetary process as autonomous ...

•• Same treatment to the Federal Government, each of the states anSame treatment to the Federal Government, each of the states and each of the d each of the municipalitiesmunicipalities autonomy in the federation has been preservedautonomy in the federation has been preserved

•• Specific limits for each of the Powers (personnel expenditures,Specific limits for each of the Powers (personnel expenditures, amounts to be amounts to be paid on the end of tenure in office) paid on the end of tenure in office) independency among Powers has been independency among Powers has been preserved preserved control depends on reports with individualized responsibilities


The Fiscal Responsibility Law: The Fiscal Responsibility Law: rules and transparencyrules and transparency


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 a structural 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.


• In case of non-compliance, the FRL establishes:compensation and deviation correction mechanisms institutional sanctions individual penalty rules

• Emphasis on inter-temporal variables ...

WHAT IS THE FRL ?

Fiscal targets Compensation for tax breaks and obligatory permanent expendituresLimits for personnel expenditures and public debtRules for intergovernmental relationsRules for Amounts to be paid


FISCAL TARGETS (FEDERAL/STATE/MUNICIPAL)

1) 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 nominal results and public debt and also:

Report on the use of privatization resourcesFinancial and actuarial evaluation of social security and fundsEvaluation 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


TRANSPARENCYTRANSPARENCY

ANDAND

CONTROLCONTROL

PPA

LDO

LOABUDGETARY AND

FINANCIAL EXECUTION

AVALIATION

BUDGETARY CYCLE


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)


LIMITS FOR PERSONNEL EXPENDITURES BY BRANCH

Previous Law FRL

FEDERAL GOVERNMENT 50,0 50,0Executive 40,9

Federal District

0,6Others

3,0

Prosecutor`s Office37,9

Legislative 2,5Judiciary 6,0

STATES 60,0 60,0Executive 49,0Prosecutor`s Office 2,0Legislative 3,0Judiciary 6,0

MUNICIPALITIES 60,0 60,0Executive 54,0Legislative 6,0

GOVERNMENT LEVEL / BRANCH

as % of Net Current Receipts


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 quatrimester, 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)


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 Service

ARO'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 NationalTreasury Secretariat complete 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


•Prohibited the granting of new credits of any component of the Federation in benefit of any other one, even when such funds aregranted 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


•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

RULES FOR THE END OF TENURE IN OFFICE


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.


FISCAL TRANSPARENCY: REPORTS

1. RREO - Report on Financial Budgetary Execution2. RGF - Report on Fiscal Management3. 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).


RREO - Report on Financial Budgetary Execution• Each 2 months issued publicly up to 30 days after.• Contents:

Budgetary BalanceExecution of Expenditures by Function and Sub function

Net Current ReceiptsSocial Security Receipts and Expenditures (General Regime and Public

Servants` Regime)Primary and Nominal ResultsAmounts to be Paid by branchCredit Operation Receipts and Capital Expenditures Actuarial Projection of the Social Security RegimesPrivatization Receipts and Resources applicationReceipts and Expenditures with Education and Health (Constitutional

limits)Public Private Partnership.


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 limits or justifies deviations and indicates corrective measures and the time required for path correction.

Cash Availabilities and Amounts to be Paid.


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.


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


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.


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.


The Results and the ChallengesThe Results and the Challenges


SIGNALS OF CULTURAL CHANGE

• LRF has passed two important tests: economic cycle and political change

• After 7 years, all the legislative initiatives to change FRL have been not successful.

• Actions at the Supreme Court: after preliminary analysis of the 31 questioned dispositions, just 7 of minor importance have been suspended.

• International recognition: Brazil is a reference for many countries.

• IBEP’s research, jan.-apr. 2001, with 211 opinion makers:86% with a positive opinion on FRL

81% think it’s an important idea for any presidency candidate


PERSONNEL EXPENDITURES AND DEBT LIMITS: STATES


● 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 limit

X 2006: two

FRL: STATES (2000 X 2006)


●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)


More resources for:More resources for:

Health Health

EducationEducation

Half of the municipalities budget is spent in education (24%) and health

(22%) = most of them achieve FRL limits

HEALTH AND EDUCATION EXPENDITURES IN MUNICIPALITIES


● Personnel expenditures/NCR:

● 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.

FRL: MUNICIPALITIES (2000 X 2006)


● 1st challenge: There should be more debate about fiscal targets to avoid pursuing only primary results and because better primary results do not guarantee better public expenditures.

CHALLENGES


● 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 Expendituresassociated 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 infrastructure investments and social expenditures

CHALLENGES


● 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


● 5th challenge: avoid “creative accounting”:

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


● 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.

CHALLENGESCHALLENGES


● 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


●Medium run:

External Auditing Authorities Modernization Program (PROMOEX)

Towards FRL`s concepts interpretation and procedures pattern;

Information will be at disposal at an integrated net at Internet;

Data ware systems modernization.

National discussion of the Brazilian Rules applied to public accounting

National Training of States and Municipalities.



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

accounting system, control towards better expenditures quality)



RECOMMENDATIONS TO OTHER COUNTRIES

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

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

stimulate the observance of rules. stimulate the observance of rules.

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

federal practices. federal practices.

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

require administrative measures to be implemented: disseminationrequire administrative measures to be implemented: dissemination, , capacitationcapacitation, ,

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


RECOMMENDATIONS TO OTHER COUNTRIES

•• ScopeScope Though it might be used in both countries, under a central authThough it might be used in both countries, under a central authority ority

or not, reports might be a key to harmonize fiscal balance and or not, reports might be a key to harmonize fiscal balance and governabilitygovernability in in

decentralized countries. decentralized countries.

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

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

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

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

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

–– to strengthen social control). to strengthen social control).


ADDITIONAL INFORMATION

Selene Peres Peres Nunes

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

Suggested site:

http://www.stn.fazenda.gov.br

mailto:[email protected]

mailto:[email protected]

the case of the brazilian fiscal responsibility law: rules ... brazilian_ bra… · Öfinancial and...

Documents