The Case of The Brazilian Fiscal Responsibility Law: Rules, Results and Challenges

The case of the Brazilian
Fiscal Responsibility Law: rules,

results and challenges

Selene Peres Peres Nunes
Peru, Lima, February, 7
th
2008
Seminario Internacional Descentralizacin e
inclusin social en el marco de los procesos de
integracin regional
Brazil
Seminario Internacional - Per
CYCLES OF INSTITUTIONAL REFORMS BEFORE FRL
60s: reform of public accounting system (law defining structure of accounting
plans, concepts and accrual basis)

80s:
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 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 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 Law-FRL, new culture
within 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 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) independency among Powers has been
preserved control depends on reports with individualized
responsibilities


The Fiscal Responsibility Law:
rules 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 expenditures
Limits for personnel expenditures and public debt
Rules for intergovernmental relations
Rules for Amounts to be paid
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 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

TRANSPARENCY
AND
CONTROL
PPA
LDO
LOA
BUDGETARY
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
50,0
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
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)
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 National
Treasury 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 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
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 arent enough cash resources.
Credit Operations based on Anticipated Revenues: Prohibited during the
last year of the Executive Chiefs 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 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).
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.
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 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.
IBEPs research, jan.-apr. 2001, with 211 opinion makers:
86% with a positive opinion on FRL
81% think its 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:
Health

Education

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
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)

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 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 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.

CHALLENGES

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 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.
RECOMMENDATIONS TO OTHER COUNTRIES
Scope Though it might be used in both countries, under a central authority
or 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).
ADDITIONAL INFORMATION

Selene Peres Peres Nunes

e-mail: selene.nunes@fazenda.gov.br ou selenenunes@gmail.com

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

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