IV. Brazil: The Fiscal Responsibility Law¹

1. In April 1999 the government submitted to congress a draft of the Fiscal Responsibility Law (FRL) which sets general principles and rules to guide budgetary planning and execution for all levels and branches of government. The authorities expect the draft FRL to be enacted into law by the end of 1999. The FRL is expected to improve the management of the public finances and ensure fiscal sustainability. In particular, the FRL establishes limits on the level of public indebtedness and budget deficits, and establishes corrective steps to be taken in cases of deviations from fiscal objectives and targets. The FRL also contains mandatory rules to enhance fiscal transparency and responsibility, such as the publication of fiscal objectives, goals and results according to standard accounting rules. Also public officials are subject to sanctions and penalties for nonobservance of specific norms, rules, and limits.

2. Limits on the consolidated net debt of each level of government are to be established as a proportion of its net tax revenues,² by the Senate on recommendations from the President of the Republic. There are two limits for each level of government, a maximum ceiling and a prudential limit that is always set at a level below the maximum ceiling. If the maximum debt ceiling is exceeded, the stock of debt would need to be reduced to the maximum limit by the end of the second quarter after the quarter where the excess occurs, with at least half of the adjustment taking place in the first quarter. The nonobservance of the timeframe to get under the maximum debt limit by states and municipalities would trigger the suspension of voluntary transfers of the central government to states or of the states to municipalities. During the time the maximum limit is exceeded, all borrowing operations will be stopped, except for debt refinancing, and all available cash balances will be transferred to a special account at the central bank or another official financial institution where drawings on the account will be permitted only for essential expenses. While the prudential limit is exceeded, total expenses are required to be below total revenues.

3. The limits on borrowing operations envisaged in the FRL are generally governed by the golden rule that stipulates that the level of borrowing operations is limited by the level of capital expenditures. In addition, central bank financing to the federal, state and municipal governments is strictly prohibited. Also, short-term revenue anticipation loans (AROs) from banks are permitted only to bridge possible temporary cash shortfalls and must be fully repaid by December 15 of each year.³ In cases of unlawful credit operations, the law requires that they be cancelled or that a compensatory reserve be created. The sanctions for noncompliance with the relevant cancellation requirements include the ineligibility to receive voluntary transfers and the preclusion to undertake any borrowing, except for debt refinancing.

4. The FRL contains a number of rules and limits that discipline expenditures for all entities of the federation. A general rule that applies to all categories of expenditure is a compensation mechanism that stipulates that any long-term increase in expenditure (more than three years) has to be fully offset by a reduction in other expenses or by an increase in revenues.⁴ For social security expenses, there is a specific rule that prohibits the creation of benefits or services without identification of the corresponding source of funding. In addition, the compensating principle is reinforced through the requirement that any permanent increase in social security benefits has to be offset fully within the framework of the social security system itself⁵ In particular, the accounts and funding for the social security system have to be separated from the treasuries of each entity of the federation and its resources can only be used for the payments of social security benefits.

5. For personnel expenses, the FRL would strengthen the restrictions of the Camata Law II, passed in June 1999, by introducing maximum and prudential limits for each entity of the federation. The maximum limits, determined as a proportion of net tax revenues, are 60 percent for the central government, 80 percent for the states, and 70 percent for the municipalities.⁶ Within each government level, the maximum limit on personnel expenses as a proportion of net tax revenues has been assigned in line with the current distribution among the legislative, judiciary, and executive branches.⁷ There will be no increases in personnel expenses of the executive or legislative in the six-month period prior to the end of the legislature, or of the term of office the executive. Prudential limits are set at 90 percent of the maximum limit. In the event the prudential limit is exceeded, following the Lei Camata II, the FRL stipulates that it is prohibited to grant additional benefits to civil servants, including wage increases, create new positions, and grant overtime payments. After mid-2001 (when the transition period ends for Lei Camata II), when the maximum limit is exceeded, a period of two quarters is allowed to eliminate the excess, where half of the adjustment is to be done in the first quarter. If adjustment is not completed within the specified period of time, federal and state transfers will be suspended, borrowing operations will be precluded, except for debt refinancing, and in the case of the prosecutor’s office, the budget allocation will be transferred to a special account where they can only be used upon confirmation of compliance with the limit.

6. Other restrictions on expenditures include limits on unspent commitments (restos a pagar). Only expenditures already committed and executed by the last day of the fiscal year and liquidated (i.e., approved for payment) by January 31 will be included in the category of restos a pagar. Their level will be limited by the amount of cash balances available on the last day of the fiscal year plus 5 percent of total expenditures effectively paid during the fiscal year, so that in cases of excess, the budgetary allocations of the following fiscal year will be reduced accordingly. In the last year of the legislature or term of office of the government, the amount of restos a pagar cannot exceed the amount of available cash balances.

7. The FRL requires the multiyear development plan Piano Plurianual (PPA), the budget guideline law Lei de Diretriz Orcamentaria, (LDO) and the annual budget to define rolling fiscal objectives and targets for three-year periods. When it is estimated that the fiscal targets will not be met at any level of government, automatic cutbacks in expenditure will need to be effected until attainment of the fiscal targets is ensured. In the event this is not done in the case of states and municipalities, the federal government is authorized to withhold transfers to them.⁸

8. The FRL also includes mandatory rules for fiscal transparency and responsibility, such as the publication and dissemination of the objectives, goals and expected fiscal results, that will be reported according to standard accounting rules, explicitly including the potential risks for fiscal policy. The federal government is required to consolidate the accounts of all members of the federation. Heads of governments are also required to sign a fiscal responsibility statement and to publish a quarterly and an annual economic and fiscal performance report assessing compliance with the relevant limits and targets; establishing accountability; justifying deviations and indicating corrective actions; and defining the estimated period for the adoption of corrective actions. There are also a number of rules that govern intergovernmental relations. Specifically, the granting of new intergovernmental credits is strictly prohibited even for purposes of renewal or refinancing of outstanding debt; and official financial institutions cannot grant credit to entities that control them.

9. Managers that fail to observe the provisions of the FRL will be liable to criminal charges that are in a separate legislation—the Fiscal Criminal Law—that was submitted to congress on the same date of submission of the FRL. The Fiscal Criminal Law defines as a crime subject to imprisonment of up to four years, the nonobservance of the principles, norms and rules governing the FRL.