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Session Two: Reforms Of Fiscal Relations In Brazil, Meeting 2018

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14th Annual Meeting of the OECD Network on Fiscal Relations Across Levels of Government, 19-20 November 2018

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Session Two: Reforms Of Fiscal Relations In Brazil, Meeting 2018

  1. 1. 14th Annual Meeting of the OECD Network on Fiscal Relations across Levels of Government 19 November 2018 Reforms of Fiscal Relations in Brazil
  2. 2. 2 Main issues and challenges1 Budget framework 21.83% 21.13% 21.22% 21.28% 21.20% 8.68% 8.60% 8.62% 8.84% 8.91% 2.07% 2.14% 2.22% 2.25% 2.25% 2013 2014 2015 2016 2017 Federal Government States Municipalities Brazilian Tax Burden (% of GDP) • Tax assignment clearly defined in the Federal Constitution • Formula-based granting system • High level of fiscal decentralization by international comparison
  3. 3. 3 Main issues and challenges1 Budget framework • High tax burden compared to Brazil’s peers (32% of GDP) • High level of budgetary rigidity (90% for the Federal Government) • Earmarked revenues • Transfers to municipalities • Mandatory minimum spending in health and education services of 12% and 25% of tax revenue, respectively • Resources of the states' pensions system • Mandatory spending
  4. 4. 4 Main issues and challenges1 States’ Indebtedness • Fiscal Adjustment Program (FAP) • The states had to commit to a FAP as a counterpart of a debt renegotiation with the Federal Government in the late 1990s • This Program establishes annual limits for the amount each state can borrow • There was no objective rule for these authorizations and states in a sensitive fiscal situation were allowed to borrow • Analysis of Payment Capacity • Used to decide whether the Federal Government will guarantee a SNG loan or not • The former methodology allowed the granting of guarantee to SNGs with C and D ratings, according to the consent of the Finance Minister • Fiscal Responsibility Law and subsequent Senate regulations • Net Debt ceiling of twice the Net Current Revenue for states, and 1.2 for municipalities • Among the states, only Rio de Janeiro and Rio Grande do Sul exceed the limit, even if other states have difficulties honouring their liabilities: the ceiling is nonbinding
  5. 5. 5 Main issues and challenges1 States’ Indebtedness 15 11 17 26 39 61 3 5 0 6 10 2 4 11 13 9 31 42 34 20 15 16 0 10 20 30 40 50 60 70 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 BillionofReais New loans for states in the Fiscal Adjustment Program Increase in the limit of new loans Loans revenue 0 5 10 15 20 25 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 States and Municipalities Net Debt/GDP (%)
  6. 6. 6 Main issues and challenges1 Accounting standardization • Each state has its own court of accounts with constitutional autonomy to issue control rules • The Fiscal Responsibility Law (FRL) foresees the creation of a fiscal management board composed of representatives of all government branches and levels and technical entities representative of society • This board has not been created yet • Meanwhile, the National Treasury has this transitory attribution • The regional courts of accounts have autonomy and in some cases do not follow the rules issued by the National Treasury • The shortage of accounting standardization caused by the distinct understandings of the courts of accounts has undermined FRL’s efficiency and transparency
  7. 7. 7 What has been done to address the main issues2 States’ Indebtedness • Fiscal Adjustment Program (FAP) • An objective rule for setting the limit on the total amount each state can borrow is being developed • The methodology under development takes into account the state’s rating in the analysis of payment capacity, the Net Current Revenue, and the level of indebtedness (Gross Debt to Net Current Revenue) • Analysis of Payment Capacity • A new methodology was developed in 2017 to avoid discretions and give more transparency to the process • It eliminated the possibility of granting guarantees for SNGs with C and D ratings • Three indicators: Indebtedness, Current Savings, and Liquidity Index
  8. 8. 8 What has been done to address the main issues2 Accounting standardization • Fiscal Adjustment Program (FAP) • The FAP was reformulated in 2017 to converge to the Fiscal Responsibility Law • The states publish their accounting and fiscal reports according to the understanding of their courts of accounts, and these numbers are adjusted according to the FRL methodology • Although the adjusted values are not used for assessing the compliance with the FRL rules, they are used to evaluate the fulfilment of the Program goals and are an important tool of transparency • Matrix of Accounting Balances (MAB) • Framework for receiving detailed accounting and fiscal information from all levels of government and producing standardized reports
  9. 9. 9 Important future reforms3 Budget framework • To revise the Federal legal order to reduce the budgetary rigidity of the SNGs and its procyclical character • Pensions system: the special retirement rules determined by Federal law generated an important part of the states' problems; thus, Federal pension reform is critical for the healing of the financial and actuarial imbalance of states' pensions system. • Teachers’ minimum salary: its readjustment is determined by the Federal Government and it has generated strong pressure on SNGs’ expenditures, since its growth has been considerably greater than inflation. The SNGs claim for a reform that considers the readjustment by the inflation index. • Earmarked revenues: a rule for avoiding the pro-cyclicality would be desirable: (a) to accumulate the minimum spending values in a reserve account to be used in a certain period of years; or (b) to link the increase in spending by the average growth of permanent revenue in the last five years rather than annual growth.
  10. 10. 10 Important future reforms3 Accounting standardization • Creation of the Fiscal Management Board • It could strengthen the legitimacy of the technical standards currently issued by the National Treasury due to its transitory competence • The courts of accounts would still be autonomous, but there would probably be some progress in the convergence of the standardization, as the normative and interpretative competence of the board would derive from the FRL, and the decisions would be collective, with broad participation of the courts of accounts themselves • There are several bills underway, however the main controversy is about the representativeness of the many agents involved
  11. 11. Thank you!

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