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Fabio Giambiagi (Institute of Applied Economic Research IPEA, Ministry of Planning, Brazil) and Marcio Ronci (Policy Development and Review Department, IMF). The paper benefited from comments by Martin Gilman, Nigel Chalk, Vincent Moissinac, Max Alier, Hemant Shah and Laura Papi.
The year 1990 is usually disregarded in analyses of Brazilian fiscal policy in the 1980s and 1990s, as an atypical year due to the extraordinary revenues collected during the first year of the Collor Plan.
During the 1998 election, the authorities attempted to impose limits on campaign promises due to the fiscal situation, for which they were criticized by one of the leaders of the government coalition in the National Congress who contended that “there has to be funding for everything.” That view was emblematic of the political climate in Brazil until that time, in which there was no notion of budget restrictions.
In this paper, the concept of the public sector borrowing requirements (PSBR) refers to the nominal rather than to the operational result, except when otherwise explained.
In our context, fiscal institutions include both the legal framework of fiscal policy as well as authorities’ fiscal attitude, which indeed helps to enforce formal rules. It is important to emphasize that institutional arrangements are not primarily to be understood as formal organizations and formally written laws and regulations. Institutions are the rules of the game, that is, those formal or informal rules that are actually used by a set of actors (North, 1990).
The initial primary surplus target of 2.7 percent of GDP for 2002 had been announced in 2000, in the context of a significant fall in interest rates, which, as was foreseen at the time, would continue in subsequent years. After this, however, the nominal SELIC rate, which fell to 15 percent at the start of 2001, rose to more than 20 percent during 2002, making it necessary to revise the projected numbers for the following year.
While the data for this study begin in 1994, for reasons of space, we intend to concentrate more on the fiscal adjustment that took place after 1998. For an extensive account of the various aspects of fiscal policy during the 1995-1998 period, see Além and Giambiagi (1999). For the period before the Real Plan in 1994, see Giambiagi (1997).
Until 1994, the principal fiscal indicator was the PSBR according to the operational concept, which corrected the nominal PSBR for inflationary effects. With price stabilization, analyses started to concentrate on the nominal balance, in the same way as in almost all countries. In 1998, the Central Bank discontinued publication of the operational balance among the statistics in its Press Notes although it has continued to publish the information in its Monthly Bulletin. In any case, the comparison of the 1995 nominal balance with that of 1994 —which was still ‘contaminated’ by high inflation—is unwarranted. In operational terms, the consolidated public sector balance, which had registered a small average deficit of 0.9 percent of GDP for the period 1991–93, recorded a surplus of 1.1 percent of GDP in 1994, before returning to a deficit of 5 percent of GDP in 1995.
Strictly speaking, the recognition of old debts that had previously been unrecorded as a balance sheet adjustment began with the Collor administration, with the ‘resetting’ of obligations through the so-called “privatization currencies,” i.e. debts that were accepted as a means of payment in the sale of state-owned companies. In any case, it was only during the second half of the 1990s that the Central Bank began to specify this adjustment component in its statistics, separating it from the components of fiscal flows that affected the debt stock.
The data provide details of revenue items, including items that are beyond the direct control of the Treasury, and the various expenditure items, including those items that are covered by revenues beyond the control of the Treasury. The data refer to the ‘above the line’ statistics determined by the National Treasury Secretariat (STN) that also cover the balances of the Social Security and the Central Bank. The difference between that figure and the “below the line” primary balance published by the Central Bank, measured by borrowing requirements minus nominal interest, is adjusted by the “statistical discrepancy,” which resembles the errors and omissions statistic in the balance of payments.
From the federal government’s point of view, it made sense to give priority to an adjustment through these contributions rather than through taxes such as income tax or the IPI. In the case of the contributions, the entire revenue gain remains with the federal government as they are not shared with states and municipalities. While, in the case of the income tax and IPI, the net revenue gain for the federal government is much reduced as about half of the revenues must be distributed to the participation funds of the states and municipalities.
Some of the military category privileges were partially reduced over the last few years.
The social security index was calculated by deflating the nominal increase in social security benefits by the IPCA price index, with the adjustment accompanying the minimum wage in broad terms, albeit with some differences arising in a number of years. In the cases in which the basic remuneration was adjusted by a different factor than benefits above this floor, the index was weighted by the multiplication factor (total number of benefits times the floor) with regard to total expenses with benefits. The index would allow us to infer the potential evolution of expenditure in the event that the quantity of benefits remained constant.
This tendency to transform a “potential” imbalance into effective deficits was foreseen by Bacha (1994).
In 1999, cost and capital expenditures excluding the Workers’ Assistance Fund (FAT) fell by 11 percent in nominal terms. At the start of 1999, this item was considered impossible to cut despite the increase observed since 1994. The contraction of 1999 suggests that OCC expenditure in previous years could have been lower.
The division of responsibility for the increasing rigidity of the OCC between the Executive and the Legislature is a controversial point. Although the Executive bears most of responsibility for the increasing rigidity of OCC expenses, in some years, most of the rigidity resulted from the existence of larger commitments due to Legislature initiatives such as the Fund for Fighting Poverty.
Since this provision was only implemented months after the approval of the Constitutional Amendment in 2001, it did not take full effect until 2002, which explains the increase in the nondiscretionary expenditures of OCC expenditure in 2002 compared with 2001.
The first agreement was signed in May 1997, and the last in October 1999. With regard to the municipalities, the first agreement was signed in July 1999, and the last in May 2000.
The bilateral agreements established monthly annuity payments by states adjusted by the IGP index and subjected to a maximum of 13 percent of revenue to avoid excessively onerous commitments. If the annuity payments exceed the 13 percent ceiling on revenue, the difference between the payments due and the ceiling is capitalized in the debt stock. Some critics of the renegotiation of state debts have alleged that this debt could become impossible to pay. Strictly speaking, this would only occur with a permanently stagnated or low growth economy, since in such an event, the residue arising from the difference between the payments based on the price table and the ceiling of 13 percent of revenue would have to be capitalized for an indefinite period. In the event of growth, however, this residue would eventually disappear as increasing revenues would cover the previously accumulated balances, given that the limit of 13 percent of revenue would exceed the fixed real value of the price table.
The Kandir Law was negotiated between the federal and state governments before the 1999 devaluation in order to provide a financial gain for exporters by lifting state ICMS on exports. Subsequently, the states claimed that the pay compensation had been incorrectly calculated, and succeeded in obtaining from the federal government a commitment to making substantial supplementary constitutional transfers over several years.
Between 1997 and 2001, the primary result for states and municipalities improved by 1.6 percent of GDP.
In 2001–2002 average aggregate primary surplus for federal enterprises, including Itaipu Binacional, was approximately 0.5 percent of GDP. This primary surplus breaks down into a surplus of 0.4 percent of GDP for Petrobras and 0.2 percent of GDP for Itaipu, and a primary deficit of 0.1 percent for the Eletrobrás group, explained by the fall in revenues due to the energy crisis, combined with an increase in investments. The other federal companies generated a virtually zero primary result.
The definition of what exactly constitutes “temporary revenues” is to a certain degree arbitrary. In Table 13, we consider as “temporary revenues” the revenues that were strictly temporary (in force for only a year) or the revenues that would tend to disappear in the absence of any modification to the legislation that gave rise to them.
The official statistics do not present data in the Table 13 format on a regular basis causing the numbers in question to be affected by a certain lack of precision.
These included a Personal Income Tax Surcharge for higher bracket incomes from 1998 onwards; exceptionally in 1998, the double taxation of income from financial applications; the income tax surcharge on profits on the 1999 currency devaluation in certain operations; the temporary suspension, from 1999 onwards of the deductibility of a portion of Cofins that was initially allowed for the purposes of payment of Corporate Income Tax; the payment of overdue tax by pension funds in 2002, etc.
The exchange rate has a double impact on the debt through a balance sheet adjustment. On the one hand, the foreign public sector debt increases. On the other hand, the same occurs with the appreciation of the dollar-denominated domestic debt. This effect was particularly strong in 1999, 2001 and 2002, and explains the jumps in the ratio of debt to GDP, despite the solid primary balance results observed after 1998.
The list includes a summary of what could be defined as “structural changes.” In addition to these, the National Monetary Council (CMN) established limits on credit to the public sector, according to which, no public or private sector financial institution could lend more than 45 percent of its assets to the public sector (this limit was based on the public sector production’s share in the Brazilian economy).
Some of the modifications described here fell outside the authority of the federal government, such as the sale of the state banks that were state governments’ property. However, it seems valid to consider the measures as part of broader reforms proposed by the federal government as the federal authorities were involved in various rounds of negotiations on the issues discussed.
Complementary Law No. 101, May 4, 2000.
Over several decades, states borrowed from private creditors, under the assumption— which until then was always proved to be true—that at a later date, “the National Treasury would somehow or other honor the debt.” With the collateralization of revenues, however, this unwritten rule began to change, since the states could no longer avoid payment, on the basis that, if they tried, the government would appropriate part of their revenues.
In practice, however, this reduction did not materialize due to the ongoing high borrowing needs during the period (see Table 15).
During the period 1980–85, on average, the Telebrás and Vale do Rio Doce corporations together made investments of 0.8 percent of GDP. Some critics of the economic policy consider methodologically incorrect the inclusion of investments by public sector enterprises in the calculation of the public sector deficit. This questioning seems unfounded. First, Brazil follows international accounting standards. Second, it is practically impossible to monitor the investments of all public sector companies on a monthly basis in such a way as to exclude them from the ‘below the line’ result published by the Central Bank. Finally and most importantly, independently of how the resources are spent, they generate financing needs that must be covered. These financing requirements are exactly what we wish to measure by calculating the deficit, in order to assess the pressure of the public sector on the credit market and aggregate demand.
A rising social welfare factor implies a falling discount as a function of age.
The social security deficit was contained in 2000, but began to rise again as a proportion of GDP in 2001 and 2002, due to large adjustments in the minimum salary, which affected the floor for social welfare benefits and helped to raise social security expenditure by 0.7 percent of GDP between 2000 and 2002.
Until then, retirement pensions were calculated using the average contributing salaries of the last three years, encouraging the understating of income in the first years of contribution, since this did not affect the value of the retirement benefit. Under the present system, income may still be understated, but such a practice will subsequently entail a loss of benefit income.
A more generous view of the official stance prior to 1999 would acknowledge that during 1995–98 the government had an ambitious agenda of reforms, involving the approval of constitutional amendments, some of which were important for the subsequent fiscal adjustment, such as the social welfare reform, which took a long time to negotiate with the Congress. As a result, the focus on the reforms would have led to a relaxation in short-term fiscal flows, favored by a benign external environment that financed growing current account deficits until 1999. The conclusion that it would have been possible in such an environment to achieve the same type of budgetary restriction during 1995–98 as was observed during 1999–2002 is a counterfactual not easy to establish.
The issue of the social welfare factor as a mechanism for encouraging the postponement of retirement was not introduced into the reform agenda until 1999.
Jornal do Brasil, September 24, 1998.
An important element for greater fiscal control was the improvement of public sector statistics since 1995. Five aspects merit mention: a) from 1995, the breakdown of the results of public sector enterprises into federal, state and municipal companies; b) from 1996, the publication of monthly fiscal statistics on a regular basis in the Central Bank Press Notes; c) from 1997, the incorporation of social security data into the National Treasury, generating consolidated statistics for the federal government by the “above the line” criteria, published monthly in the National Treasury Press Notes; d) from 1998, the breakdown of the balances for states and municipalities; and e) from August 2000, the reduction in the lag between the end of the month and the release of the official fiscal data by the Central Bank to only 25 days. The first data indicative of the fiscal situation for 1995 were only published in the third quarter of that year, by which time very little could have been done. By contrast, it is now possible to know the causes of any fiscal deterioration with a lag of less than a month. The capacity of the authorities to respond rapidly to an adverse fiscal result is therefore much greater than it was in the past.
It is worth pointing out that this may be perfectly consistent with a real increase in public spending in absolute terms. Indeed, in the presence of economic growth of 4–4.5 percent per year, there is a certain margin for the ratio of expenditure to GDP to fall, through growth in expenses at a lower rate than the expansion of GDP.
While the LRF introduced a hard budget constraint in the fiscal regimes of states and municipalities, it has not constrained the federal government budget. The federal government’s primary surplus targets are valid only for the current budget year and can be revised in the following year: in principle there is no clear and durable budget constraint to the federal government budget to prevent a substantial reduction in the primary surplus that could lead to an increasing debt-to-GDP ratio.
Ideally, we should use net-of-taxes real rate of interest. However, net-of-tax yield securities is a difficult task as tax rates vary according to security holder and there is limited information on the identity of security holders.