A. Clarity of Roles and Responsibilities

2. Brazil uses very comprehensive fiscal definitions. The consolidated nonfinancial public sector comprises the central government (the federal government, the Central Bank of Brazil (BCB), and the social security system), state and municipal governments, and the public enterprises (including federal, state, and municipal enterprises).² The definition of the general government (which comprises the central government, the state governments, and the municipalities) is broader than in the standard international practice as it includes the BCB. However, as a subscriber to the (SDDS), Brazil also reports data according to the standard definition of the general government excluding the BCB.³ The nonfinancial public sector is clearly separated from the financial public sector.⁴

3. The allocation of responsibilities between different levels of government is defined in the Federal Constitution, which clearly separates revenue-raising responsibilities of the three levels of government, but allows for significant areas of overlap on the expenditure side. According to Article 18 of the Brazilian Constitution, all members of the federation (i.e., the union, the states, the Federal District, and the municipalities) are autonomous. Articles 153-156 of the Constitution explicitly define the tax powers of each level of government, and Articles 157-159 set out revenue-sharing mechanisms between the different levels of government. As for government expenditures, the Constitution defines the powers and responsibilities of each level of government, thereby implicitly giving rise to certain expenditure assignments (e.g., national defense being the prerogative of the federal level). Article 25 of the Constitution stipulates that, as a general principle, the states have jurisdiction over all matters not forbidden to them. The Constitution also explicitly sets out areas of common powers (Article 23) (e.g., environmental protection) and concurrent legislation (Article 24) (e.g., education, social security). The absence of complementary laws⁵ that clearly define the expenditure responsibilities of the different levels of government means that there remain areas of significant overlapping responsibility. Since the mid-1990s, however, the federal government has implemented a policy of progressive decentralization, in particular, municipalization, of the delivery of social services, specifically in health and education, taking into account regional differences in economic and administrative capacities. The federal government has retained supervisory and coordinating functions and responsibilities in these areas, and provided targeted support to regions and municipalities with weak administrative capacities, as well as additional transfers to fund the decentralized expenditure programs.

4. Within the limits set by the Constitution concerning the autonomy of all levels of government, Brazil has developed, over the last several years, important instruments to strengthen control over, and improve the transparency of, subnational government finances. In general, the operations of each level of government are subject to checks and balances that are contained in complementary laws covering specific aspects of fiscal operations, including government balances and financing, public debt, government bond transactions, and the provision of government guarantees. A key piece of legislation in this area is the Fiscal Responsibility Law (LRF)—complementary law No. 101 of May 2000—which regulates comprehensively the operational responsibilities of various levels of government (Box 1). Also, Senate Resolution 78 of 1998, tightened conditions for debt and credit operations of the states, the federal district, and the municipalities, and the provision of guarantees. In addition, specific actions, including the government’s 1997 Program for Reducing State Banking Activity (PROES), and the debt refinancing agreements with the states and over 180 municipalities that were concluded over the last several years, have effectively conditioned federal financial support for state and municipal debt restructuring to improved fiscal discipline at these levels of government (Box 2).

5. The legislative and regulatory framework for taxation is comprehensive but fairly complex. Article 153 of the Constitution allocates to the federal government the power of taxation on the following bases; imports and exports; income and earnings of any nature; industrial products; transactions of credit, foreign exchange, and insurance, or transactions with financial instruments and securities; rural property; and large fortunes. Article 154 of the Constitution allows for additional taxes to be instituted (by complementary law), provided they are noncumulative, and have a specific taxable event or assessment basis other than those specified in the Constitution.⁶ According to the National Tax Code,⁷ each tax requires an explicit legal basis: “it is forbidden for the federal government, states, and municipalities to levy or increase taxes without a corresponding law that establishes it.” Also, all contributions, fees, and duties require an explicit legal basis.⁸ The main tax bases for state governments are value-added (ICMS) and motor vehicles; for the municipal governments, they are services (ISS) and real estate. The LRP (Article 14) stipulates that new tax concessions by each level of government have to be recorded explicitly in the corresponding budget. The LDO also includes a table detailing existing federal tax expenditures. Tax administration has been strengthened significantly over the last several years, helped by a number of legal changes, including Law No. 10174 of 2001 which allows to break bank secrecy for tax enforcement purposes.

6. Roles and responsibilities of the executive, legislative, and judicial branches of all levels of government in the budgetary process are clearly defined in the federal Constitution. Article 2 establishes the independence of the three branches of government. Article 165 sets out the responsibilities of the executive branch regarding the budgetary process. At the federal level, it requires the preparation of three budgetary instruments—PPAs, LDOs, and annual budget laws (LOAs). Draft bills for each of these instruments must be prepared by the executive branch in accordance with Article 167 of the Constitution, which limits budgetary flexibility,⁹ and with the various existing laws, rules, regulations that cover the budget process—including, in particular, the LRF, but also other complementary laws, such as law No. 4320 of 1964,¹⁰ which establishes general rules for the preparation, execution, accounting, and reporting of the budgets for the three levels of the government, and Law No. 8666 of 1993, which establishes rules for government procurement and contracts. The executive branch submits the draft budget documents to the legislative branch, which subsequently reviews and discusses them, and may modify and amend them according to the procedures in Article 166 of the Constitution.¹¹ Various budget reporting requirements are meant to facilitate budget oversight, be it in the form of internal control, or control by legislative or judicial bodies; these are detailed in subsection ILB below.

7. There are no extrabudgetary funds or extrabudgetary expenditures. Budgets are required to include the operations of all nonfinancial public sector institutions at the level of government to which the budget applies, and no expenditure can be made without explicit budgetary appropriation. There are various budgetary funds (e.g., the recently created poverty fund), all of which require a specific law to be created. All budgetary funds enjoy earmarked revenue for their specific expenditures, but they axe an integral part of the federal budget and must comply with all budgetary procedures during budget preparation and execution. However, budgetary funds may carry over into the next fiscal year any financial surplus remaining from the current fiscal year, provided that it is properly budgeted and executed according to budgetary procedures.

8. The central bank is not formally independent, but, in practice, enjoys substantial operational autonomy. Formally, the BCB is under the authority of the MoF; efforts are under way to strengthen the legal basis for its autonomy—the BCB cooperates closely with the MoF in a number of areas, including macroeconomic projections and policy coordination, the consolidation of fiscal data (“below-the-line”) with “above-the-line” data, and external debt management. Under the inflation targeting regime that was established in mid-1999, the central bank was given the responsibilities to pursue the annual inflation targets established by the National Monetary Council (CMN), which is presided by the Minister of Finance. Monetary policies in pursuit of the inflation target have been carried out independently, based on decisions taken by the Monetary Policy Committee (COPOM), which consists of the BCB president and its board of directors.

9. Relations between the budget and the central bank are transparent. The BCB’s administrative budget (namely wages and administrative expenditures) is fully integrated into the federal budget; operations related to the conduct of monetary policy are outside the federal budget.¹² Article 164 of the Federal Constitution forbids the BCB to finance the STN. In particular, the BCB may not grant loans to the treasury, or to any agency or entity which is not a financial institution. Also, it may not buy primary issues of federal debt (although, the STN was allowed to roll over existing liabilities held by the BCB).¹³ STN balances held at the BCB are remunerated at the average interest rate for all government securities in the BCB’s portfolio. Positive BCB income is to be transferred to the STN each six months; possible BCB losses have to be addressed through a transfer from the budget. As set out in the LRF, the BCB has to provide, on a quarterly basis, its balances and an account of the fiscal impact of its operations.¹⁴

10. Operations between the budget and the public financial institutions are transparent; operations of a quasi-fiscal nature have been largely eliminated. As other public companies, public financial institutions may not enjoy fiscal privileges which are not extended to private sector banks. Strict rules apply to the provision of guarantees by the federal government.¹⁵ In the past, quasi-fiscal or extrabudgetary practices were often pervasive, leading to the accumulation of unrecorded liabilities, the so-called “skeletons.” Since 1996, the STN has been securitizing a substantial amount of these liabilities,¹⁶ and it will continue to do so over the next few years. A few more “skeletons” may materialize in the future, depending mainly on the outcome of claims still under review in the court system.¹⁷ Some practices that used to be of a quasi-fiscal nature still continue, but with a reduced scope, and they are now captured in the budget through explicit transfers. In particular, BB and CEF are still subject to directed lending requirements to agriculture and housing, respectively.¹⁸ However, the subsidy element arising from these directed lending operations is now recorded transparently in the budget. The BNDES continues to rely, in part, on captive resources from the Unemployment Fund (FAT); these resources are remunerated at a government-regulated long-term interest rate (TJLP),¹⁹ which is adjusted periodically to reflect market developments, but is significantly lower than the benchmark overnight market interest rate. The Fiscal Risks Annex of the LDO also discusses the contingent liabilities associated with public guarantees, and provides the value of outstanding guarantees, which traditionally have been small.

11. Quasi-fiscal operations of nonfinancial public enterprises have also been largely eliminated,²⁰ particularly at the federal level. The nature and extent of these operations (and of government intervention in their controlled enterprises) is less transparent at the subnational level of government, although available (below-the-line) aggregate data on the finances of these enterprises suggest that they have remained in approximate balance in recent years.

12. Government equity holdings still remain significant in some sectors; they are reported clearly on a company-by-company basis, although not comprehensively in the aggregate. Notwithstanding the extensive privatizations in recent years (detailed in Box 3), government equity holdings remain significant, particularly in the oil sector (Petrobrás), electricity generation (Eletrobrás), airport administration (Infraero), the financial sector (as indicated above), and the sewerage and water sectors. At the federal level, equity is held either by the STN or by the BNDES and its investment corporation (BNDESPAR),²¹ but subnational governments have their separate equity holdings. According to the Brazilian Constitution (Article 173), public and private enterprises are subject to the same legal regime, and follow the same general accounting, reporting, and audit requirements.²² While there is no comprehensive list of the stock of all public sector equity holdings, the existing reporting requirements imply that, for any given company, government ownership is transparently reported to the general public, following private-sector accounting standards.²³ A detailed account of STN equity holdings (e.g., in companies like Petrobrás and BB) is published bi-monthly, including on the STN website. BNDES and BNDESPAR also report on their equity participations according to their standard reporting requirements every six months; these are published in the DO and in two other newspapers. Furthermore, the financial statements of BNDES and BNDESPAR, which include government equity participations, are sent to the CVM on a quarterly basis. New government equity participations (e.g., through the BNDES subsidiary BNDESPAR or directly) have been limited, and generally for temporary purposes.²⁴

13. Government regulation of the nonbank private sector is implemented with clear, albeit complex, regulations. While following the basic principle of self-regulation of markets, government regulation of the nonbank private sector is complex, with a fairly large number of legal stipulations, and of specific regulatory and control agencies. The supervisory activities of the CVM involve the monitoring of the information disclosure process (including of all publicly listed companies), and the behavior of securities traded.²⁵ Among others, the CVM carries out the registration of publicly held companies; registration of public offerings; accreditation of independent auditors; suspension of the trading, issuance, or distribution of securities. Particularly for sectors that were historically characterized by state monopolies, the government has created a number of specific oversight and regulatory agencies.²⁶

14. Public servants are subject to a strict code of behavior which is embedded in a number of legal stipulations. The 1990 Statute for Civil Servants²⁷ is applicable to all employees of the federal government and its decentralized agencies (e.g., federal foundations). It comprehensively establishes hiring and employment procedures; general remuneration rules; rights and responsibilities of public servants; and disciplinary mechanisms and procedures. The 1992 Law on Improper Administrative Behavior²⁸ defines three main categories of improper behavior of public servants: illicit enrichment, acts that result in unfair advantages, and acts that are in conflict with good principles of public administration (e.g., honesty, impartiality, confidentiality, or use of privileged information). In 1994, the government established by decree a Professional Ethics Code for Federal Civil Servants²⁹ however, this code did not provide for effective sanction mechanisms for noncompliance, apart from reprimand.³⁰ In 2000, a Fiscal Crimes Law (LCF) was enacted³¹ that, among others, defines specific infractions by public officials at all levels of government that would adversely affect fiscally responsible public administration, and sets out a general structure of penalties to be applied. Also, the government established a Code of Conduct for senior federal government officials (CCAAF),³² applicable to about 700 senior officials appointed by the President, and a separate ethics code for federal government officials who manage the public debt (CEADP),³³ which complements the CCAAF. The CCAAF clarifies, among others, the ethical rules applicable to high-level government officials; establishes basic rules regarding conflicts between public and private interests, and limitations on professional activities that are undertaken immediately after leaving office; and creates consultative mechanisms and procedures to prevent unethical conduct. To implement the CCAAF, a Public Ethics Commission (CEP), that has largely a preventive character, was created under the Presidency.

15. Upon entry into service, all public servants have to supply a declaration of assets. Also, in line with the CCAAF, all senior government officials have to provide, 10 days after taking office, a detailed statement on their assets and income; indicating which assets could raise conflicts of interest, and ways to avoid them.³⁴ Also, the CEP has to be notified immediately of any relevant changes in personal assets. To strengthen the public’s recourse against improper behavior of public servants, the government established in April this year a General Corrector’s Office (CGU)³⁵ to follow up on infractions by public officials against federal funds or assets, or, more generally, corrupt practices. The CGU can either act on its own initiative or on the basis of denunciations.

B. Public Availability of Information

16. Detailed data on central government finances are readily available. The STN posts at its website on a monthly basis, with a one-month lag, the above-the-line outturn of the consolidated operations of the central government (including the BCB).³⁶ Expenditures are reported in a mix of functional and economic classifications. In addition, the STN issues more detailed bi-monthly execution reports, as required by the LRF. These reports follow the classification of the LOA and, therefore, allow for an exact mapping of budget execution and budget allocations; they are also available at the STN website. The Internal Revenue Service (SRF) publishes monthly reports on central government revenues, with a month’s lag, available at its website. Monthly reports are also available at the website of the Ministry of Social Security and Assistance (MPAS), showing the private-sector social security system’s outturn, with a month’s lag; annual reports on medium- and long-term projections for the social security system are also available. The above-the-line outturn of the federal public enterprises is available on an annual basis, but is monitored on a monthly basis by the Ministry of Planning, Budget, and Management (MoP), where information is consolidated from the federal enterprises’ balance sheets, and reconciled with the budget accounts on a cash basis for the purpose of calculating the primary balance of the consolidated federal public enterprise sector.

17. Data on subnational government finances are available, but they are less comprehensive and timely than central government data. Many government agencies, including, among others, the STN, the BCB, the Federal Internal Control Secretariat of the Ministry of Finance (SFC), and the TCU, publish information on the central government mandated transfers to the states and municipalities. The National Statistics Institute (IBGE) collects annual above-the-line data on subnational finances for the 26 states and the Federal District, as well as a representative sample of 250 out of 5,561 municipalities for the purpose of producing national accounts statistics. The STN collects annual above-the-line data on the states’ budget execution, typically with one-year lag. Data on the above-the-line outturn of individual public enterprises of the states and municipalities are readily available from their balance sheets and income statements, and are subsequently consolidated with government fiscal accounts. The quality of above-the-line information on subnational finances has improved significantly since the above-mentioned bilateral debt rescheduling arrangements have been signed between the federal government and most states and over 180 municipalities.³⁷

18. The BC6 provides monthly below-the-line data on the consolidated operations of the various levels of government and the nonfinancial public sector. The PSBR is calculated as the monthly change in the public debt stock. The latter is calculated on the basis of information from the banking sector; on domestic bond issues; and from the BCB’s external debt register. Interest payments on domestic public debt, including the foreign exchange-indexed debt, are calculated on an accrual basis. Therefore, the PSBR includes the changes in the stock value of the foreign exchange-indexed debt due to exchange rate movements in the reference period.³⁸ The BCB also reports PSBR data using the harmonized Southern Common Market (MERCOSUL) debt statistics methodology, in which interest payments due on the exchange rate-indexed domestic debt are calculated on a cash basis. This methodology provides equal treatment to the debt service of the external debt and the foreign exchange-linked domestic debt. The BCB also publishes data on nominal interest payments for the different levels of government and their primary balances. The BCB has begun to publish on a monthly basis statistics on the uses and sources of financing of government operations, for all levels of government and the consolidated public sector, including a breakdown by broad categories of domestic and external financing. Reports of the external audits of the BCB are also available at its website.

19. Data on public debt and the government’s financial operations are comprehensive and readily available. The BCB publishes on a monthly basis detailed information on the level and composition of the net debt of the general government (excluding the BCB), as well as indicators of average maturity and duration of the securitized debt stock issued by the STN and the BCB by security type. In addition to information on the net public debt stock, the BCB has recently begun to publish on a monthly basis information on the gross debt stock of the consolidated public sector, including information on the government’s financial assets for all levels of government. The STN publishes on a monthly basis information on domestic and external debt operations during the previous month and on debt service payments due in the following months, as well as indicators of average cost, maturity, and duration of its debt securities; and, on an annual basis (since 2001), its baseline program for debt issuance and management during the year. The schedule of monthly debt auctions is announced in advance. Detailed information on divestiture operations, including legislation, auction schedules, and financial statements of privatization operations and sales of assets, is available at the BNDES website. Information is available at the BCB website on the privatization of the state banks under its control, as well as on the government program for reducing state banking activity (PROES).

20. Information on tax legislation and a wide range of taxpayer services is provided online. Information on tax collections, tax legislation, as well as taxpayer services, is provided on the website of the SRF. About 90 percent of personal income tax returns are filed via the internet, and all corporate income tax returns are filed electronically. Information on state and municipal own tax revenues is available on an annual basis from the IBGE and the STN.

21. The dissemination of federal budget documents and legislation is comprehensive. Information on the federal budget instruments—PPA, LDO, and LOA—is available at the MoP website. The LOA includes the budgets of the central government, as well as investment ceilings for the nonfinancial federal enterprises. A detailed consolidated budget of the nonfinancial federal enterprises, comprising all revenues and expenditures, is issued separately through a presidential decree. The federal LDO sets the fiscal targets for the central government and the nonfinancial enterprises, as well as guidelines on budget formulation and execution. The LRF requires comprehensive dissemination of information at all levels of government, and the issuance of annual, bi-monthly, and four-monthly reports on budget execution. In line with the LRF, the LDO provides budget execution information for the preceding two fiscal years, based on which compliance with the fiscal targets is assessed, as well as key aggregate expenditure, revenue, and primary balance targets for the following three fiscal years (Fiscal Targets Annex).

22. Information is provided on contingent liabilities and tax expenditures. As indicated above, the LDO includes detailed annexes on the securitization of unfunded liabilities incurred in the past, as well as a fairly detailed assessment of the contingent liabilities that may arise in the future (Fiscal Risks Annex). Also reported in the LDO is detailed information on tax expenditures of the central government and the social security system;³⁹ revenues are reported in the budget net of tax expenditures. Subsidies and defense expenditures are clearly reported in the federal budget.

23. The PPA has contributed to greater dissemination of information. The PPA has allowed greater transparency in the dissemination of information by strengthening the link between multi-year planning and annual budget preparation and execution (Box 4). The PPA also facilitates a clear link between individual programs and the functional and economic classifications of expenditures in the central government budget. Updated information on the PPA’s execution, program implementation, and program managers is provided to authorized users through an Integrated Information System (SIG). Information on the implementation of the PPA is available to the public at the MoP website, including the monthly implementation reports and the annual reports submitted to congress.

24. Information on internal and external control is widely available. The TCU posts its audit reports on its website, and publishes them in the DO. Reports of the SFC are submitted to the TCU and to individual program managers. Information on the activities of the SFC is available at its website, but not its audit reports. Efforts have been made to strengthen the internal control agencies in the Judiciary and Legislative branches of the federal government, and at the subnational level. Internal and external control agencies also receive grievances and information requests from the public at their websites.

25. Several e-government programs are available. A website-based federal procurement program is accessible to the public (Box 5). Most states provide online information on their tax legislations, public procurement instruments, including online auctions, and social assistance programs. Some municipalities provide information online on the services available to residents, social programs, and procurement activities.

26. Brazil subscribes to the SDDS since March 2001. Advance release calendars, as well information on the coverage of the fiscal accounts, are available at the BCB’s website. A flexibility option on the timeliness of reporting general government operations is taken under the SDDS. Currently, the reporting delay for these data is about two years, reflecting the IBGE data release schedule; full compliance is expected in two years. Delays in reporting GFS statistics primarily reflect various changes in the government agency responsible for consolidating budget statistics, and the current lag in consolidating subnational, particularly municipal, budget outturns.

C. Open Budget Preparation, Execution, and Reporting

27. The preparation of the LOA is based on the PPA, and on an assessment of fiscal sustainability focusing on targets for the public debt-to-GDP ratio. For each level of government, preparation of the LOA bill is preceded by the LDO, which must indicate the fiscal targets for the reference year and provide projections for the two following years in terms of overall and primary balances, the stock of net public debt, and budgetary aggregates, including revenues and expenditures. The LDO must also indicate limits for overall expenditures, program priorities, and procedures that must guide the annual budget preparation. As of 2001, the LDO also included a discussion of the impact on revenues and on the net debt-to-GDP ratio of changes in macroeconomic assumptions, like the growth rate of real GDP, interest rates, and exchange rates (Fiscal Risks Annex). Although there is no law establishing overall fiscal targets for the public sector as a whole, the federal government’s PPA, LDO and LOA⁴⁰ proposals have been consistent with a medium-term macroeconomic framework and fiscal consolidation program, which includes estimates for subnational government. The federal government budget is prepared within the general guiding framework of the PPA, and for that purpose it includes, alongside functional and economic classifications in line with current GFS standards, a program classification consistent with that utilized in the PPA. The budget is comprehensive, encompassing the operations of the executive, legislative, and judiciary branches of government, the attorney general’s office, all government-controlled funds, the social security system, and all other federal entities, including foundations receiving public funds. The budget document also includes the capital investment budgets of the federal nonfinancial enterprises.

28. The LOA is a comprehensive three-part document. It comprises (1) a budget statement, including the macroeconomic framework and a discussion of spending priorities and main budgetary programs; (2) the budget proposal bill; and (3) the annexes including detailed information and classifications of all programs and activities. The LOA includes revenue and expenditure data of the preceding year (original budget and revisions) and the three latest audited accounts. The LOA also identifies earmarked revenues (constitutional transfers to subnational governments, resources for health programs, and social security), as well as tax expenditures and main contingent liabilities. After being sent to congress, this documentation, prepared by the MoP’s Secretariat of the Federal Budget (SOF), is made available on the MoP website. While the program-based PPA is fully translated into the budget, administrative costs of programs, especially personnel costs, have not yet been disaggregated by program.⁴¹

29. The federal government and subnational governments prepare and publish annual accounts, as well as statements of financial assets and liabilities. The expenditure accounting system is on an accrual basis (verified expenditure), while revenue is registered on a cash basis.⁴² The accounting system of the federal government, embodied in SIAFI, is comprehensive and capable of generating data on all the stages of the expenditure execution and revenue collection processes.⁴³ Therefore, reliable information on verified but yet unpaid expenditures is available on a timely basis. The accounting system includes all domestic and external financial transactions, as well as the cash flow and balance of these credit operations. The system allows for (1) daily validation and confirmation by spending unit managers of transactions and documents entered into the system, and monthly validation and confirmation of the system’s corresponding automatic accounting entries; and (2) the preparation at any time of interim financial statements and budget execution reports, as well as formal accounts at the end of each fiscal period, including changes in government assets and liabilities. The system also registers and controls the guarantees given by the STN for the external debt of all members of the federation and of public enterprises.

30. Budget and planning forecasts are clearly presented in the budget documents. There are three integrated planning horizons. First, there is an indicative planning stage in which the government’s long-term (eight-year) general strategy, objectives, goals and priorities are defined. Second, there is a programming phase, involving the preparation of the four-year PPA, in which the allocation of projected budgetary resources over the following years to different programs and activities is defined, consistent with the medium-term macroeconomic framework, fiscal targets, and revenue forecasts. Third, there is an annual budgeting phase in which the annual budget allocations to the programs and activities defined in the PPA are established in light of the updated macroeconomic framework for the year, prepared by the MoF, in coordination with the MoP and the BCB. This framework is widely debated and scrutinized by the public, including financial analysts, who compare it with their own forecasts. New government programs and activities and their cost are clearly identified in the preparation of the PPA and in the LOA. As indicated above, the budget documents include a clear statement of the main underlying macroeconomic assumptions, and, starting with the 2002 budget, some sensitivity analysis of the budgetary implications of changing these assumptions. The government must present new tax policy initiatives, if any, in the LDO. The budget speech identifies main changes in tax policy and their revenue impact. Additional expenditures to be financed by proposed new tax measures have been conditioned to approval in full of such measures by the congress.

31. The LRF has preserved the practice of a presidential decree that establishes guidelines and limits for budget execution, financial planning, and payments. According to the budgetary legislation, budgetary allocations are not mandatory. Therefore, the LRF mandates that a decree on budget execution and financing procedures be issued no later than 30 days after the approval of the LOA. The LRF also requires this decree to be reviewed every two months, and revised if necessary, should projected revenues fall short of what would be required to achieve the government’s fiscal targets. The decree establishes ceilings for expenditure commitments and payments that are equal or below the corresponding approved budget allocations. The decree also establishes, by ministry, monthly ceilings on payments, including those on account of previous year’s undisbursed commitments (restos a pagar) and those financed by the spending units’ own revenues. Each ministry, given the overall ceilings established by the presidential decree, defines sublimits for its spending units. These limits are recorded in the SIAFI, which does not allow the execution of expenditure commitments in excess of the limit. The execution of the budget through the SIAFI is closely monitored by the STN, as well as the Secretariat of Planning and Strategic Investments (SPI), which focuses on the implementation of priority programs identified in the PPA. Also, the legislation allows for three forms of supplementary budget appropriations⁴⁴ during the year (the first two of which require that for each increase in expenditure the corresponding additional financing sources be identified):

• supplementary budget appropriations (créditos orçamentários suplementares), which can be enacted through presidential decrees during the fiscal year, provided that the proposed increase in expenditure, does not exceed a certain percentage⁴⁵ approved in the LOA—above this limit, the legislation requires the supplementary budget proposal to be approved by congress;

• special budget appropriations (créditos orçamentários especiais), approved by congress, for new expenditures which are not included in the budget; and

• extraordinary budget appropriations (créditos orçamentários extraordinários), which may be enacted by a provisional measure and then approved by congress, for unforeseen and urgent expenditures.

32. The bi-monthly review of expenditures is accompanied by a report on the budget execution, presented to Congress in a public hearing every four months. This report, signed by top MoP officials, explains changes in the budget programming, and, if needed, suggests measures to reduce risks to the achievement of the government’s fiscal targets. Budgetary developments are also monitored closely by a committee, co-chaired by the vice ministers of finance and planning, which is responsible for approving new spending initiatives that may have a significant impact on the budget, and preparing recommendations on remedial actions in the event of perceived risks to the achievement of the primary surplus target. These recommendations, published in the DO, are considered by a high level interministerial committee, chaired by the Chief of Staff of the Presidency, and including the Central Bank President, and transmitted to the President of the Republic for approval. The deliberations of these committees are not made public, but budgetary developments during the year, and any policy response to them, are explained in the bi-monthly reports on budget execution.

33. Goods and services are purchased according to comprehensive procurement regulations.⁴⁶ However, there are still risks of fraud because of exemptions in specific tenders, which may call for certain technical requirements and may indirectly determine the choice of a particular supplier. According to the current legislation, government purchases above the equivalent of US$260,000 for goods and services and US$600,000 for engineering services are subject to procurement procedures. Simpler procurement procedures may be followed for purchases that are below these amounts but above US$3,200 for goods and services and USS6,000 for engineering services. Standard procurements of goods and services can be carried out through auctions, independent of the value of the purchase. All relevant legislation, the requirements for inclusion in the government suppliers’ registry, electronic auctions procedures and all auction results are available online.⁴⁷

34. Internal control procedures are in place. The internal control is carried out by the SFC, which reports to the minister of finance. According to Article 74 of the federal constitution, internal control has to evaluate budgetary programs and management, including financial data, and provide support to the external control. Since 1998, the SFC has focused on auditing and program evaluation, including results of government programs and activities. Each year, it carries out an average of 18,000 inspections (physical verification of use of resources and results) and 3,000 audits (more comprehensive and detailed analysis, including but not limited to, legal compliance), of which around 2,000 are submitted to external control organs (i.e., the TCU). All inspections and audit results are available in a database that is shared with the external control. The internal control has no legal power to penalize irregularities, errors, abuses, mismanagement or loss of public resources due to waste. Internal audit and inspections reports are not disclosed to the public, but are sent, for further followup and application of due penalties, to both the external control and the institution that was audited, and or inspected, and its respective minister. The internal control also consolidates the annual government accounts, which are sent to congress for approval. The SFC website contains all relevant legislation, annual reports on the accounts of the government, and the respective TCU’s opinion in this regard, as well as information on the budget execution of discretionary transfers to states and municipalities.

35. Annual federal government accounts are to be prepared, examined by the external control organs and submitted to the legislature, within five months for entities comprising the direct administration and six months for those included in the indirect administration.⁴⁸ Subnational governments, especially the states, have reasonably met this standard. The 26 states and the Federal District are audited by their respective courts of accounts that report to the respective state legislative branches. These state courts of accounts also audit all the municipalities in their respective states, except for the municipalities of the states of Bahia, Ceará, Goiás, and Pará, which have special state audit courts for their municipalities.⁴⁹ The PPA and the program budgeting implemented in 2000 have improved the evaluation of the government programs and the results have been presented to the legislature, Further improvements are still needed, including enhancing the timeliness of the physical evaluations of decentralized programs of the states and municipalities.

D. Assurances of Integrity

36. Repeated macroeconomic shocks, as well as overoptimistic upward revisions by congress of the revenue estimates included in the government’s budget proposals, and commensurate increases in expenditures, have generally required an underexecution of the approved budget in recent years. The disinflation that followed the implementation of the Real Plan in the mid-1990s facilitated substantial improvements in budgetary forecasts. Nevertheless, in light of severe external and other macroeconomic shocks, and of the above-mentioned revisions by congress to the revenue estimates included in the government’s LOA bill, the government has been resorting to supplementary budgetary appropriations, in-year revenue raising measures, selective budget cuts, and limits on commitments and payments. Inevitably, this has diminished the reliability of the LOA as an indicator of the likely fiscal outturn.

37. Appropriate revenue forecasting techniques are used by the institutions involved in the preparation of the budget. These techniques include the estimation of elasticities, trends, and the impact of policy change and macroeconomic developments. The basic macroeconomic parameters and assumptions used in preparing the PPA, LDO, and the LOA are made availabe to the public. Except for periods of extreme volatility in the relevant macroeconomic parameters, the revenue forecasts prepared by the government have been quite accurate. As regards expenditure, the implementation of the PPA has facilitated a more realistic costing of programs and activities. The program preparation techniques used—including the bottom-up approach, medium-term expenditure framework, costing by activities and actions and by economic classification—have provided more reliable estimates on current and capital expenditure (except for personnel cost) for the annual budget preparation. The MoP, in coordination with sectoral ministries and agencies, prepares personnel cost estimates. More disaggregated estimates of personnel expenditure and of a few other administrative costs by program and activities are still being developed.

38. General rules for the preparation, execution, accounting and reporting of the budgets at each level of the government were set out in 1964 in the budget framework Law No. 4320. This law requires revenues to be registered on a cash basis and expenditure on an accrual basis, although capital expenditures are treated as ordinary expenditure and there is no capitalization or depreciation of assets. All phases of the expenditure process are recorded, including commitment and verification. Since 1967, the TCU has monitored compliance with accounting principles and rules at the federal level, while state audit courts have overseen compliance at the state municipal levels. Except for small municipalities, public sector entities generally comply with these procedures.

39. The processes for accounts reconciliation and fiscal reporting are effective. As outlined in Box 6, the SIAFI has been in use since 1987, and it encompasses budget appropriations, accounting procedures (automatic registering and consolidation), financial management (cash release, control of the treasury single account), and reporting (preparation of accounts and reports). All budgetary units are linked online to the system. Monthly financial reports are formally reconciled in an effective and timely way, including with bank accounts. The SIAFI also generates reports on the internal and external federal public debt and other liabilities, as well as on government financial assets. This information on the federal debt is periodically reconciled with the BCB’s statistics, which encompass financial assets and liabilities of other components of the public sector as well.⁵⁰

40. The TCU and the state and municipal audit courts carry out external audits, as established by the constitution, and independently from the executive branch. According to the constitution, the President appoints and submits for senate approval, one-third of the nine-members TCU, while the congress appoints the remaining two-thirds. The TCU staff is entirely selected through competitive recruitment and enjoys higher remuneration than other comparable government employees. The staff is systematically trained, including in modem techniques of performance auditing, and auditing of computer systems. The mandate of the TCU includes attesting annually the financial accountability of each budgetary organization (around 2,400) and the federal government as a whole, as well as to audit financial systems and internal control. The TCU also audits appointments and retirements of civil servants and the federal transfers to states and municipalities. The TCU has constitutional power to judge and impose penalties on budget organizations for irregularities, errors, abuses, mismanagement and waste of public resources. Penalties imposed by the TCU include fines, barring from public office position, punishment by loss of position, ineligibility, and reimbursement of the damage made. The audit reports are sent to congress, as well as to the Attorney General’s Office for prosecution, if appropriate, and are published in the DO and on the TCU website. The Constitution (Article 74) stipulates that any citizen, political party, association, or trade union is allowed to denounce irregularities or illegalities to the TCU.

41. The IBGE reports to the MoP (and, hence, is not legally independent), but has operational autonomy. IBGE is in charge of the production and analysis of statistical and geographical information, and it is the main coordinator, consolidator, and disseminator of statistical information within the government. The IBGE has established several advisory committees, which include private sector representatives, to discuss methodological issues. Fiscal data published by the IBGE are limited to the broad categories of the annual national income accounts.