The Brazilian Fiscal Responsibility Law of May 2000

1. The Brazilian Fiscal Responsibility Law of May 2000 Helio Tollini Fiscal Affairs Department/IMF April 1, 2010

2. Why a Fiscal Responsibility Law? • Federal Constitution of 1988: • Article 165: “A Complementary Law will establish financial and assets management norms for the general government.” • Article 169: “Personnel expenditure of the Federal, State, and Municipal governments must stay within limits defined by a Complementary Law.” • Consolidation of Economic Stability: safe way for a sustainable economic and social development . • Fiscal Coordination: assuring the federal, state (26+1) and municipal (≈5.600) governments will work together in promoting fiscal discipline. • Improved Transparency: allow market mechanisms and the political process to work as instruments of control and punishment of fiscally irresponsible officials.

3. Fiscal Rules • Procedural Rules: • Creation of Permanent Expenditures: institutes a compensation mechanism (new revenue or another expenditure reduction); • Intergovernmental Financing: prohibited the financing or refinancing of debts among governments; • Guarantee: subject to a counter-guarantee offer, in an amount equal or higher than the value of the guarantee to be granted; • Central Bank: forbidden to issue its own securities and to grant guarantees to the federal, state, and municipal governments; • Last Year of Term of Office: prohibits advancements of approved budgeted funds; must only incur in expenses that can be paid in the same year or have available fund if transferred to the next year; and does not allow increase of personnel expenditures during the last 180 days on office.

4. Fiscal Rules • Numerical Rules: • Balanced Budget: golden rule. • Debt Limits: defined by the Senate, in relation to the net recurrent revenue: • 2.0 to state level governments; and • 1.2 to municipal level governments. • Expenditure Limits on Personnel: a percentage of the governments’ net recurrent revenue, broken down by branch and independent agencies. For the federal government (60%): • 2.5% to the Legislative, including Court of Accounts; • 6% to the Judiciary; • 0.6% to the Public Prosecution Office; • 3% to the Federal District (Brasilia); and • 37.9% to the Executive.

5. Transparency • Processes: in the formulation, approval, and implementation of the budget laws, as well as in the annual rendering of accounts, the FRL requires transparent procedures, like full disclosure of proposals, including through electronic means. • Fiscal Risks: periodic evaluation reported in a Fiscal Risks Annex to the Budget Guidelines Law, containing information on financial and actuarial status of social security fund, other public funds and programs of actuarial nature, and contingent liabilities and other risks (including macro-fiscal risks) to public finances. • Central Bank:detailed provisions to render central bank’s operations more transparent, which include the obligation to present detailed reports (note: the Central Bank of Brazil is only operationally independent).

6. Transparency • Budget Execution Report: must be published by all branches and by the Public Prosecution Office up to thirty days after the end of each two-months period, containing for the fiscal year: • execution of revenue, specifying the initial estimation, the revenue collected in the two-month period and accumulated in the year, and an updated estimation for the rest of the year; • expenditure, per economic group (showing commitments and payments incurred in the two-month period and accumulated in the fiscal year) and according to the functional classification; • evolution and re-estimation of net recurrent revenue; • social security revenue and spending; • overall and primary fiscal balances; • outstanding commitments, detailing per branch and independent entity the registered amounts, payments made, and amounts yet to be paid.

7. Transparency • Fiscal Management Report: published up to 30 days after the end of each quarter, and signed by the head of branch, contains: • A comparison of the FRL limits and the following amounts: • total personnel expenditure, with data on retired workers; • consolidated and security debts; • granting of guarantees; and • credit operations, including through advance of funds. • The indication of corrective measures adopted or to be adopted, if any limit has been exceeded. • Additionally, for the last quarter of the fiscal year: • the amount of available funds on December 31; and • outstanding commitments and expenditures not registered due to lack of available funds.

8. Enforcement • Enforcement: the legislative, directly or in collaboration with the courts of accounts, the MoF, the internal control system of each branch, and the public prosecutors office are responsible for controlling the observance of the FRL rules and limits. • Courts of Accounts: • will inform the branch or agency whenever they verify that the expense level is close to the limits established in the FRL. • are also responsible for controlling the limits for total personnel expenditure set for each government branch or agency.

9. Enforcement Institutional Sanctions for Noncompliance: • Revenue: voluntary transfers are suspended for state or local governments that do not implement and/or collect taxes under their competence. • Personnel Expenditure Limits: • Prudential Limit: should 95% of the maximum limit for personnel expenditure be exceeded, the granting of new benefits, the creation of offices, new admissions (except for replacement in some sectors), and overtime will be suspended. • Maximum Limit: if surpassed, voluntary transfers, contracting of credit operations (except for debt refinancing and reduction of personnel expenditures), and guarantees will be suspended.

10. Enforcement • Personnel Expenditure: it is legally void the act that • does not fulfill the compensation mechanism (permanent revenue increase or expenditure reduction); • does not comply with the legal limit applied to spending on retired workers; and • increases spending on personnel 180 days prior to the end of the government’s term of office. • Debt limits: after 12 months, if an excess remains because corrective mechanisms were not effective, receiving voluntary transfers, obtaining guarantees, and contracting new credit operations is prohibited (except for debt refinancing and reduction of expenditures with personnel). • Guarantees: should correction mechanisms not be observed, the entity whose debt has been borne by the federal or state government will have its access to new credits or financing suspended until the debt is repaid.

11. Enforcement Personal Sanctions for Noncompliance: • The Fiscal Responsibility Crimes Law: a statutory law determining that officials may be personally held accountable for their acts (irresponsible behavior and mismanagement may lead to civil and criminal penalties). Examples of sanctions: • removal from office (even if elected); • prevention from occupying public office (5 years); • fines (up to 30% of annual salary); and • prison. • Penalties: may be applied to officials of the three branches of the federal, state, and municipal governments; every citizen is a legitimate party to denounce offenders.

12. Escape Clauses • Escape clauses are well-defined and restricted: • Limits on Personnel: deadlines to meet target will be extended in the event of negative economic growth or low growth (i.e., lower than one percent in four consecutive quarters); deadlines will be temporarily suspended in the event of public calamity, and state of siege or defense. • Public Debt Limits: during economic crises (or monetary and foreign exchange shocks, acknowledged by the Senate), the President of the Republic may forward a request to the Senate asking for their review.