Fiscal Responsibility Law

Quoted from dictionary.com: "\Fis"cal\, a. [F. fiscal, L. fiscalis, fr. fiscus.] Pertaining to the public treasury or revenue.".
To behave with Fiscal Responsibility is to manage government expenditures, revenues and debt in such a way to keep public finances healthy.
Attitudes seen as just common sense in developed countries had, in Brazil, to be enforced by law. Until a few years ago, it was common to see Brazilian public administrators run public finances more concerned with their personal interests than with Society welfare.
So, it wasn´t difficult to find cases like this: governments spending way more than allowed by the Budget, and covering the deficit by either printing money or issuing bonds or somehow else pushing the burden to taxpayers; mayors and governors hiring plenty of new servants, regardless of need, to gain popularity for future elections; misuse of state-owned companies, especially financial institutions, to favor politicians (the case of Banespa, ex-State bank of Sao Paulo, became famous: ex-governor Orestes Quercia recognized to have led the bank close to bankruptcy, in his successful attempt to elect his successor, Antonio Fleury, in the 1990 campaign); new projects being started (again, in search of political gains) without provision of resources. Such practices were more common when the government terms were close to end; the sequels were left to the successors.
The mentors of the Real Plan had realized the importance of controlling fiscal deficits in fighting inflation. The Real Plan was successful in reducing inflation, but it didn´t change the mentality of governors; the high inflation rates helped governants disguise their fiscal malpractices, by quickly devaluing expenditures and revenues; the consequence of malpractices was the constant growing public debts, which could only be managed with help of even more inflation.
On May 4th 2000, after efforts of the economic team, the Suplementary Law nr. 101 was approved; click the link for the full text, in Portuguese, English and Spanish, of the Brazilian Fiscal Responsibility Law.

The law was much debated in Brazil, before and after promulgation, because of its effects on Public Administration. Two examples show the impact of the law in Brazilian society: i) several States and municipalities had to impose tight control on salary raises, to adequate payrolls to the limits determined by the law; most civil servants didn´t get a salary increase during several years; the old practices of using public funds to tame servants and unions are now gone; ii) the Executive (read: the Ministry of Finances) gained the prerrogative to set financial targets for the Budget; such targets must be observed by the Congress, when elaborating the Budgetary Law; such targets include the total budgetary surplus (for the years of 2,004 through 2,006 - the entire Lula´s term -, the primary surplus was set in 4.25 % of GNP; primary surplus is defined as all revenues less all expenditures, excluded interest payments).
There was so much discussion, that the Ministry of Planning released a document (aimed to all citizens but particularly at Governors´ and mayors´ staffs) with explanations of details of the law. Read the PDF document, in English, by clicking here.

A few comments about the law:
Art. 1 establishes the objectives of the law
Art. 4, paragraphs: "The Budgetary Directive Law must enclose a Fiscal Target Apendix, which will set annual targets, in current and constant values, for revenues and expenditures, nominal and primary results, and the public debt, for the current and for the two subsequent years." Furthermore, the law determines that a few reports should be annexed to the Budgetary Law, to depict the status of public finances. Article 5 mentions the effects of the ry BudgetDirective Law on the Annual Draft Budgetary Law.
Arts. 8 and 9. Gives power to the Executive to, in case of revenues falling short than the foreseen, cut the funds destined to the Legislative and Judiciary; there was judicial appeal against this article, as some people understood it as an inconstitutional injunction of the Executive onto the other Powers.
Arts. 11 - 13. Public Revenues. States and municipalities which do not institute all the taxes allowed by the Constitution would not be entitled to receive voluntary transfers from the Federal government (many smaller cities didn´t bother to collect Predial Taxes, preferring to rely only on Federal funds). The Legislative can´t revise revenue forecasts, except in specific cases (an usual practice of the Legislative was to artificially increase budgetary revenues, opening room to include new expenditures)
Art. 14. Tax breaks. In the fight for investors, governments were offering excessive tax incentives. The law restrained such practices.
Arts. 15 - 24. Expenditures. Any government action which results in new expenditures must be preceeded by extensive analysis of budgetary and financial impacts (art. 16). Articles 18 - 20 establishes limits for personnel expenditures; different limits are imposed for the Union, States and Municipalities, as well as for the Executive, Legislative and Judiciary branches. Articles 21 - 23 establish measures to be taken in case the expenditures exceed limits, as well as penalties in case of persistant non-compliance.
Arts. 29 - 31. Debts. Article 29 defines different kinds of public debts. Article 30 gives to the President power to propose limits to public debts in all levels. Article 31 lists measures to be taken by Federative members so as to bring debts within limits; also, the article mentions penalties to be imposed to members which don´t comply.
Arts. 32 - 40. Credit Operations. Many restrictions were imposed to the credit operations of all Federation members. All requests of credit operations, by all Federative members, must be approved, as well, by the Ministry of Finances (this is in addition to the approval of the operation by the Senate, as per the Constitution). The Ministry of Finances must maintain a database, with public access, with records of internal and external public debts (art. 32, paragraph 4). Article 34 prohibited the Central Bank from issuing government securities (this ended a long lasting promiscuity between the Central Bank and the Treasury). Article 35 restricts operations among Federation members. Article 36 severely restricted, among others, operations between Federation members and state-owned financial institutions (official banks, which still exist in Brazil, can´t be used as a Treasury extension any more). Article 40 regulate collaterals.
Article 42. Outstanding commitments. It was usual for officials ending their terms in office to assume commitments which would have to be paid by the successors. The law restricted the assumption of expenditure commitments in the last two 4-month periods of the term.
Arts. 43 - 47. Management of Public Assets. Most important is article 44, which determines that capital revenues derived from the transfer of properties or rights integrating the public assets must not be used to finance current (overhead) expenditures. So, proceeds from privatization can´t be used to pay personnel, nor can be used to pay debt interests (they can be used to amortize debt principals, though).
Arts. 48 - 59. Transparency and reports. Several instruments of fiscal management transparency are created. Periodic reports must be produced and made available to public and auditing bodies. Compliance with the law (or corrective measures taken) must be outlined. All the reports are made public, the online versions can be found at the website of the Secretary of Treasury.
Arts. 60 - 75. Final provisions. A few cases were compliance with the law is excused are mentioned, including public calamity (art. 65) and economic recession (art. 66). Article 68 determines the creation of the General Social Security System Fund (to manage the pensions of the workers in the private sector). Article 69 determines that the Social Security of the public sector must operate in a contribution-based system (it´s a huge difference from the previous system, which was proceeds-based; formerly, the benefitiaries knew how much he would be paid, regardless of their contributions; now, the contributions are known, and the proceeds are unknown, dependant on the performance of the respective funds).


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