Fiscal federalism in Brazil: historical trends, present controversies

Transcrição

VIII Congreso Internacional del CLAD sobre la Reforma del Estado y de la Administración Pública, Panamá, 28-31 Oct. 2003
Fiscal federalism in Brazil:
historical trends present controversies and future challenges
José Cezar Castanhar
1. Introduction
Brazil steps in the twenty first century as a country accounting for undeniable achievements, holding
tremendous potential and facing complexes challenges. Its more than US$ 500 billions of Gross
Domestic Product allow it to be ranked among the ten biggest economies of the world. With a
population near 170 million of people, it is also the fifth most populated country of the world and its
more than 8.5 millions of square kilometers ranks it as the fifth biggest of the world in extension.
After showing the biggest GDP real growth rate among all countries in the world, between the 1870s
and the 1970s1, Brazil faced a sharp slowing in its growing pace, alternating periods of stagnation,
recession, low rates of growth in most years and in some very few years an acceptable rate of growth.
The most commonly accepted explanation for this change is the fiscal crisis of the public sector which
the main driver of the exceptional growth after 1930. In the last ten years we are witnessing great
efforts for changing the so called Brazilian Development Model, meaning that the private sector should
replace the financially weakened public sector as responsible for the investments in the productive
sectors and infrastructure. This would allow the country resume its growth trend. In its new “model”
the public sector should be in charge only for the investments in the social sectors, which remains the
most urgent necessity for the Brazilian society. Indeed, it is also recognized that the tremendous
economic growth of more than one century was not sufficient to eliminate the deep inequalities and
basic need of the majority of the population. That situation was, of course, worsened in the last twenty
years as a consequence of the economic growth reduction.
A crucial challenge for Brazil in the years to come is, therefore, to balance the public sector finance in
order to cope with these social demands. Being a federation, an equally important challenge is to assign
to which different level of government their responsibilities in that task and the corresponding
financial resources to cope with it. That is not an easy challenge, since the struggle between the federal
and the states and local governments to increase its share of the public sector revenues seems to be an
endless one. In fact, that struggle has been deepened in the last ten years or so, following the 1988
Constitution that implemented a strong decentralization of tax revenues. Moreover, the Federal
Government, that normally would resist to giving-up revenues as a natural political instinct, recently
had added to its line of reasoning the necessity to maintain a strict control on the financial flows in
order to ensure balanced finance for the public sector and the economic stability. To justify that sort of
reasoning it is alleged that the subnational (states and local) levels of government are known to be less
committed to fiscal discipline.2 By the other hand is also known that from a managerial point of view
it is recommended that the services should be, preferably, carried out more close to the constituency,
that is, in a decentralized manner.
1
Serra, José e Afonso, José Roberto R, “O Federalismo Fiscal à Brasileira: algumas reflexões”, p. 3, mimeo, paper
presented at the International Conference on Federalism, held by the Forum of Federations, Mont-Tremblant, Canadá,
Outubro 1999.
2
This “bad reputation” of subnational governments with respect to fiscal discipline can be explained by mixed reasons: the
populism and clientelism that characterizes politics in Brazil and that is more generalized at the subnational levels, the
heavily reliance on transferred revenues at the subnational levels that encourage governments to increase spending with no
corresponding increasing in taxing on local taxpayers, among others.
The purpose of this paper is to discuss some aspects of these issues. Basically it will be argued that the
changes in the Tax System introduced by the Federal Government over the last eight years, allegedly
to restore its financial balance jeopardized by the 1988 Constitution and to ensure macroeconomics
stability, brought mostly negative consequences to the Federate equilibrium, either by concentrating
revenue at the Federal Government, or by imposing political and administrative constraints over the
subnational governments. Additionally, it will be suggested that the indisputable priority assigned to
the fiscal balance, established by the agreement with the International Monetary Fund, forced the
Federal Government to raise taxes and create new ones, increasing the tax burden and deteriorating the
quality of the tax system. It also will be suggested that massive increases of revenue obtained by the
Federal Government with these actions it is not helping to meet the urgent social demands of the
Brazilian most underprivileged population.
The paper is organized as follows. Section II presents a historical background of the evolution of the
Brazilian Federation. Section III discuss some present controversial issues related to tax revenue
distribution and responsibilities assignment for the different levels of government and Section IV will
outline some themes that constitutes challenges for politicians and public managers for the years to
come and some suggestions of changes and the current path will be made.
2. The Brazilian Federation: historical background
Presently a republic with 3 levels of government (the Central – Federal Government-, the intermediary
– 27 states and one Federal District and a Local Government – more tha 5.500 municipalities) the
Brazilian Federation was created along with the Republic back in 1889. Differently from other known
republican experiences, the Brazilian Federation was not a result of conviction of the people in
general, but rather decided at the highest levels of authority to divide the unitary State that prevailed
during the Imperial Regime. According to Serra and Afonso, the Federal Regime was convenient
mainly to the most developed provinces of the South and Southeast, specially São Paulo, where the
new exporting sector (of agricultural products at that time) was located. The goal of these provinces
was, then, to obtain revenues by imposing local taxes on its export proceedings. In exchange, the less
developed regions were granted political representation more than proportional to its population.3
Many of the changes in the process of evolution of the Brazilian Federation, as well as some distortions
that still remains, may be traced back to the way it began.
Thus, the Tax System adopted by the newly created Federal Republic was inherited from the Imperial
Regime. Naturally, the main changes introduced were to ensure that the States would have some
financial autonomy. So, it was adopted the regime of separation of tax revenues for the different levels
of government. The tax on imports was kept as exclusively source of revenue for the Central
Government and the States were entitled to tax the proceedings of exports, plus taxes on rural and
urban estates and tax on industries and professions (a primitive form of tax on goods and services). As
for the Municipalities (Local Governments), the Republican Constitution provided that the States
would be in charge of establishing specific taxes, so that to ensure their financial autonomy. At the
beginning of the Federation, therefore, the Local Government was the weak link of the chain,
3
Serra, José e Afonso, José Roberto R, “O Federalismo Fiscal à Brasileira: algumas reflexões”, pp. 3-6, mimeo, paper
presented at the International Conference on Federalism, held by the Forum of Federations, Mont-Tremblant, Canadá,
Outubro 1999.
2
depending heavily on the State Governments.4
Despite the creation of a excise tax on tobacco in the late nineteen century, a sales tax in 1922, and a
primitive form of Income Tax in 1924, the tax system would depend heavily upon taxes charged on
foreign trade. For instance, in 1934 as much as 50% of the Central Government tax revenues would
come from the Import Tax and 40% of the States tax revenues proceeded from the tax on Imports. The
first attempt to modernize the system occurred in 1934, embodied in the new Constitution. The State
Governments were no longer allowed to charge tax on interstate transactions, and a new tax on sales
was created, to be charged by the States. To the Local Governments were assigned the revenues
proceedings from the taxes on Rural and Urban Estates, as well as taxes on local services and permits.
An important innovation adopted then was the principle of partition of tax revenues. The Constitution
provided that some taxes would be collected by the States Governments and its revenue shared by the
Central and Local Governments. Despite the commendable intention, this provisions were of little or no
practical result at that time.
It is worth to mention that all along the initial period of the Brazilian Federation, the functions and
responsibilities of the different levels of government remained basically unaltered. It can be partially
explained by the fact that until the fifties Brazil was mainly a rural country, with a low percentage of
the population living in urban areas. Therefore, the demand for public services was incipient. Thus, in
addition to the traditional government functions of defense, justice and public administration, the only
important public service provided by government at that time was Education, that was a responsibility
shared by the Federal Government (College Education), States (Secondary Education) and
Municipalities (Primary Education).
In 1937 the constitutional government of Getúlio Vargas was turned into a dictatorship that lasted for 8
years. During this regime a significant amount of centralization was introduced, characterized mainly
by the loss of power of the State Governments5. Another significant change on the prevailing Tax
System took place in this period. The effects of the World War II on international trade, affected
heavily the revenues obtained from the taxes charged on these transactions, and forced the different
levels of government to rely increasingly on taxes incident on domestic transactions. Therefore, by
1946 approximately 2/3 of the Central Government tax revenues were originated from a wholesale tax
and from the income tax. From the State Governments side, the proceedings from the retail sales tax
comprised at that time, 60% of the tax revenues. As for the local governments, around 70% of the total
tax revenues were obtained from the Urban and Rural Estates Taxes, and the Tax on Industry and
Professions.
The year of 1946 represent the beginning of a new stage in the Brazilian Federation evolution as well to
its Tax System. In the year before the Vargas Dictatorship had ended, a new congress was elected to
vote a democratic constitution and a president was democratically elected again after 15 years.
Although the new constitution did not introduce radical changes on the Tax System, it promoted
significant efforts of decentralization, giving to the State Governments and mainly to the Local
Governments more autonomy as well as sources of revenue. It also institutionalized a mechanism of tax
revenue sharing among the different levels of government. Nonetheless, conjuncture and administrative
4
Most of this section is based on Varsano, Ricardo, “A Evolu;ção do Sistema Tributário Brasileiro ao Longo do Século:
anotações e reflexòes para futuras reformas”, mimeo, Working Paper n. 405, IPEA (Institute of Applied Economics of the
Planning and Budget Ministry), Rio de Janeiro, 1996, pp. 2-12.
5
To give an Idea of the loss of political and administrative power of that level of government, is worth to mention that all
along this period, the state governors were no longer elected, but appointed by the Federal Government, and the State
Legislatives were closed.
3
aspects, such as the growing inflation rate at that period and the delay in transfer the financial
proceedings, especially between States and Local Governments, turned that mechanism ineffective in
practice.
The efforts to industrialize the country carried out in the 1950s demanded significant amount of
investment by the Federal Government, which raised the tax burden from 8% of de GDP in the 1940s
to 13% in the beginning of the 1960s. At that time the existing Tax System showed unable to match the
finance demands of the Government which resulted in a growing public deficit that peaked 4% of de
GDP. The lack of adequate mechanisms for financing this deficit forced the Government to increase the
money supply to finance its defict, thus increasing inflation, which ultimately led to a slowing in the
pace of economic growth and to a further deterioration of the Public Finance. At that time there was a
consensus on the urgent need of a Reform of Tax System, as well as a modernization of the Fiscal
Administration Bureau. The deterioration of the economic conditions was followed by a political
turmoil that ended up on a military coup that deposed Constitutional president João Goulart and gave
birth to a military regime that last for 20 years.
One of the first measures of the Military Government was to implement a broad Tax Reform, that
created, for the first time in Brazil, what could really be called a Tax System and not just a stack of
taxes and revenue sources as occurred since the beginning of the Republic.6 That Reform can be
roughly summarized by the following aspects:
1) the introduction of Value Added Taxes, both at the Federal and the State Governments, replacing
old and inefficient cumulative taxes;
2) the adoption of a consistent and reliable system of intergovernmental financial transfers, that, for
the first time, really worked (the main innovation was that the flow of the resources were automatic
and regular);
3) the drastic limitation of the ability of the State and Local Governments to impose new taxes;
4) a radical centralization of revenue at the Federal Government that would responsible for the
collection of 75% of the Tax Revenues and would dispose of 67% of that revenues.
As a result of these changes and of the strict political control carried out by the military governments,
the Tax Revenue increased sharply, reaching 25% of the GDP in the mid 70s. That increase on
revenues allowed the military regime to balance the public budget and to finance an ambitious program
of public investment that surged the economic growth rate, producing what was called at that time the
Brazilian Economic Miracle.
The emergence of a new economic crisis (oil crisis, external debt crisis) in the beginning of the 80s, on
one hand, and the pressure for democratization, on the other hand, interfered in the results of the Tax
System created in 1965, in two ways: the slowing pace of the economic growth and the resurgent of the
inflation decreased the Tax Revenue and the political demands of the State and Local Governments
forced the Federal Government to increase the share of these two levels of government in the total Tax
Revenue. These mobilizations culminated in the complete democratization of the country in 1985 and
the voting of a new Constitution in 1988, which radically changes the trend established in 1965. The
changes introduced by the new constitutional in the Tax System and on the balance of the Federation
forces will be discussed in the next section, since the main controversies about the present status and
future trends of the Fiscal Federalism in Brazil usually is traced back to the 1988 Constitution.
6
Varsano (1996), op. Cit. pp. 12.
4
To summarize that long historical road of the Fiscal Federalism in Brazil, is sufficient to underline
three aspects:
1) the gradual shift from a system based on Taxes dependent of Foreign Trade to one entirely
dependent on domestic transactions;
2) the gradual introduction and improvement of a System of Financial Transfers between the different
levels of government;
3) cyclical movements of centralization and decentralization referred to the amount of financial
resources shared by each level of government as well as the autonomy of each level to define their
own taxes; these cycles can be summarized as follows:7
•
•
•
•
•
post 1891: first Republican Constitution = decentralization
post 1936: Vargas dictatorship = centralization
post 1946: Democratic Constitution = decentralization
post 1964: Military regime = centralization
post 1988 : Back to democracy = decentralization
3. The last decade and the present: some facts and some controversies.
The Constitution promulgated in 1988, caused important consequences to the Brazilian Fiscal
Federalism. At first, and as reaction of the dictatorial period, it produced a significant decentralization
of revenue and political power towards the subnational governments, in detriment of the Federal
Government. In a second moment, the Federal Government fights to recover its share of the Tax
Revenue and increase its political power, limiting the room of subnational governments in Fiscal
matters. As a consequence, the Fiscal Federalism autonomy, intended by the 1988 Constitution, is
significantly damaged. The following subsections will discuss the ways that these three movements
took place, and its consequences for the Fiscal Federalism and the very process of setting political and
economic priorities in Brazil.
3.1 – The 1988 Constitution and the Decentralization drive
As mentioned in the previous section the changes introduced in the Fiscal Federalism domain by the
1988 Constitution radically altered the Fiscal Federalist model adopted in the 60s by the military
regime, although little change was introduced on the design of the Tax System itself. The share of the
Federal Government in the Tax Revenues sharply decreased, benefiting mainly the Local Governments,
since the share of the States in the total Tax Revenue remained practically unaltered. At the same time
the autonomy for States and Municipalities to impose new taxes or change the percentage of the
existing ones were increased.
The political drive for decentralization and for support for the local governments was so strong at that
time that the Municipalities were granted the status of Federated entities, what is not so usual in the
Federal regimes. Unlike other federal constitutions, which typically define municipal governments as
creatures of their respective states, the 1988 Constitution establishes municipal government as a third
tier of government with a Constitutional status equal to the States. States therefore cannot compel or
7
Rezende, Fernando and Afonso, José Roberto R., “Fiscal Federalism: The Brazilian Case”, mimeo, paper presented to the
Federalis Workshop, Stanford University, April/2001.
5
prohibit actions by the municipalities within their jurisdictions. 8
The strengthening of the financial capabilities of State and Local governments were ensured by the
creation of new taxes, the raising of the rates of existing ones and the increasing of the share of Federal
collected taxes that were transferred to State and Local Governments.9
Table I shows that the Tax Revenues collected directly by the Federal Government was dropping since
the beginning of the eighties, following the process of gradual democratization of the country,
decreasing from a peak of 74,7% of the total Tax Revenue in 1980 to 71,7% in 1988. The decrease was
even more intense when the disposable revenue is considered.10 In this case the share of the Federal
Government dropped from a peak of 68,2% in 1980 to 60,1% in 1988. Of course, the participation of
State and Local Governments increased significantly in this period, either in the proceeds of taxes
direct collected as in the disposable revenues.
Accentuating the existing trend, the 1988 Constitution took the decentralization a step further. Three
years after its promulgation, when the fiscal effects of the decentralization of revenues were completed,
the participation of the Federal Government dropped from 71,7% to 63,4% in the Tax Revenues
directed collected, and from 60,1% to 54,6% in the disposable revenues. As a consequence, either the
amount of tax revenues collected by the States and Local Governments, as the revenues disposable to
these levels of governments were proportionally increased, as shown in Table I. The proceeds of tax
direct collected rose from 25,6% to 31,2% for the State Governments, and from 2,7% to 5,4% in the
case of Local Governments. Considering the disposable revenues, the share of State Governments rose
from 26,6% to 29,6%, and from 13,3% to 15,7% for the Local Governments (municipalities).
It is important to note that the decrease of the Central Government in the total amount of Tax Revenues
were only a relative one. In absolute terms the share of the Central Government increased between
1988 and 1991, as a result of the an increase in the Tax Burden that rose from 22,4% to 25,2% of the
GDP in that period. In fact, the disposable revenue for the Federal Government rose, in that period,
from 13,46% to 13,76% of the GDP. Considering that the GDP had a real growth in the period, it is
easy to see that the Federal Government tax revenue increased in absolute terms. Also, it is important
to note that the figure of the tax burden for the year of 1990 is distorted by the so-called Collor Plan,
adopted by former president Fernando Collor, that imposed a compulsory extending of terms of the
Federal Debt (up to 36 month) and adopted an index to correct the principal that was fixed bellow the
inflation of that period, imposing, also, an implicit discount in the total debt. These measures
accounted for an extra revenue of more than 3% of the GDP, most of it, benefiting the Federal
Government.
It is important to bear in mind that the decentralization drive fostered by the 1988 Constitution emerged
from two different kinds of considerations. One of them was a political one, brought about by the
democratization process. The decentralization was considered as a natural reaction to the twenty years
of authoritarian regime and to the centralization of powers and financial resources at the federal level,
that it supported. In this way, decentralization of political and financial powers and the strengthening of
8
World Bank Report, “Brazil – Issues in Fiscal Federalism”, mimeo, Document of the World Bank, Washington, May
2002.
9
To ilustrate the magnitude of these changes is worth to mention that the part of the two main Federal Taxes (the Income
Tax and the Federal VAT) that were transfer to States and Local Governments raised from 18% of these Tax Revenues in
1980 to 44% in 1990. If we add other shares that are transfer to Regional Constitutional Funds (North and Northwest
Regions) that amount reaches 57%.
10
Disposable revenue is the amount that is available to each level of government, after consideration of intergovernmental
financial transfers
6
the Federation, was considered a institutional and political framework more consistent with the new
democratic times. The other consideration was a administrative one, and reflected the growing concern
with the lack of efficiency of the government in providing goods and services to the population. It was
considered, that one of the reasons of the low efficiency of the public services was the long “journey”
that the money and the services (health, education, urban infrastructure, etc.) had to travel to reach the
beneficiaries. So, it was supposed to be more natural and lead to more efficiency, if most of the public
services were produced and delivery at the level more close to the “consumer”: the state level, and,
more properly, the local level.
Of course that, for this to work, was necessary a gradual process of devolution of responsibilities from
the federal government to the states and municipalities, what in the end, haven’t happened, for a
number of reasons: the lack of political will, the gradual and continue loss of planning and managerial
capacity at all levels of governing that would make these ‘reframing’ of the public sector more
difficult, and so on.
At this point, the Federal Government got the worse of the worlds: had to live with a smaller piece of
the revenue pie and kept its responsibilities with provision of public services. All this in a time that a
severe fiscal crisis was growing in threatening the public sector, with its origins in the decrease of the
rates of growth of country’s GDP, which ironically increased the demand for public services
(unemployment insurance, social assistance, etc.).
The perspective of growing difficulties in balancing the Federal Government budget, and the political
and administrative difficulties in transferring responsibilities to the States and Municipalities, helped
the Federal Government to gain political support to inflect the decentralization drive established by the
1988 Constitution. As a first step, the Federal Government coped with the problem by discontinuing or
decreasing the quality of the public services within its responsibilities. As a second step, measures to
reinforce the tax revenue of the Federal Government and to restore its political influence in the
Federation were put in place. These measures will be discussed in the following subsections.
3.2 – The Federal Government strikes back
Soon after the approval of the Constitution the critics to the tax revenue sharing system that it
implemented, began. As mentioned above, the main line of reasoning was that the Federal Government
had its Financial capability endangered with the drastic reduction of revenue and that because the State
and Local Governments were not assigned corresponding duties along with the new Tax Revenues that
they would be entitled. That problem was worsened by the fact that in some areas such as health care
and education, social security and welfare, agriculture and food distribution, sanitation and housing,
public safety, public transport, environment control and others, there is not a clear division of
responsibilities among different government levels, often leading to overlap of spending across
different levels of government.11
To cope with that lack of Tax Revenue, the Federal Government acted in two ways: increasing the tax
burden creating new cumulative taxes or raising the rate of the existing ones, choosing taxes that were
not supposed to be shared with other levels of government, and by provisionally reverting the increase
of the Tax Revenue Share of State and Local Governments through the approval of Constitutional
11
According to Afonso, José Roberto R and Mello, Luiz de, “Brazil: Na Evolving Federation”, mimeo, paper presented at
the IMF/FAD Seminar on decentralization, held in Washington, DC, on November-2000.
7
amendments. As a result it can be observed a drastic increase in the tax burden and that an increasingly
greater portion of these new Revenues were collected and kept by the Federal Government. As shown
in table I, above, the tax burden was raised from 22,4% to 25,2% of the GDP from 1988 to 1991, and
raised again, from 25,2% to 34,1% of the GDP from 1991 to 2001. This second wave of increase in the
tax burden was mainly to restore the financial capability of the Federal Government. Still in Table I is
shown that the share of disposable revenues for the Federal Government rose from is 54,6% low in
1991 to almost 57% in the recent years. It is important to note that the Federal Government recovered a
significant part of a much greater revenue pie, meaning that, in absolute terms, it regained a substantial
financial strength over the last decade, offsetting much of the effects intended by the 1988 Constitution.
Table II shows the increasingly importance of the so-called Contributions (turnover taxes, net profit tax
and financial transaction tax) in the total tax revenue of the Federal Government. The change in
composition of the disposable revenues of the Federal Government along the period considered is
impressive. From less than 10% of the total disposable revenue, at the beginning of the period, the
participation of the Contributions rose to more than one third, in the year 2000.
It is important to highlight these figures for two reasons: first, these kind of taxes are the ones that are
not shared by the other levels of government; second, they are cumulative taxes, and therefore, tend to
worsen the quality of the Tax System. These issues will be resumed in the following sections.
3.3 – The set back in the Fiscal Federalist autonomy
The evidences gathered in the previous sub-section showed that in less than five years the Federal
Government was able not only to recover a significant part of the revenue share lost with the 1988
Constitution, but also to increase its total revenue, by persistently increasing the tax burden. Beyond the
changes in the Tax System and in the Revenue Share system introduced after the Constitution
promulgation, a whole new set of changes, institutional and political, were put in place after 1995 that
would significantly affect the Fiscal autonomy that Constitution aimed to the subnational government
levels.
Underneath the impulse to restore some kind of hierarchy on the Federation, with the Federal
Government bearing more authority than the other Federation levels, was a belief (or a ideology)
widely supported by analysts and economists (international and domestics) sustaining that: 1) the State
and Local Governments area traditionally bad managers of public resources and are easily seduced by
spending it’s revenues in non priority programs; 2) these governments are also reluctant to commit
themselves with fiscal discipline and, therefore if not forced to that discipline they could jeopardize the
gigantic effort of the Federal Government to achieve and sustain economic stability. In the remaining
of this section we will be presenting the measures adopted by the Federal Government that restored the
“hierarchical authority” of the Federal Government over the subnational levels, and in the following
sections we will be discussing the validity of the two assumptions presented above.
One of these measures was the reestablishment of the so-called non Constitutional (or discretionary)
intergovernmental financial transfers. As mentioned above, the proceeds of the Contributions collected
by the Federal Government are subject to mandatory sharing among the other levels of governments, as
are, for instance, the proceeds from the Income Tax and the Federal VAT. Nevertheless, some of these
proceeds may be shared with States and Municipalities. The difference is that instead of the sharing
system be mandatory and established by the Constitution, it is negotiated in a case by case basis
between the Federal Government and the Subnational governments. The bulk of the transferring of
these resources are, usually, subject to the signing of an agreement among the Federal and the other
8
level of Government and are subject to strict follow up and control, otherwise they can be discontinued.
Also, the resources are usually earmarked to specific applications (health and education, mostly).
Therefore, the system allow for the Federal Government to restore a coordination role and to influence
on the subnational governments priorities, since the transferring of resources are usually attached to a
proportional spending of their own budget resources, from the subnational government’s part. Table III
shows the increasingly importance that this kind of resources are assuming to the subnational
governments, especially the municipalities.
As shown in Table III, those discretionary transfers added, since 1999, more than 1% of the total tax
revenues for the State Governments, increasing the revenues of States in around 5%. As for the
Municipalities, the resources from this source are even more important, transferring to this level of
government more than 1,5% of the total tax revenues, meaning and addition of more than 20%, in the
average of the period to the Local Governments revenues. At this point it must be said that, although
the mechanism of discretionary and earmarked transfers may, in fact, increase the rationality of public
sector spending, to the extent that it allows for a more tight coordination of resource spending and for
an alignment of priorities among the different levels of government, it means also a lost of autonomy
for the subnational governments, especially for the municipalities, that show already a significant
dependency on these resources.
Another step towards the reduction of the subnational governments autonomy was took when the
Federal Government used the necessity of the State Governments and some municipalities to refund
their Debts. Along the nineties the Federal Government sponsored two partial renegotiations of the
State Government and Municipalities debt. In 1989 the Federal Government assumed states’ and
municipalities’ foreign debt and refinanced it to these units (the subnational governments exchanged a
debt in foreign currencies for a debt in local currency with the federal government). A second round of
negotiation resulted, in 1993, in the rescheduling of the debt contracted with federal institutions.12 At
the middle of the decade another part of the subnational borrowings had soared and threatened the
fiscal balance of states and municipalities: the debt in bonds with the private financial sector. Bonds
accounted, in 1996, for about 30% of total debt not yet refinanced by the Federal Government, which
had reached an amount over US$ 100 billions.13
Table IV shows that the State Debt in Bonds, as percentage of GDP, more than doubled between 1990
and 1996, and that more than 90% of it were concentrated in the four biggest states of the Country.
It is interesting to note that along the period expressed in Table IV, the access of subnational
governments to new debt in the bonds private markets was almost completely restricted, either by
regulations or by credit risk assessment. So, the growing of the debt outstanding was due, almost
totally, by the capitalization of very high rates of interest along the period. Table V shows the interest
rates, in real terms, of that period and the growth of Debt in Bonds, and they are almost entirely
coincident. It is also interesting to note that the extremely high rates were the result of a tight monetary
policy adopted by the federal government, at the beginning of the period as an attempt to fight the high
inflation rates, and after 1994, also as a deliberate economic policy designed to attract foreign capital
and sustain the Real Plan. Ironically, than, in this case, as will be in others that we will discuss later, the
States and Municipalities had their financial situation endangered, not necessarily by inefficient or
irresponsible management, but as consequence of an option of macroeconomic policy that they could
12
See Mônica Mora & Ricardo Varsano, “Fiscal Decentralization and Subnational Fiscal Autonomy in Brazil: some facts of
the nineties”, IPEA, mimeo, pp. 18/20, Rio de Janeiro, December, 2001.
13
Ibid., pp. 20.
9
not control, nor interfere.
Ironically or not, this time the solution proposed by the Federal Government, inspired by IMF
practices, was a conditional bailout. The major part of the state debt not yet rescheduled was refinanced
in the context of an agreement – The Fiscal and Financial Restructuring Program – that presumed a
rigorous long term fiscal adjustment, privatization of state and municipal owned companies (energy,
gas, transportation, water supply, etc.) and the sale (privatization) or liquidation of the state official
bank, which, no doubt about it, had been misused and had been the source of many fiscal
irresponsibly.14 To ensure that the deal would be, this time, true to the commitments of the
Restructuring Program, the deal was collateralized by the proceeds of States and Municipalities in the
Participation Funds (States and Municipal) and if that was not sufficient, the Union could retain the
proceeds of the States and Municipalities own tax revenues.
Obviously the Financial Restructuring Program represents an interference of the Federal Government
on the Administration of subnational governments, although it should be concede as a positive one.
Furthermore, the sort of constrains and control that the Federal Government acquired over the
subnational governments represent a permanent tension to the Federalist harmony, so to speak. The
attempt of the Union to execute those collaterals could provoke a reaction of governor or mayors on the
basis of the Federalist autonomy. Recently the Restructuring Program faced this test, when the
governor of Rio de Janeiro, Rosinha Garotinho, appealed to the Brazilian Supreme Court when the
State defaulted the payment of part of its debt service and the Federal Government called the collateral
represented by part of the proceed of the State VAT. Initially the Supreme Court granted the State an
Order that prevented the Union from taking the State Tax Revenue, on the basis that it could be
provoke and irremediable damage to the citizens of the State. Further, the Court ruled favorable to the
Union, in a way giving a constitutional status to the Restructuring Program.
This episode, despite the way it ended, is very representative of the legal and political tensions that the
Federal regime is exposed presently in Brazil. Paradoxically, according to Mora & Varsano, although
the Restructuring Program had, certainly, harmed the Fiscal Federalist autonomy, it had also
consolidate the decentralization intended by the 1988 Constitution. This is so because, if the
Restructuring Program had not existed, the financial situation of the states would be explosive and the
states would be bankrupted and with their administration in a chaotic situation. Thus, the loss of the
some fiscal and administrative autonomy, allowed on the other hand, the states to restore their financial
health and to play their role in the federalist system with more effectiveness and legitimacy.15
For many Public Finance analysts, the Fiscal and Restructuring Program marked a change in the nature
of intergovernmental fiscal relations. The simple limitation imposed on subnational borrowing was
replaced by a comprehensive monitoring of fiscal and financial accounts, which intends to prevent
excessive borrowing and, thus, financial crisis. This new approach was strengthened by the enactment,
in 2000, of the Fiscal Responsibility Law (FRL).16 If the Financial Restructuring Program was
“inspired” on IMF practices, the FRL on the other hand, was explicitly suggested by the IMF on the
agreement signed between the Fund and the Brazilian Government in 1999, in the crisis that preceded
and followed the devaluation of the Real (the Brazilian currency). The Law was voted and enacted, a
little more than one year after the signing of the Agreement. The Law is very broad and complex,
encompassing many public finance aspects. Only of its points are mentioned here.
14
Ibid, pp. 20.
Ibid, p. 21.
16
Complementary Law 101, of the 4th of May of 2000.
15
10
FRL determines, to ensure fiscal sustainability, that any new permanent expenditure – those that will
exist for more than two fiscal years – must be attached to a new permanent source of financing – a new
tax or the increase in the rate of tax, for instance. The law establishes, in an attempt to improve
efficiency of the public sector, limits to personnel expenditures, which shall not exceed 50% of net
current revenue, in the case of the Union, and 60% in that of states and municipalities. In addition, the
law established limits to expenses with legislative and judiciary personnel. The legal dispositions are an
important instrument for the executive branch, which has no power to limit the expenditures of other
branches.
Requirements for contracting new credit operations are stringent, working as an obstacle to borrowing.
Furthermore, credit operations between federation entities, to finance current expenditures or refinance
standing debt, are forbidden. This means that new bailouts are ruled out.
The essentials of the FRL seems to be the basics of any good and financially sound administration. It
could be said that its not surprising that it was adopted, but that it was adopted earlier. Or, that it should
no be necessary, since it encompass rules of management and behavior that any efficient and
responsible public manager should abide. Also, as Mora and Varsano point out, it also contributes to
the solidification of the decentralization process, insofar as it prevents irresponsible fiscal and financial
management.17
Nevertheless, all these benefits have some costs. One of them is that, being conceived from the Union
point of view, and lacking a major concern with federalism harmony, it is characterized by symmetry.
The constraints that it establishes are the same for all states and municipalities, no matter what their
size, population, level of income, initial situation, and so on. A Law that had the concern with
equilibrium and equality in the Federal System, should had looked to differentiate among different
states and municipalities, as long as the core philosophy, namely, responsible fiscal and financial
management be accomplished. Being a Law inspired entirely by an economic view of the
administrative process (fiscal responsibility, balanced budget and so on), it lacks a concern with the
quality of the administration and services rendered to the public. According to the Law, a State
Governor that spends less than 50% of the net revenue with personnel is efficient and other that spends
more than it (say, 52%) is inefficient and can be punished, based on the Law. Not necessarily, however,
the services produced by the first governor meet the necessity or the quality demanded by the public.
The reverse can be said about the other governor. The FRL had not created performance, or impact
indicators to help to form a better judgment on the success of the administration.
Finally, the FRL, as the other measures discussed earlier in these subsection imposes further reduction
in the degree of fiscal autonomy of subnational governments.
3.4 – Fiscal Responsibility: who has it and for what?
As mentioned before, the recent drive for centralization and control over the subnational governments
are usually justified on the ground of the bad reputation of these levels of governments as managers.
According to these line of reasoning the subnational governments, due to a tradition of clientelistic
politics and lack of a commitment to national goals, such as economic stability, tend to waste the
public money and not to show commitment with fiscal discipline. Let’s confront these arguments
with some practical evidence, assembled in Table VI.
17
Mônica Mora
& Ricardo Varsano, op. cit. pp. 23.
11
At first, should be noted that public spending has a correspondence with goods and services for the
society. Then, one important question should be: which kind of public expenditure each level of
government is responsible for, and how important are these expenditures for the public. Table VI,
presented above, shows for the 1991/1998 period the break down of public spending in the major nonfinancial items. It shows that, in absolute terms (as a percentage of GDP), the Federal Government
increased modestly its spending in payroll and significantly in Social Security and Assistance and
reduced its spending in investment and consumption. The State Governments spending remained
practically unaltered in Payroll, increased in Consumption and Social Security and Assistance and
decreased in Investment. The local governments, by its turn, showed an increase in all items, but Social
Security and Assistance.
In relative terms, considering the share of each level of government in the total spending of each
specific item (lower part of Table VI), it can be seen that the Federal Government reduced its share of
spending sharply in Consumption and Investment and remained unchanged in Payroll. The spending in
Social Security and Assistance, on the other hand, increased its share in the total spending of the item.
The State Governments, by it’s turn, increased it’s share of spending in consumption and Social
Security and Assistance and sharply reduced it’s participation in Payroll and Investment. The Local
Governments increased it’s share in all items but Social Security and Assistance. The data displayed
also confirm that the State and Local Governments are responsible for the majority of the spending in
Payroll, Consumption and Investment, and the Federal Government plays the major role in Social
Security and Assistance.
Two considerations can be drawn from these data. First, although the State Governments are constantly
charged of being overstaffed, they were the only level that had a decrease in these item, in absolute and
relative terms. Second, it’s important to note that spending in payroll in this case, usually means to
ensure the providing of important social services like education, public security and health mainly.
Moreover, the investments associated with State and Local Governments are also associated with those
programs and more: sanitation, public transport, professional training, infrastructure, among others.
Table VII give more detailed information on how the public expenditures are assigned among different
public functions and services.
The data showed leave no doubt that the performing of the most important public functions, such as
Education, Health and Sanitation, Housing and Urbanism and Public Security, are heavily dependent
on the subnational governments. In all these items, but Health and Sanitation, they are responsible for
more than 80% of the total spending, and for Health and Sanitation, they account for 55% of the total
spending. When considered the percentage of each function on the total spending of each level of
government, it’s clear the overwhelming importance of Social Insurance and Social Assistance in the
total spending of the Federal Government, accounting for more than 50%. For the State Governments,
the most prominent item is Education, representing 18,5%, followed by Social Insurance and Social
Assistance, Health and Sanitation and Public Security, with percentages ranging from 7,8% to 13,3% in
these items. As for the Municipal Governments, the spending with Education, Health and Sanitation
alone, account for almost 50% of the total, followed by Housing and Urbanism and Social Insurance
and Social Assistance.18
18
It should be noted that the items included in Table VII would not sum up 100%. This is due to the exclusion of the
function Administration and Planning that have not a clear definition and can include expenditures that would be better
classified along the other items. This function is particularly important for the State Governments, where it accounts for
about one third of total expenditures for this level. This function accounts for 16% of municipal and 4% of the federal total
expenditures (see Mora and Ricardo Varsano, op. cit. pp. 4.)
12
The data discussed above reinforces the notion that State and Local Governments play a major role in
the implementation of the most important Public Policies, especially those that can have impact on the
underprivileged portion of the population. Also, they did not confirm the assumption that subnational
governments are prone to excessive and unnecessary spending (the State Governments were the only
level in which the payroll spending decreased along the nineties). Therefore, the continuing trend to
withdraw financial resources from State and Local Governments and transfer it back to Federal
Government could increase the shortage of important public services, in a moment that it’s demand is
growing and is essential to attenuate the impoverishment brought about with the succession of
economic crisis in the last 6 years.
Let’s now consider the assumed lack of commitment of States and Local Governments to adhere to
fiscal discipline and contribute to macroeconomics stabilization. Table VIII have some data on the
budget performance of the State and Local Governments over the last 9 years (it is important to note
that the Stabilization Program - known as the Plan Real - started in mid 1994 and the signature of the
Agreement between Brazil and IMF was at the end of 1997).
It can be clearly seen that these levels of government, despite the responsibilities in carrying out
important public programs in a growing proportion and despite the burden of a significant debt whose
service is charged strictly by the Federal Government, are showing consistently budgets surpluses in
the last four years, thus clearly contributing for the budget surplus agreed with the IMF. Even before
1999, the year in which the Agreement with the IMF was renewed and more rigorous Fiscal Goals
were imposed, the performance of States and Municipalities could not be characterized as a lost of
control, since in any year the deficit exceeded 0,8% of GDP, and is most cases was bellow 0,5% of
GDP.
Also, should be noted that, although before the Fiscal Responsibility Law the performance of states and
municipalities were different among them, with some states (like São Paulo, Ceará and Bahia, showing
very disciplined budgets, and other performing not so good, as Rio de Janeiro and Minas Gerais), after
the enactment of the Fiscal Responsibility Law, all states and the majority of the municipalities are
showing budget primary surplus, since the Law has a provision that forces the subnational governments
to commit with primary surpluses.
One final question should be posed at this moment. If the Tax Burden was increased significantly in the
recent years, if by the other hand the Federal Government reduced its participation on the providing of
the public goods and services, where the money went to? The last table presented give a clue to answer
that question. Table IX shows that all the fiscal effort and discipline to produce growing budget
primary surpluses are consumed with the payment of interests.
From that table can be seen that not only the burden derived from the interest payments is abnormally
high (in the best year it counted for 17% of all the Tax Revenues), but it is worsening in the recent
years, coinciding with the Asia Crisis and deepened with the Russian crisis, and presents a high
volatility that certainly can harm the ability of the public sector of planning and establishing and
pursuing strategic priorities.
The actual situation is even worse than that showed in Table IX. The reason is, since the devaluation of
the Real in 1999, the part of the Federal Debt indexed to the dollar had increased substantially, from
less than 15% of the total debt to almost 40% of it, presently. So, the total cost with this kind of debt is
the sum of interest paid plus the change in the nominal value, that almost doubled in the last two years.
The figures showed above represents only the interests paid and not include the increase in the
13
Principal Amount. If that cost is added, the total expenditure can be increased in almost 50% in 1999,
2001 and 2002, the years in which the Real had a bulk devaluation. That means that in those years,
more than 10% of the GDP (or almost one third of the total Tax Burden) was used to service the public
debt, most of it under the responsibility of the Federal Government.
So, a tremendous effort to achieve and sustain fiscal discipline, in all levels of government, is being
consumed in paying interests, instead of investing in the urgent needs of social services, compensatory
policies to face the inequalities and in modernizing and expand the country’s infrastructure in order to
reduce its production costs, improve economic growth and increase the competitiveness of Brazilian
products in a global economy.
Quite the contrary, when the present macroeconomic policy deliberately opt for not interfere with the
speculative domestic and foreign capital, it allows the Brazilian currency to float and devaluate wildly,
as in the past four years. Inevitably, the devaluation of the exchange rates presses the inflation rates
domestically and the governments responds to the threat of the return of inflation “by the book”: raising
still more the interest rates (in the last 5 month the interest paid by the Federal Government increase
from 18% pa. To 26,5% pa. To keep the fiscal discipline and the compromises with the IMF agreement
no other alternative is left but to increase the Tax Burden, with the kind of taxes that are not shared
with the subnational governments, that means the worse kind, the cumulative “Contributions”.
So, the economy looses competitiveness, turning more difficult to increase exports and reduce the
foreign dependency, on the one hand, and threatening the economic growth and aggravating the social
problems, on the other.
In the next and final section we will take a look in the challenges ahead and discuss which alternatives
can be considered.
4. Final remarks: the challenges ahead.
As mentioned in the introduction of this paper, in the name of an undisputed priority of achieving
fiscal discipline, the Brazilian Tax System and the fiscal and political relations of the Brazilian
Federation have deteriorated in the recent years. As a consequence we had, today, a Tax System that
produces a high tax burden, in which abound cumulative taxes that threat the competitiveness of the
economy and jeopardize its ability to grow.
Furthermore, in pursuing this Graal of the Fiscal Discipline the Federal Government had not hesitated
in the adoption of measures that in some extent harms the autonomy of the Federation members. The
outcomes of the recent years of Brazilian Economy makes one wonders about the effectiveness of such
policy. The economy remains unstable, practically hostage of the international turbulence. One good
example of that weakness occurred in the last two years. All the forecasts for the year 2001 were
positives and the analysts at last foresaw a good year for the Brazilian Economy, almost as prize for
five years of “good behavior” on the fiscal field. Nonetheless, the sole expectation of problems with
the flow of foreign investment to Argentina, changed radically the economic environment in Brazil, the
Foreign Exchange Rate soared, the forecasts of inflation became threatening and the whole scenario
changed from positive to negative in less than one semester. On top of that the revelation that the
country was facing the possibility of a sharp energy shortage contributed to worsen that scenario. The
irony here is that the recognition by the Federal Government itself that the energy crisis resulted from
the reduction on investment of the Federal Electricity Companies, due to the rigid fiscal goals
14
established by the agreement with the IMF.
In the last year, once again after a mild beginning, the alleged fear of international investor about the
possibility of a left candidate was elected for president triggered another wave of turbulence, that cut
the foreign loans to the country, forced it to sign an emergency with the IMF, extending the primary
surplus goals for two years ahead the government that took office this year and forcing all candidates to
publicly endorse the agreement (and so limiting their choices of economic policies). Despite all these
efforts, the Real devaluated wildly, the inflation soared and so the interest rates and the expenditure
with interests, forcing the new government to announce an increase in the primary surplus goals.
On such an environment the argument that the interests of the State and Local Governments should be
submitted to the Federal Government interests, in a almost hierarchical manner, its arguable, to say the
least.
Undoubtedly, there are substantive issues concerned either the design of the Brazilian Tax System, and
the characteristics of our Fiscal Federalism that has to be consistently discussed. The role of the State
Governments, the shape and nature of the Intergovernmental Financial Transfer system are only a
sample of these matters. For instance, a recent study of the World Bank criticizes the ambiguities of our
Federation System. It is reminded that, although the Brazilian Constitution determines which activities
should be performed or regulated exclusively by the Union and by the municipalities, the States may
carry out all those functions that are not interdicted to them by the Constitution. As a consequence,
several activities are executed concurrently by the three levels of government, potentially leading to
inefficiency and waste of public financial resources. 19 Therefore, a long postponed discussion of the
attributions and responsibilities of each level of government is an urgent and preliminary task. The
present discussion and critics of State Governors and Mayors of important cities about the financial
squeeze that they are submitted, and the beginning of a new administration, allegedly more open to the
political dialogue, could be the ideal opportunity to resume and solve that challenge.
Also, as reminded in the World Bank study, the amount of constitutional transfers for the
municipalities can be considered excessive, in comparison with international standards. Moreover,
considering that these resources are mostly free to be used in any function (with exceptions of
mandatory minimum spending in education and health). That system can lead to three negative effects:
tend to blur the accountability of the local governments, since they are not collecting taxes from their
local constituencies, they tend to be less monitored by the tax payers; tend to under tax the local tax
payers, since the local administration can cope with the necessity of financial resources, through
intergovernmental transfers; and can lead to overlapping of activities and turn more difficult the setting
and coordination of national priorities, since there is no mandatory demand for spending in functions or
programs of interest other than that of the local mayor.
Here, a trade off could be considered. The municipalities could have a cut in the constitutional
transfers, and then loosing some of its autonomy, in favor of a more coordinated and efficient use of
resources. This not necessarily imply in reducing the amount of money for the municipalities, but
mainly earmarking a greater proportion of these resources, or extending the amount of resources
transferred through negotiated agreements.
19
World Bank Report, “Brazil – Issues in Fiscal Federalism”, pp. 27, mimeo, Document of the World Bank, Washington,
May 2002.
15
However, little can be advanced if the Federal Government and the analysts and specialists insist in
reducing the discussion to one of how best to achieve budget surpluses, as if it is a goal itself and not a
mean. And here lies the great political change for the new Administration. To really and deeply discuss
the nature of the present “neo-liberal” economic policy. According to its reasoning, the only thing that
is up to the government is to have a balanced budget, to open the economy, to extend the market
mechanisms, adopt a free floating exchange currency and do not interfere with the flow of foreign
capital. Well, this haven’t work in Brazil, as argued above. It only produced vicious circles of external
dependency of foreign capital, the withdrawing of that capital at slightest sign of crisis, huge
devaluation of the local currency, inflation surge, increase in interest rates and the need of biggest
primary surplus. Either we go on, believing the “at the long run it will work (unless we will be dead at
the time)” or we seriously think in changes in this “model”.
I will dare to present some suggestions of change, since, in my view, the Federalist Fiscal discussion
can only progress if this macroeconomic dilemma is solved. The main challenge is to cope with the
causes of the exchange rate volatility, that put press on the inflation, and forces the government to
increase the interest rate, and to increase the goal for primary surplus, and so on, and so on. There are
two causes for that volatility: one, real, that is the external vulnerability of the country, represented by
the deficit in external current account (trade surplus or deficit, plus interests and dividends paid for
international investors, plus the surplus or deficit with tourism, freight, etc.), and other financially
engineered, that is forced for aggressive speculative operations in the domestic financial market,
mainly using the financial derivative instruments.20
The first cause is already being faced and solved by the real sector of the Brazilian economy. The trade
surplus had a spectacular increase in the last year, going from US$ 2.6 billions in the previous year to
to US$ 13.1 in 2002. Also there was a huge adjustment in the tourism sector. All this being considered
the external deficit decreased from 5% of the GDP in June of 2001 to 1,7% of the GDP in December
2002, with prospects that end this year with a surplus.
The financial (or virtual cause) has to be faced with decisive initiatives of the Central Bank in order to:
1) control the domestic speculation; 2) establish some kind of control to the flow of international
capital. Some of the measures that can be considered (an many of them were used in the past and are
used today in other countries) are:
1) to raise the requirements of equity for the Commercial, Investment Banks and Brokers to invest
in the derivative markets (since in this market a position can be made without a cash
investment, the leverage can be almost unlimited; the requirements would work to limit this
leverage);
2) to establish limits for Banks and Brokers carry cash positions with foreign account; presently
there is no such limit, so a Bank foreseeing (or planning) a devaluation on the currency can buy
un unlimited amount of foreign currency, for speculative purposes, thus pressing the exchange
market and increasing volatility;
3) to establish a reserve requirement, in cash, to be deposited at the Central Bank , proportionally
to the Notional Amount of the Derivatives Positions (net of assets and liabilities) bear by a
Commercial Bank, Investment Bank or Broker (it would work as down payment for the
20
Brazil has a very dynamic and solid derivatives market, with the Futures Exchange of São Paulo (BMF) being ranked
among the five top of the World Futures Exchanges, in volume of contracts.
16
speculative bet that these economic agents place in the derivative market);
4) adopt some kind of restriction (mild restriction) to the free inflow of foreign investments and to
the outflow of currency to the Brazilian residents:
4.1) for the inflow of foreign investors: demand that the foreign investment (not applied if is a
direct foreign investment, or investment in the productive sector) is kept for a period of 90 to
180 days in the Central Bank, before it can be used for buying financial assets in the domestic
market (obviously, for those that consider that Brazil is a risk to high to wait for 90 or 180 days
will not bring their money to Brazil; this, contrary to what is usually said would be good and not
bad for the country, since this money usually comes in when its not necessary, and leaves the
country when it is most needed);
4.2) for the Brazilian residents that are willing to buy dollars and invest it abroad, for whatever
reason, the only demand would be to present a formal declaration of the IRS that the money is
“honest”; (probably, this sole measure would make that 80% or more of Brazilian’s money that
left Brazil in the last four years, would find another way, thus not creating an additional
pressure to the exchange market).
This set of initiatives, most certainly, would stabilize the exchange rate, reduce the volatility, and
would allow the government, in the short run, to start cut the interest rates, thus creating a virtuous
circle of less spending with interest, more investment in the production of goods and services, with
lower interest rates the private sector can resume investments and consumers are motivated to buy
using credit, thus increasing the growth rate, creating jobs, increasing the tax collection, cutting the
social security deficit, and decreasing the tax burden, giving room for the reconstruction of a more
efficient and consistent Tax System, that could contribute to the Brazilian products regain
competitiveness, increasing exporting, and so on, and so on, as it was for a century before.
None of these recommendations are easy to implement, or free of risk. But to face with complexities of
the Public Administration problems and to assume risk is the very nature of the Administrative and
Managerial task. To rise up to the greatness of the challenge is what is expected of the new Brazilian
Administration.
Bibliography
Afonso, José Roberto R and Mello, Luiz de, “Brazil: Na Evolving Federation”, mimeo, paper
presented at the IMF/FAD Seminar on decentralization, held in Washington, DC, on November-2000.
Fábio Giambiagi, "Do déficit de Metas às Metas de Déficit: A Política Fiscal do Governo FHC 1995/2002, Discussion Paper nº 93, mimeo, BNDES, Rio de Janeiro, April 2002.
Mônica Mora & Ricardo Varsano, “Fiscal Decentralization and Subnational Fiscal Autonomy in
Brazil: some facts of the nineties”, IPEA, mimeo, Rio de Janeiro, December, 2001
Rezende, Fernando and Afonso, José Roberto R., “Fiscal Federalism: The Brazilian Case”,
mimeo, paper presented to the Federalis Workshop, Stanford University, April/2001.
Serra, José e Afonso, José Roberto R, “O Federalismo Fiscal à Brasileira: algumas reflexões”,
mimeo, paper presented at the International Conference on Federalism, held by the Forum of
Federations, Mont-Tremblant, Canadá, Outubro 1999.
"Termômetros Fiscais da Tributação e da Decentralização - Posição em Novembro de 2002",
BNDES, mimeo, Janeiro, 2002
Varsano, Ricardo, “A Evolu;ção do Sistema Tributário Brasileiro ao Longo do Século: anotações
17
e reflexòes para futuras reformas”, mimeo, Working Paper n. 405, IPEA (Institute of Applied
Economics of the Planning and Budget Ministry), Rio de Janeiro, 1996.
World Bank Report, “Brazil – Issues in Fiscal Federalism”, mimeo, Document of the World
Bank, Washington, May 2002.
Resenha Biográfica
José Cezar Castanhar é Mestre em Administração Pública pela EBAPE/FGV; Engenheiro pela
Universidade Federal do Paraná; Ex-Diretor Administrativo da Fundação Getúlio Vargas e ex-vicediretor da EBAPE. Professor das disciplinas, Gestão de Recursos Financeiros, Finanças Públicas,
Avaliação de Programas Sociais e Formulação, Gestão e Avaliação de Políticas Públicas, nos cursos de
Mestrado em Administração e de Especialização da EBAPE; desenvolve linha de pesquisa sobre
Avaliação de Políticas e de Programas Públicos, tendo apresentado trabalhos sobre o tem no 36º
Congresso Internacional de Finanças Públicas em Jerusalem, Israel, na 8ª Mesa Redonda do
International Institute of the Administrative Sciences em Copenhagen, Dinamarca e no 21º Congresso
do International Institute of the Administrative Sciences em Viena, Áustria e no VI e VII Congresso
Internacional do CLAD, em Buenos Aires e Lisboa. Consultor de empresas públicas e privadas e
instrutor de programas de treinamento gerencial para empresas públicas e privadas.
18
TABLE I
NATIONAL TAX REVENUES AND DISPOSABLE REVENUES: DISTRIBUTION BY LEVEL
OF GOVERNMENT
1960 – 2001
Direct
Proceeds
1960
1970
1980
1988
1990
1991
1992
1994
1998
1999
2000
2001
Disposable
Revenues1
1960
1970
1980
1988
1990
1991
1992
1994
1998
1999
2000
2001
CENTRAL
STATE
LOCAL
TOTAL
%
of %
of %
of %
of %
of % of Total % of GDP
GDP
Total
GDP
Total
GDP
11,136
64,0
5,4462
31,3
0,8178
4,7
17,4
17,342
66,7
7,956
30,6
0,702
2,7
26,0
18,3015
74,7
5,292
21,6
0,9065
3,7
24,5
16,0608
71,7
5,7344
25,6
0,6048
2,7
22,4
19,296
67,0
8,5248
29,6
0,9792
3,4
28,8
15,9768
63,4
7,8624
31,2
1,3608
5,4
25,2
16,525
66,1
7,275
29,1
1,2
4,8
25,0
20,2342
67,9
8,0758
27,1
1,5198
5,1
29,8
19,832
67,0
8,14
27,5
1,628
5,5
29,6
21,5877
68,1
8,5273
26,9
1,585
5,0
31,7
22,0071
67,3
9,0579
27,7
1,635
5,0
32,7
22,9493
67,3
9,5139
27,9
1,6368
4,8
34,1
10,353
15,808
16,709
13,4624
16,9632
13,7592
14,225
17,6714
16,6352
18,069
18,5409
19,3688
59,5
60,8
68,2
60,1
58,9
54,6
56,9
59,3
56,2
57,0
56,7
56,8
5,9334
7,592
5,7085
5,9584
7,9488
7,4592
7,025
7,4798
7,8736
8,242
8,6328
8,9683
34,1
29,2
23,3
26,6
27,6
29,6
28,1
25,1
26,6
26,0
26,4
26,3
1,1136
2,6
2,107
2,9792
3,888
3,9564
3,725
4,6488
5,0912
5,389
5,5263
5,7629
6,4
10,0
8,6
13,3
13,5
15,7
14,9
15,6
17,2
17,0
16,9
16,9
17,4
26,0
24,5
22,4
28,8
25,2
25,0
29,8
29,6
31,7
32,7
34,1
1/ = after consideration of intergovernmental financial transfers
Source : Fernando Rezende and José Roberto Afonso, “The Brazilian Federation: Facts, Challenges
and Perspectives”,pp. 42-43, mimeo, Rio de Janeiro, May, 2002.
19
Table II
Participation of Taxes and Contribution in the Federal Government Disposable Revenues
1988/2000
Year
1988
1991
1995
1999
2000
Disposable
Taxes as a percentage Contributions as a Total
of Total Disposable percentage of Total Revenues (%)
Disposable Revenue 2
Revenues 1
100
91,85%
8,15%
100
79,12%
20,88%
100
74,20%
25,80%
100
68,25%
31,75%
100
64,64%
35,36%
1/ Tax revenues, social security contributions and unemployment insurance
2/ Turnover taxes, tax on financial transactions and net profit tax.
Source : Fernando Rezende and José Roberto Afonso, “The Brazilian Federation: Facts, Challenges
and Perspectives”,pp. 43, mimeo, Rio de Janeiro, May, 2002.
Table III
Tax Revenues Distribution by level of Government
1995
1999
2000
2001
2002
Disposable Revenues 1
Central
States
Local
61,78%
25,98%
12,24%
63,31%
23,96%
12,74%
62,78%
24,51%
12,71%
62,60%
24,45%
12,95%
63,27%
23,72%
13,01%
Extended Disposable Revenues 2
Central States
Local
61,78%
25,98%
12,24%
59,71%
25,05%
15,24%
58,71%
25,83%
15,46%
58,71%
25,82%
15,48%
59,43%
25,01%
15,57%
Source: "Termômetros Fiscais da Tributação e da Decentralização - Posição em Novembro de 2002",
BNDES, mimeo, Janeiro, 2002
1/ Total revenue after constitutional financial transfers
2/ Total revenue after constitutional and discretionary financial transfers
20
Table IV
State Debt in Bonds – 1990 and 1996
State
Minas Gerais
Rio de Janeiro
São Paulo
Rio Grande do
Sul
All others
Brazil
1990
As % of GDP
As % of Total
0,5
21,7
0,4
17,4
0,9
39,1
0,4
0,1
2,3
1996
As % of GDP
As % of Total
1,3
22,4
0,9
15,5
2,1
36,2
17,4
4,4
100,0
1,0
0,5
5,8
17,3
8,6
100,0
Source : Central Bank of Brazil
Transcript from Mônica Mora & Ricardo Varsano, “Fiscal Decentralization and Subnational Fiscal
Autonomy in Brazil: some facts of the nineties”, IPEA, mimeo, pp.20, Rio de Janeiro, December, 2001
Table V
Growth Rate of Debt in Bonds and the Level of Interest Ratea
Itens
Growth Rate of Debt in Bonds
Interest on Federal Treasury Papers
(LFT)
Interest on State Treasury Papers
(LFTE)
(In % per annum)
1994
1995
14
33
1992
35
1993
4
1996
15
30
7
24
33
15
35
10
28
36
16
a/ real interest rate: discount the rate of inflation of each year
Source: Central Bank of Brazil
Transcript from Mônica Mora & Ricardo Varsano, “Fiscal Decentralization and Subnational Fiscal
Autonomy in Brazil: some facts of the nineties”, IPEA, mimeo, pp.20, Rio de Janeiro, December, 2001
21
TABLE VI
PUBLIC NON-FINANCIAL SPENDING BY LEVEL OF GOVERNMENT
1991-1998!
Federal
1991 1998 Change
1991
State
1998 Change 1991
Local
1998 Change
(In percent of GDP)
Consumption2
2,1
1,7
-0,4
1,5
2,3
0,8
1,4
2,1
0,6
Payroll
2,6
2,9
0,3
4,2
4,1
0,0
1,8
2,4
0,6
Investment3
0,8
0,5
-0,3
1,1
0,6
-0,5
0,9
1,1
0,2
Social
Security and
Assistance3
7,0
11,5
4,6
1,3
2,4
1,1
0,6
0,4
-0,2
Total
16,5
25,2
8,7
9,2
12,2
3,0
5,3
5,8
0,5
(In percent of total non-financial spending1 )
Consumption
41,8
28,3
-13,5
29,7
37,4
7,7
28,5
34,3
5,8
Payroll
30,7
30,7
0,0
48,6
43,7
-4,8
20,7
25,6
4,8
Investment3
27,7
22,5
-5,2
39,3
27,8
-11,6
32,9
49,7
16,8
Social
Security and
Assistance4
78,3
80,1
1,9
14,8
16,9
2,1
6,9
3,0
-3,9
Total
53,2
58,4
5,1
29,6
28,3
-1,3
17,2
13,4
-3,8
Source: Afonso, José Roberto R. and Mello, Luiz de, “Brazil: na Evolving Federation”, mimeo, paper
presented at the IMF/FAD Seminar on decentralization, november 2000, Washington D.C., USA.
1 / non-financial spending excludes debt service and amortization
2/ purchase of goods and services by the government
3 / For 1998, available from the Brazilian Bureau of Statistics
4/ Includes spending with pensions, retirements, family support and other benefits, and withdrawals from worker’s Funds
administered by the government
22
Table VII
Brazil : Distribution of Government Expenditures in Some Functions - Year 2000
Distribution
Function as a % of Total
Expenditure b
Function
Unio States Municip
a
n
.
Unio
n
States Municip. Total
a
Social Insurance and Social
78.8
Assistance
Education, Culture, Sport
19.5
and Leisure
Health and Sanitation
44.2
Housing and Urbanism
15.2
Labor
90.8
Environmental Management 100.0
Energy and Mineral
72.2
Resources
Transportation
23.8
c
Sectorial Policies
58.9
Defense
100.0
Public Security
15.2
Foreign Affairs
100.0
Legislative Branch
23.5
Judiciary Branch
42.4
16.2
5.0
53.8
13.3
9.4
31.1
49.6
30.9
6.1
18.5
26.4
14.1
25.4
16.1
9.3
19.8
30.3
68.7
8.0
11.2
1.0
3.4
0.6
0.3
7.8
1.3
0.4
0.1
21.2
12.3
0.1
11.6
3.0
1.7
0.3
0.2
47.3
33.0
82.2
0.0
41.0
56.3
28.9
8.1
2.5
35.5
1.3
1.8
4.9
5.9
1.2
0.4
1.0
3.9
4.3
3.3
7.8
0.0
2.0
6.3
6.1
1.9
0.6
4.0
0.3
3.5
3.8
2.7
3.6
0.2
1.9
4.2
Total Expenditures b
37.9
16.5 100.0 100.0
100.0
100.0
45.5
Transcript from Monica Mora and Ricardo Varsano, “Fiscal Descentralization and Subnational Fiscal
Autonomy in Brazil: Some facts of the nineties”, Discussion Paper nº 854, IPEA, mimeo, Rio de
Janeiro, 2001.
a
Total for 57% of Brazilian municipalities
Total expenditure excludes Union expenditure on “special responsibilities” (essentially interest
payments and debt amortization)
c
Includes Agriculture, Land Reform, Industry, Commerce, Services, Science and Technology and
Communication Policies.
b
23
Table VIII
Primary a Budget Surplus / Deficit of States and Municipalities
1994-2002 (Deficit/Surplus as a % of GDP) b
Year
States
Munic.
Total
1994
Na
Na
0,77
1995
Na
Na
-0,18
1996
Na
Na
-0,54
1997
Na
Na
-0,72
1998
-0,4
0,22
-0,18
1999
0,16
0,06
0,22
2000
0,42
0,13
0,55
2001
0,61
0,28
0,89
2002 c
0,45
0,25
0,7
Transcript from Fábio Giambiagi, "Do déficit de Metas às Metas de Déficit: A Política Fiscal do
Governo FHC -1995/2002", pp. 23, Discussion Paper nº 93, mimeo, BNDES, Rio de Janeiro, April
2002.
a/ primary surplus or déficit means the budget result before paying interest on the debt
b/ a positive figure indicates a budget surplus
c/ preliminary estimates
Na = not available
Item
PSBR
Union
States
Munic.
Primary
Deficitb
Union
States
Munic.
Interest
Payd
Union
States
Munic.
Table IX
Public Sector Borrowing Requirements (PSBR) – 1995/2002
(all figure as a % of GDP)
1995
1996
1997
1998
1999
2000
2001
7,27
5,86
6,07
7,47
5,82
3,68
3,63
2,38
2,56
2,62
4,94
2,73
2,3
2,14
3,57
2,7
3,01
2,01
3,16
2,12
2,05
1,32
0,6
0,44
0,52
-0,07
-0,74
-0,56
2002 a
3,7
1,75
2,1
-0,15
-0,27
-0,52
0,18
0,07
0,09
-0,37
0,54
-0,08
0,97
0,32
0,72
-0,07
-0,02
-0,55
0,18
0,35
-3,23
-2,35
-0,22
-0,66
-3,5
-1,88
-0,55
-1,07
-3,69
-1,86
-0,89
-0,94
-3,5
-2,25
-0,7
-0,55
7,54
2,9
3,39
1,25
5,77
2,93
2,16
0,68
5,1
2,3
2,29
0,51
7,49
5,49
1,83
0,17
9,05
5,08
3,38
0,59
7,18
4,18
2,67
0,33
7,32
4
2,94
0,38
7,2
4
2,8
0,4
Source: Fábio Giambiagi, "Do déficit de Metas às Metas de Déficit: A Política Fiscal do Governo FHC
-1995/2002", pp. 9, Discussion Paper nº 93, mimeo, BNDES, Rio de Janeiro, April 2002.
a/ preliminary estimates
b/ (-) means a primary surplus
24

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