Fiscal federalism in Brazil: historical trends present controversies and future challenges

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1 1. Introduction Fiscal federalism in Brazil: historical trends present controversies and future challenges José Cezar Castanhar Brazil steps in the twenty first century as a country accounting for undeniable achievements, holding tremendous potential and facing complexes challenges. Its more than US$ 500 billions of Gross Domestic Product allow it to be ranked among the ten biggest economies of the world. With a population near 170 million of people, it is also the fifth most populated country of the world and its more than 8.5 millions of square kilometers ranks it as the fifth biggest of the world in extension. After showing the biggest GDP real growth rate among all countries in the world, between the 1870s and the 1970s 1, Brazil faced a sharp slowing in its growing pace, alternating periods of stagnation, recession, low rates of growth in most years and in some very few years an acceptable rate of growth. The most commonly accepted explanation for this change is the fiscal crisis of the public sector which the main driver of the exceptional growth after In the last ten years we are witnessing great efforts for changing the so called Brazilian Development Model, meaning that the private sector should replace the financially weakened public sector as responsible for the investments in the productive sectors and infrastructure. This would allow the country resume its growth trend. In its new model the public sector should be in charge only for the investments in the social sectors, which remains the most urgent necessity for the Brazilian society. Indeed, it is also recognized that the tremendous economic growth of more than one century was not sufficient to eliminate the deep inequalities and basic need of the majority of the population. That situation was, of course, worsened in the last twenty years as a consequence of the economic growth reduction. A crucial challenge for Brazil in the years to come is, therefore, to balance the public sector finance in order to cope with these social demands. Being a federation, an equally important challenge is to assign to which different level of government their responsibilities in that task and the corresponding financial resources to cope with it. That is not an easy challenge, since the struggle between the federal and the states and local governments to increase its share of the public sector revenues seems to be an endless one. In fact, that struggle has been deepened in the last ten years or so, following the 1988 Constitution that implemented a strong decentralization of tax revenues. Moreover, the Federal Government, that normally would resist to giving-up revenues as a natural political instinct, recently had added to its line of reasoning the necessity to maintain a strict control on the financial flows in order to ensure balanced finance for the public sector and the economic stability. To justify that sort of reasoning it is alleged that the subnational (states and local) levels of government are known to be less committed to fiscal discipline. 2 By the other hand is also known that from a managerial point of view it is recommended that the services should be, preferably, carried out more close to the constituency, that is, in a decentralized manner. 1 Serra, José e Afonso, José Roberto R, O Federalismo Fiscal à Brasileira: algumas reflexões, p. 3, mimeo, paper presented at the International Conference on Federalism, held by the Forum of Federations, Mont-Tremblant, Canadá, Outubro This bad reputation of subnational governments with respect to fiscal discipline can be explained by mixed reasons: the populism and clientelism that characterizes politics in Brazil and that is more generalized at the subnational levels, the heavily reliance on transferred revenues at the subnational levels that encourage governments to increase spending with no corresponding increasing in taxing on local taxpayers, among others.

2 The purpose of this paper is to discuss some aspects of these issues. Basically it will be argued that the changes in the Tax System introduced by the Federal Government over the last eight years, allegedly to restore its financial balance jeopardized by the 1988 Constitution and to ensure macroeconomics stability, brought mostly negative consequences to the Federate equilibrium, either by concentrating revenue at the Federal Government, or by imposing political and administrative constraints over the subnational governments. Additionally, it will be suggested that the indisputable priority assigned to the fiscal balance, established by the agreement with the International Monetary Fund, forced the Federal Government to raise taxes and create new ones, increasing the tax burden and deteriorating the quality of the tax system. It also will be suggested that massive increases of revenue obtained by the Federal Government with these actions it is not helping to meet the urgent social demands of the Brazilian most underprivileged population. The paper is organized as follows. Section II presents a historical background of the evolution of the Brazilian Federation. Section III discuss some present controversial issues related to tax revenue distribution and responsibilities assignment for the different levels of government and Section IV will outline some themes that constitutes challenges for politicians and public managers for the years to come and some suggestions of changes and the current path will be made. 2. The Brazilian Federation: historical background Presently a republic with 3 levels of government (the Central Federal Government-, the intermediary 27 states and one Federal District and a Local Government more tha municipalities) the Brazilian Federation was created along with the Republic back in Differently from other known republican experiences, the Brazilian Federation was not a result of conviction of the people in general, but rather decided at the highest levels of authority to divide the unitary State that prevailed during the Imperial Regime. According to Serra and Afonso, the Federal Regime was convenient mainly to the most developed provinces of the South and Southeast, specially São Paulo, where the new exporting sector (of agricultural products at that time) was located. The goal of these provinces was, then, to obtain revenues by imposing local taxes on its export proceedings. In exchange, the less developed regions were granted political representation more than proportional to its population. 3 Many of the changes in the process of evolution of the Brazilian Federation, as well as some distortions that still remains, may be traced back to the way it began. Thus, the Tax System adopted by the newly created Federal Republic was inherited from the Imperial Regime. Naturally, the main changes introduced were to ensure that the States would have some financial autonomy. So, it was adopted the regime of separation of tax revenues for the different levels of government. The tax on imports was kept as exclusively source of revenue for the Central Government and the States were entitled to tax the proceedings of exports, plus taxes on rural and urban estates and tax on industries and professions (a primitive form of tax on goods and services). As for the Municipalities (Local Governments), the Republican Constitution provided that the States would be in charge of establishing specific taxes, so that to ensure their financial autonomy. At the beginning of the Federation, therefore, the Local Government was the weak link of the chain, 3 Serra, José e Afonso, José Roberto R, O Federalismo Fiscal à Brasileira: algumas reflexões, pp. 3-6, mimeo, paper presented at the International Conference on Federalism, held by the Forum of Federations, Mont-Tremblant, Canadá, Outubro

3 depending heavily on the State Governments. 4 Despite the creation of a excise tax on tobacco in the late nineteen century, a sales tax in 1922, and a primitive form of Income Tax in 1924, the tax system would depend heavily upon taxes charged on foreign trade. For instance, in 1934 as much as 50% of the Central Government tax revenues would come from the Import Tax and 40% of the States tax revenues proceeded from the tax on Imports. The first attempt to modernize the system occurred in 1934, embodied in the new Constitution. The State Governments were no longer allowed to charge tax on interstate transactions, and a new tax on sales was created, to be charged by the States. To the Local Governments were assigned the revenues proceedings from the taxes on Rural and Urban Estates, as well as taxes on local services and permits. An important innovation adopted then was the principle of partition of tax revenues. The Constitution provided that some taxes would be collected by the States Governments and its revenue shared by the Central and Local Governments. Despite the commendable intention, this provisions were of little or no practical result at that time. It is worth to mention that all along the initial period of the Brazilian Federation, the functions and responsibilities of the different levels of government remained basically unaltered. It can be partially explained by the fact that until the fifties Brazil was mainly a rural country, with a low percentage of the population living in urban areas. Therefore, the demand for public services was incipient. Thus, in addition to the traditional government functions of defense, justice and public administration, the only important public service provided by government at that time was Education, that was a responsibility shared by the Federal Government (College Education), States (Secondary Education) and Municipalities (Primary Education). In 1937 the constitutional government of Getúlio Vargas was turned into a dictatorship that lasted for 8 years. During this regime a significant amount of centralization was introduced, characterized mainly by the loss of power of the State Governments 5. Another significant change on the prevailing Tax System took place in this period. The effects of the World War II on international trade, affected heavily the revenues obtained from the taxes charged on these transactions, and forced the different levels of government to rely increasingly on taxes incident on domestic transactions. Therefore, by 1946 approximately 2/3 of the Central Government tax revenues were originated from a wholesale tax and from the income tax. From the State Governments side, the proceedings from the retail sales tax comprised at that time, 60% of the tax revenues. As for the local governments, around 70% of the total tax revenues were obtained from the Urban and Rural Estates Taxes, and the Tax on Industry and Professions. The year of 1946 represent the beginning of a new stage in the Brazilian Federation evolution as well to its Tax System. In the year before the Vargas Dictatorship had ended, a new congress was elected to vote a democratic constitution and a president was democratically elected again after 15 years. Although the new constitution did not introduce radical changes on the Tax System, it promoted significant efforts of decentralization, giving to the State Governments and mainly to the Local Governments more autonomy as well as sources of revenue. It also institutionalized a mechanism of tax revenue sharing among the different levels of government. Nonetheless, conjuncture and administrative 4 Most of this section is based on Varsano, Ricardo, A Evolu;ção do Sistema Tributário Brasileiro ao Longo do Século: anotações e reflexòes para futuras reformas, mimeo, Working Paper n. 405, IPEA (Institute of Applied Economics of the Planning and Budget Ministry), Rio de Janeiro, 1996, pp To give an Idea of the loss of political and administrative power of that level of government, is worth to mention that all along this period, the state governors were no longer elected, but appointed by the Federal Government, and the State Legislatives were closed. 3

4 aspects, such as the growing inflation rate at that period and the delay in transfer the financial proceedings, especially between States and Local Governments, turned that mechanism ineffective in practice. The efforts to industrialize the country carried out in the 1950s demanded significant amount of investment by the Federal Government, which raised the tax burden from 8% of de GDP in the 1940s to 13% in the beginning of the 1960s. At that time the existing Tax System showed unable to match the finance demands of the Government which resulted in a growing public deficit that peaked 4% of de GDP. The lack of adequate mechanisms for financing this deficit forced the Government to increase the money supply to finance its defict, thus increasing inflation, which ultimately led to a slowing in the pace of economic growth and to a further deterioration of the Public Finance. At that time there was a consensus on the urgent need of a Reform of Tax System, as well as a modernization of the Fiscal Administration Bureau. The deterioration of the economic conditions was followed by a political turmoil that ended up on a military coup that deposed Constitutional president João Goulart and gave birth to a military regime that last for 20 years. One of the first measures of the Military Government was to implement a broad Tax Reform, that created, for the first time in Brazil, what could really be called a Tax System and not just a stack of taxes and revenue sources as occurred since the beginning of the Republic. 6 That Reform can be roughly summarized by the following aspects: 1) the introduction of Value Added Taxes, both at the Federal and the State Governments, replacing old and inefficient cumulative taxes; 2) the adoption of a consistent and reliable system of intergovernmental financial transfers, that, for the first time, really worked (the main innovation was that the flow of the resources were automatic and regular); 3) the drastic limitation of the ability of the State and Local Governments to impose new taxes; 4) a radical centralization of revenue at the Federal Government that would responsible for the collection of 75% of the Tax Revenues and would dispose of 67% of that revenues. As a result of these changes and of the strict political control carried out by the military governments, the Tax Revenue increased sharply, reaching 25% of the GDP in the mid 70s. That increase on revenues allowed the military regime to balance the public budget and to finance an ambitious program of public investment that surged the economic growth rate, producing what was called at that time the Brazilian Economic Miracle. The emergence of a new economic crisis (oil crisis, external debt crisis) in the beginning of the 80s, on one hand, and the pressure for democratization, on the other hand, interfered in the results of the Tax System created in 1965, in two ways: the slowing pace of the economic growth and the resurgent of the inflation decreased the Tax Revenue and the political demands of the State and Local Governments forced the Federal Government to increase the share of these two levels of government in the total Tax Revenue. These mobilizations culminated in the complete democratization of the country in 1985 and the voting of a new Constitution in 1988, which radically changes the trend established in The changes introduced by the new constitutional in the Tax System and on the balance of the Federation forces will be discussed in the next section, since the main controversies about the present status and future trends of the Fiscal Federalism in Brazil usually is traced back to the 1988 Constitution. 6 Varsano (1996), op. Cit. pp

5 To summarize that long historical road of the Fiscal Federalism in Brazil, is sufficient to underline three aspects: 1) the gradual shift from a system based on Taxes dependent of Foreign Trade to one entirely dependent on domestic transactions; 2) the gradual introduction and improvement of a System of Financial Transfers between the different levels of government; 3) cyclical movements of centralization and decentralization referred to the amount of financial resources shared by each level of government as well as the autonomy of each level to define their own taxes; these cycles can be summarized as follows: 7 post 1891: first Republican Constitution = decentralization post 1936: Vargas dictatorship = centralization post 1946: Democratic Constitution = decentralization post 1964: Military regime = centralization post 1988 : Back to democracy = decentralization 3. The last decade and the present: some facts and some controversies. The Constitution promulgated in 1988, caused important consequences to the Brazilian Fiscal Federalism. At first, and as reaction of the dictatorial period, it produced a significant decentralization of revenue and political power towards the subnational governments, in detriment of the Federal Government. In a second moment, the Federal Government fights to recover its share of the Tax Revenue and increase its political power, limiting the room of subnational governments in Fiscal matters. As a consequence, the Fiscal Federalism autonomy, intended by the 1988 Constitution, is significantly damaged. The following subsections will discuss the ways that these three movements took place, and its consequences for the Fiscal Federalism and the very process of setting political and economic priorities in Brazil. 3.1 The 1988 Constitution and the Decentralization drive As mentioned in the previous section the changes introduced in the Fiscal Federalism domain by the 1988 Constitution radically altered the Fiscal Federalist model adopted in the 60s by the military regime, although little change was introduced on the design of the Tax System itself. The share of the Federal Government in the Tax Revenues sharply decreased, benefiting mainly the Local Governments, since the share of the States in the total Tax Revenue remained practically unaltered. At the same time the autonomy for States and Municipalities to impose new taxes or change the percentage of the existing ones were increased. The political drive for decentralization and for support for the local governments was so strong at that time that the Municipalities were granted the status of Federated entities, what is not so usual in the Federal regimes. Unlike other federal constitutions, which typically define municipal governments as creatures of their respective states, the 1988 Constitution establishes municipal government as a third tier of government with a Constitutional status equal to the States. States therefore cannot compel or 7 Rezende, Fernando and Afonso, José Roberto R., Fiscal Federalism: The Brazilian Case, mimeo, paper presented to the Federalis Workshop, Stanford University, April/

6 prohibit actions by the municipalities within their jurisdictions. 8 The strengthening of the financial capabilities of State and Local governments were ensured by the creation of new taxes, the raising of the rates of existing ones and the increasing of the share of Federal collected taxes that were transferred to State and Local Governments. 9 Table I shows that the Tax Revenues collected directly by the Federal Government was dropping since the beginning of the eighties, following the process of gradual democratization of the country, decreasing from a peak of 74,7% of the total Tax Revenue in 1980 to 71,7% in The decrease was even more intense when the disposable revenue is considered. 10 In this case the share of the Federal Government dropped from a peak of 68,2% in 1980 to 60,1% in Of course, the participation of State and Local Governments increased significantly in this period, either in the proceeds of taxes direct collected as in the disposable revenues. Accentuating the existing trend, the 1988 Constitution took the decentralization a step further. Three years after its promulgation, when the fiscal effects of the decentralization of revenues were completed, the participation of the Federal Government dropped from 71,7% to 63,4% in the Tax Revenues directed collected, and from 60,1% to 54,6% in the disposable revenues. As a consequence, either the amount of tax revenues collected by the States and Local Governments, as the revenues disposable to these levels of governments were proportionally increased, as shown in Table I. The proceeds of tax direct collected rose from 25,6% to 31,2% for the State Governments, and from 2,7% to 5,4% in the case of Local Governments. Considering the disposable revenues, the share of State Governments rose from 26,6% to 29,6%, and from 13,3% to 15,7% for the Local Governments (municipalities). It is important to note that the decrease of the Central Government in the total amount of Tax Revenues were only a relative one. In absolute terms the share of the Central Government increased between 1988 and 1991, as a result of the an increase in the Tax Burden that rose from 22,4% to 25,2% of the GDP in that period. In fact, the disposable revenue for the Federal Government rose, in that period, from 13,46% to 13,76% of the GDP. Considering that the GDP had a real growth in the period, it is easy to see that the Federal Government tax revenue increased in absolute terms. Also, it is important to note that the figure of the tax burden for the year of 1990 is distorted by the so-called Collor Plan, adopted by former president Fernando Collor, that imposed a compulsory extending of terms of the Federal Debt (up to 36 month) and adopted an index to correct the principal that was fixed bellow the inflation of that period, imposing, also, an implicit discount in the total debt. These measures accounted for an extra revenue of more than 3% of the GDP, most of it, benefiting the Federal Government. It is important to bear in mind that the decentralization drive fostered by the 1988 Constitution emerged from two different kinds of considerations. One of them was a political one, brought about by the democratization process. The decentralization was considered as a natural reaction to the twenty years of authoritarian regime and to the centralization of powers and financial resources at the federal level, that it supported. In this way, decentralization of political and financial powers and the strengthening of 8 World Bank Report, Brazil Issues in Fiscal Federalism, mimeo, Document of the World Bank, Washington, May To ilustrate the magnitude of these changes is worth to mention that the part of the two main Federal Taxes (the Income Tax and the Federal VAT) that were transfer to States and Local Governments raised from 18% of these Tax Revenues in 1980 to 44% in If we add other shares that are transfer to Regional Constitutional Funds (North and Northwest Regions) that amount reaches 57%. 10 Disposable revenue is the amount that is available to each level of government, after consideration of intergovernmental financial transfers 6

7 the Federation, was considered a institutional and political framework more consistent with the new democratic times. The other consideration was a administrative one, and reflected the growing concern with the lack of efficiency of the government in providing goods and services to the population. It was considered, that one of the reasons of the low efficiency of the public services was the long journey that the money and the services (health, education, urban infrastructure, etc.) had to travel to reach the beneficiaries. So, it was supposed to be more natural and lead to more efficiency, if most of the public services were produced and delivery at the level more close to the consumer : the state level, and, more properly, the local level. Of course that, for this to work, was necessary a gradual process of devolution of responsibilities from the federal government to the states and municipalities, what in the end, haven t happened, for a number of reasons: the lack of political will, the gradual and continue loss of planning and managerial capacity at all levels of governing that would make these reframing of the public sector more difficult, and so on. At this point, the Federal Government got the worse of the worlds: had to live with a smaller piece of the revenue pie and kept its responsibilities with provision of public services. All this in a time that a severe fiscal crisis was growing in threatening the public sector, with its origins in the decrease of the rates of growth of country s GDP, which ironically increased the demand for public services (unemployment insurance, social assistance, etc.). The perspective of growing difficulties in balancing the Federal Government budget, and the political and administrative difficulties in transferring responsibilities to the States and Municipalities, helped the Federal Government to gain political support to inflect the decentralization drive established by the 1988 Constitution. As a first step, the Federal Government coped with the problem by discontinuing or decreasing the quality of the public services within its responsibilities. As a second step, measures to reinforce the tax revenue of the Federal Government and to restore its political influence in the Federation were put in place. These measures will be discussed in the following subsections. 3.2 The Federal Government strikes back Soon after the approval of the Constitution the critics to the tax revenue sharing system that it implemented, began. As mentioned above, the main line of reasoning was that the Federal Government had its Financial capability endangered with the drastic reduction of revenue and that because the State and Local Governments were not assigned corresponding duties along with the new Tax Revenues that they would be entitled. That problem was worsened by the fact that in some areas such as health care and education, social security and welfare, agriculture and food distribution, sanitation and housing, public safety, public transport, environment control and others, there is not a clear division of responsibilities among different government levels, often leading to overlap of spending across different levels of government. 11 To cope with that lack of Tax Revenue, the Federal Government acted in two ways: increasing the tax burden creating new cumulative taxes or raising the rate of the existing ones, choosing taxes that were not supposed to be shared with other levels of government, and by provisionally reverting the increase of the Tax Revenue Share of State and Local Governments through the approval of Constitutional 11 According to Afonso, José Roberto R and Mello, Luiz de, Brazil: Na Evolving Federation, mimeo, paper presented at the IMF/FAD Seminar on decentralization, held in Washington, DC, on November

8 amendments. As a result it can be observed a drastic increase in the tax burden and that an increasingly greater portion of these new Revenues were collected and kept by the Federal Government. As shown in table I, above, the tax burden was raised from 22,4% to 25,2% of the GDP from 1988 to 1991, and raised again, from 25,2% to 34,1% of the GDP from 1991 to This second wave of increase in the tax burden was mainly to restore the financial capability of the Federal Government. Still in Table I is shown that the share of disposable revenues for the Federal Government rose from is 54,6% low in 1991 to almost 57% in the recent years. It is important to note that the Federal Government recovered a significant part of a much greater revenue pie, meaning that, in absolute terms, it regained a substantial financial strength over the last decade, offsetting much of the effects intended by the 1988 Constitution. Table II shows the increasingly importance of the so-called Contributions (turnover taxes, net profit tax and financial transaction tax) in the total tax revenue of the Federal Government. The change in composition of the disposable revenues of the Federal Government along the period considered is impressive. From less than 10% of the total disposable revenue, at the beginning of the period, the participation of the Contributions rose to more than one third, in the year It is important to highlight these figures for two reasons: first, these kind of taxes are the ones that are not shared by the other levels of government; second, they are cumulative taxes, and therefore, tend to worsen the quality of the Tax System. These issues will be resumed in the following sections. 3.3 The set back in the Fiscal Federalist autonomy The evidences gathered in the previous sub-section showed that in less than five years the Federal Government was able not only to recover a significant part of the revenue share lost with the 1988 Constitution, but also to increase its total revenue, by persistently increasing the tax burden. Beyond the changes in the Tax System and in the Revenue Share system introduced after the Constitution promulgation, a whole new set of changes, institutional and political, were put in place after 1995 that would significantly affect the Fiscal autonomy that Constitution aimed to the subnational government levels. Underneath the impulse to restore some kind of hierarchy on the Federation, with the Federal Government bearing more authority than the other Federation levels, was a belief (or a ideology) widely supported by analysts and economists (international and domestics) sustaining that: 1) the State and Local Governments area traditionally bad managers of public resources and are easily seduced by spending it s revenues in non priority programs; 2) these governments are also reluctant to commit themselves with fiscal discipline and, therefore if not forced to that discipline they could jeopardize the gigantic effort of the Federal Government to achieve and sustain economic stability. In the remaining of this section we will be presenting the measures adopted by the Federal Government that restored the hierarchical authority of the Federal Government over the subnational levels, and in the following sections we will be discussing the validity of the two assumptions presented above. One of these measures was the reestablishment of the so-called non Constitutional (or discretionary) intergovernmental financial transfers. As mentioned above, the proceeds of the Contributions collected by the Federal Government are subject to mandatory sharing among the other levels of governments, as are, for instance, the proceeds from the Income Tax and the Federal VAT. Nevertheless, some of these proceeds may be shared with States and Municipalities. The difference is that instead of the sharing system be mandatory and established by the Constitution, it is negotiated in a case by case basis between the Federal Government and the Subnational governments. The bulk of the transferring of these resources are, usually, subject to the signing of an agreement among the Federal and the other 8

9 level of Government and are subject to strict follow up and control, otherwise they can be discontinued. Also, the resources are usually earmarked to specific applications (health and education, mostly). Therefore, the system allow for the Federal Government to restore a coordination role and to influence on the subnational governments priorities, since the transferring of resources are usually attached to a proportional spending of their own budget resources, from the subnational government s part. Table III shows the increasingly importance that this kind of resources are assuming to the subnational governments, especially the municipalities. As shown in Table III, those discretionary transfers added, since 1999, more than 1% of the total tax revenues for the State Governments, increasing the revenues of States in around 5%. As for the Municipalities, the resources from this source are even more important, transferring to this level of government more than 1,5% of the total tax revenues, meaning and addition of more than 20%, in the average of the period to the Local Governments revenues. At this point it must be said that, although the mechanism of discretionary and earmarked transfers may, in fact, increase the rationality of public sector spending, to the extent that it allows for a more tight coordination of resource spending and for an alignment of priorities among the different levels of government, it means also a lost of autonomy for the subnational governments, especially for the municipalities, that show already a significant dependency on these resources. Another step towards the reduction of the subnational governments autonomy was took when the Federal Government used the necessity of the State Governments and some municipalities to refund their Debts. Along the nineties the Federal Government sponsored two partial renegotiations of the State Government and Municipalities debt. In 1989 the Federal Government assumed states and municipalities foreign debt and refinanced it to these units (the subnational governments exchanged a debt in foreign currencies for a debt in local currency with the federal government). A second round of negotiation resulted, in 1993, in the rescheduling of the debt contracted with federal institutions. 12 At the middle of the decade another part of the subnational borrowings had soared and threatened the fiscal balance of states and municipalities: the debt in bonds with the private financial sector. Bonds accounted, in 1996, for about 30% of total debt not yet refinanced by the Federal Government, which had reached an amount over US$ 100 billions. 13 Table IV shows that the State Debt in Bonds, as percentage of GDP, more than doubled between 1990 and 1996, and that more than 90% of it were concentrated in the four biggest states of the Country. It is interesting to note that along the period expressed in Table IV, the access of subnational governments to new debt in the bonds private markets was almost completely restricted, either by regulations or by credit risk assessment. So, the growing of the debt outstanding was due, almost totally, by the capitalization of very high rates of interest along the period. Table V shows the interest rates, in real terms, of that period and the growth of Debt in Bonds, and they are almost entirely coincident. It is also interesting to note that the extremely high rates were the result of a tight monetary policy adopted by the federal government, at the beginning of the period as an attempt to fight the high inflation rates, and after 1994, also as a deliberate economic policy designed to attract foreign capital and sustain the Real Plan. Ironically, than, in this case, as will be in others that we will discuss later, the States and Municipalities had their financial situation endangered, not necessarily by inefficient or irresponsible management, but as consequence of an option of macroeconomic policy that they could 12 See Mônica Mora & Ricardo Varsano, Fiscal Decentralization and Subnational Fiscal Autonomy in Brazil: some facts of the nineties, IPEA, mimeo, pp. 18/20, Rio de Janeiro, December, Ibid., pp

10 not control, nor interfere. Ironically or not, this time the solution proposed by the Federal Government, inspired by IMF practices, was a conditional bailout. The major part of the state debt not yet rescheduled was refinanced in the context of an agreement The Fiscal and Financial Restructuring Program that presumed a rigorous long term fiscal adjustment, privatization of state and municipal owned companies (energy, gas, transportation, water supply, etc.) and the sale (privatization) or liquidation of the state official bank, which, no doubt about it, had been misused and had been the source of many fiscal irresponsibly. 14 To ensure that the deal would be, this time, true to the commitments of the Restructuring Program, the deal was collateralized by the proceeds of States and Municipalities in the Participation Funds (States and Municipal) and if that was not sufficient, the Union could retain the proceeds of the States and Municipalities own tax revenues. Obviously the Financial Restructuring Program represents an interference of the Federal Government on the Administration of subnational governments, although it should be concede as a positive one. Furthermore, the sort of constrains and control that the Federal Government acquired over the subnational governments represent a permanent tension to the Federalist harmony, so to speak. The attempt of the Union to execute those collaterals could provoke a reaction of governor or mayors on the basis of the Federalist autonomy. Recently the Restructuring Program faced this test, when the governor of Rio de Janeiro, Rosinha Garotinho, appealed to the Brazilian Supreme Court when the State defaulted the payment of part of its debt service and the Federal Government called the collateral represented by part of the proceed of the State VAT. Initially the Supreme Court granted the State an Order that prevented the Union from taking the State Tax Revenue, on the basis that it could be provoke and irremediable damage to the citizens of the State. Further, the Court ruled favorable to the Union, in a way giving a constitutional status to the Restructuring Program. This episode, despite the way it ended, is very representative of the legal and political tensions that the Federal regime is exposed presently in Brazil. Paradoxically, according to Mora & Varsano, although the Restructuring Program had, certainly, harmed the Fiscal Federalist autonomy, it had also consolidate the decentralization intended by the 1988 Constitution. This is so because, if the Restructuring Program had not existed, the financial situation of the states would be explosive and the states would be bankrupted and with their administration in a chaotic situation. Thus, the loss of the some fiscal and administrative autonomy, allowed on the other hand, the states to restore their financial health and to play their role in the federalist system with more effectiveness and legitimacy. 15 For many Public Finance analysts, the Fiscal and Restructuring Program marked a change in the nature of intergovernmental fiscal relations. The simple limitation imposed on subnational borrowing was replaced by a comprehensive monitoring of fiscal and financial accounts, which intends to prevent excessive borrowing and, thus, financial crisis. This new approach was strengthened by the enactment, in 2000, of the Fiscal Responsibility Law (FRL). 16 If the Financial Restructuring Program was inspired on IMF practices, the FRL on the other hand, was explicitly suggested by the IMF on the agreement signed between the Fund and the Brazilian Government in 1999, in the crisis that preceded and followed the devaluation of the Real (the Brazilian currency). The Law was voted and enacted, a little more than one year after the signing of the Agreement. The Law is very broad and complex, encompassing many public finance aspects. Only of its points are mentioned here. 14 Ibid, pp Ibid, p Complementary Law 101, of the 4th of May of

11 FRL determines, to ensure fiscal sustainability, that any new permanent expenditure those that will exist for more than two fiscal years must be attached to a new permanent source of financing a new tax or the increase in the rate of tax, for instance. The law establishes, in an attempt to improve efficiency of the public sector, limits to personnel expenditures, which shall not exceed 50% of net current revenue, in the case of the Union, and 60% in that of states and municipalities. In addition, the law established limits to expenses with legislative and judiciary personnel. The legal dispositions are an important instrument for the executive branch, which has no power to limit the expenditures of other branches. Requirements for contracting new credit operations are stringent, working as an obstacle to borrowing. Furthermore, credit operations between federation entities, to finance current expenditures or refinance standing debt, are forbidden. This means that new bailouts are ruled out. The essentials of the FRL seems to be the basics of any good and financially sound administration. It could be said that its not surprising that it was adopted, but that it was adopted earlier. Or, that it should no be necessary, since it encompass rules of management and behavior that any efficient and responsible public manager should abide. Also, as Mora and Varsano point out, it also contributes to the solidification of the decentralization process, insofar as it prevents irresponsible fiscal and financial management. 17 Nevertheless, all these benefits have some costs. One of them is that, being conceived from the Union point of view, and lacking a major concern with federalism harmony, it is characterized by symmetry. The constraints that it establishes are the same for all states and municipalities, no matter what their size, population, level of income, initial situation, and so on. A Law that had the concern with equilibrium and equality in the Federal System, should had looked to differentiate among different states and municipalities, as long as the core philosophy, namely, responsible fiscal and financial management be accomplished. Being a Law inspired entirely by an economic view of the administrative process (fiscal responsibility, balanced budget and so on), it lacks a concern with the quality of the administration and services rendered to the public. According to the Law, a State Governor that spends less than 50% of the net revenue with personnel is efficient and other that spends more than it (say, 52%) is inefficient and can be punished, based on the Law. Not necessarily, however, the services produced by the first governor meet the necessity or the quality demanded by the public. The reverse can be said about the other governor. The FRL had not created performance, or impact indicators to help to form a better judgment on the success of the administration. Finally, the FRL, as the other measures discussed earlier in these subsection imposes further reduction in the degree of fiscal autonomy of subnational governments. 3.4 Fiscal Responsibility: who has it and for what? As mentioned before, the recent drive for centralization and control over the subnational governments are usually justified on the ground of the bad reputation of these levels of governments as managers. According to these line of reasoning the subnational governments, due to a tradition of clientelistic politics and lack of a commitment to national goals, such as economic stability, tend to waste the public money and not to show commitment with fiscal discipline. Let s confront these arguments with some practical evidence, assembled in Table VI. 17 Mônica Mora & Ricardo Varsano, op. cit. pp

12 At first, should be noted that public spending has a correspondence with goods and services for the society. Then, one important question should be: which kind of public expenditure each level of government is responsible for, and how important are these expenditures for the public. Table VI, presented above, shows for the 1991/1998 period the break down of public spending in the major nonfinancial items. It shows that, in absolute terms (as a percentage of GDP), the Federal Government increased modestly its spending in payroll and significantly in Social Security and Assistance and reduced its spending in investment and consumption. The State Governments spending remained practically unaltered in Payroll, increased in Consumption and Social Security and Assistance and decreased in Investment. The local governments, by its turn, showed an increase in all items, but Social Security and Assistance. In relative terms, considering the share of each level of government in the total spending of each specific item (lower part of Table VI), it can be seen that the Federal Government reduced its share of spending sharply in Consumption and Investment and remained unchanged in Payroll. The spending in Social Security and Assistance, on the other hand, increased its share in the total spending of the item. The State Governments, by it s turn, increased it s share of spending in consumption and Social Security and Assistance and sharply reduced it s participation in Payroll and Investment. The Local Governments increased it s share in all items but Social Security and Assistance. The data displayed also confirm that the State and Local Governments are responsible for the majority of the spending in Payroll, Consumption and Investment, and the Federal Government plays the major role in Social Security and Assistance. Two considerations can be drawn from these data. First, although the State Governments are constantly charged of being overstaffed, they were the only level that had a decrease in these item, in absolute and relative terms. Second, it s important to note that spending in payroll in this case, usually means to ensure the providing of important social services like education, public security and health mainly. Moreover, the investments associated with State and Local Governments are also associated with those programs and more: sanitation, public transport, professional training, infrastructure, among others. Table VII give more detailed information on how the public expenditures are assigned among different public functions and services. The data showed leave no doubt that the performing of the most important public functions, such as Education, Health and Sanitation, Housing and Urbanism and Public Security, are heavily dependent on the subnational governments. In all these items, but Health and Sanitation, they are responsible for more than 80% of the total spending, and for Health and Sanitation, they account for 55% of the total spending. When considered the percentage of each function on the total spending of each level of government, it s clear the overwhelming importance of Social Insurance and Social Assistance in the total spending of the Federal Government, accounting for more than 50%. For the State Governments, the most prominent item is Education, representing 18,5%, followed by Social Insurance and Social Assistance, Health and Sanitation and Public Security, with percentages ranging from 7,8% to 13,3% in these items. As for the Municipal Governments, the spending with Education, Health and Sanitation alone, account for almost 50% of the total, followed by Housing and Urbanism and Social Insurance and Social Assistance It should be noted that the items included in Table VII would not sum up 100%. This is due to the exclusion of the function Administration and Planning that have not a clear definition and can include expenditures that would be better classified along the other items. This function is particularly important for the State Governments, where it accounts for about one third of total expenditures for this level. This function accounts for 16% of municipal and 4% of the federal total expenditures (see Mora and Ricardo Varsano, op. cit. pp. 4.) 12

13 The data discussed above reinforces the notion that State and Local Governments play a major role in the implementation of the most important Public Policies, especially those that can have impact on the underprivileged portion of the population. Also, they did not confirm the assumption that subnational governments are prone to excessive and unnecessary spending (the State Governments were the only level in which the payroll spending decreased along the nineties). Therefore, the continuing trend to withdraw financial resources from State and Local Governments and transfer it back to Federal Government could increase the shortage of important public services, in a moment that it s demand is growing and is essential to attenuate the impoverishment brought about with the succession of economic crisis in the last 6 years. Let s now consider the assumed lack of commitment of States and Local Governments to adhere to fiscal discipline and contribute to macroeconomics stabilization. Table VIII have some data on the budget performance of the State and Local Governments over the last 9 years (it is important to note that the Stabilization Program - known as the Plan Real - started in mid 1994 and the signature of the Agreement between Brazil and IMF was at the end of 1997). It can be clearly seen that these levels of government, despite the responsibilities in carrying out important public programs in a growing proportion and despite the burden of a significant debt whose service is charged strictly by the Federal Government, are showing consistently budgets surpluses in the last four years, thus clearly contributing for the budget surplus agreed with the IMF. Even before 1999, the year in which the Agreement with the IMF was renewed and more rigorous Fiscal Goals were imposed, the performance of States and Municipalities could not be characterized as a lost of control, since in any year the deficit exceeded 0,8% of GDP, and is most cases was bellow 0,5% of GDP. Also, should be noted that, although before the Fiscal Responsibility Law the performance of states and municipalities were different among them, with some states (like São Paulo, Ceará and Bahia, showing very disciplined budgets, and other performing not so good, as Rio de Janeiro and Minas Gerais), after the enactment of the Fiscal Responsibility Law, all states and the majority of the municipalities are showing budget primary surplus, since the Law has a provision that forces the subnational governments to commit with primary surpluses. One final question should be posed at this moment. If the Tax Burden was increased significantly in the recent years, if by the other hand the Federal Government reduced its participation on the providing of the public goods and services, where the money went to? The last table presented give a clue to answer that question. Table IX shows that all the fiscal effort and discipline to produce growing budget primary surpluses are consumed with the payment of interests. From that table can be seen that not only the burden derived from the interest payments is abnormally high (in the best year it counted for 17% of all the Tax Revenues), but it is worsening in the recent years, coinciding with the Asia Crisis and deepened with the Russian crisis, and presents a high volatility that certainly can harm the ability of the public sector of planning and establishing and pursuing strategic priorities. The actual situation is even worse than that showed in Table IX. The reason is, since the devaluation of the Real in 1999, the part of the Federal Debt indexed to the dollar had increased substantially, from less than 15% of the total debt to almost 40% of it, presently. So, the total cost with this kind of debt is the sum of interest paid plus the change in the nominal value, that almost doubled in the last two years. The figures showed above represents only the interests paid and not include the increase in the 13

14 Principal Amount. If that cost is added, the total expenditure can be increased in almost 50% in 1999, 2001 and 2002, the years in which the Real had a bulk devaluation. That means that in those years, more than 10% of the GDP (or almost one third of the total Tax Burden) was used to service the public debt, most of it under the responsibility of the Federal Government. So, a tremendous effort to achieve and sustain fiscal discipline, in all levels of government, is being consumed in paying interests, instead of investing in the urgent needs of social services, compensatory policies to face the inequalities and in modernizing and expand the country s infrastructure in order to reduce its production costs, improve economic growth and increase the competitiveness of Brazilian products in a global economy. Quite the contrary, when the present macroeconomic policy deliberately opt for not interfere with the speculative domestic and foreign capital, it allows the Brazilian currency to float and devaluate wildly, as in the past four years. Inevitably, the devaluation of the exchange rates presses the inflation rates domestically and the governments responds to the threat of the return of inflation by the book : raising still more the interest rates (in the last 5 month the interest paid by the Federal Government increase from 18% pa. To 26,5% pa. To keep the fiscal discipline and the compromises with the IMF agreement no other alternative is left but to increase the Tax Burden, with the kind of taxes that are not shared with the subnational governments, that means the worse kind, the cumulative Contributions. So, the economy looses competitiveness, turning more difficult to increase exports and reduce the foreign dependency, on the one hand, and threatening the economic growth and aggravating the social problems, on the other. In the next and final section we will take a look in the challenges ahead and discuss which alternatives can be considered. 4. Final remarks: the challenges ahead. As mentioned in the introduction of this paper, in the name of an undisputed priority of achieving fiscal discipline, the Brazilian Tax System and the fiscal and political relations of the Brazilian Federation have deteriorated in the recent years. As a consequence we had, today, a Tax System that produces a high tax burden, in which abound cumulative taxes that threat the competitiveness of the economy and jeopardize its ability to grow. Furthermore, in pursuing this Graal of the Fiscal Discipline the Federal Government had not hesitated in the adoption of measures that in some extent harms the autonomy of the Federation members. The outcomes of the recent years of Brazilian Economy makes one wonders about the effectiveness of such policy. The economy remains unstable, practically hostage of the international turbulence. One good example of that weakness occurred in the last two years. All the forecasts for the year 2001 were positives and the analysts at last foresaw a good year for the Brazilian Economy, almost as prize for five years of good behavior on the fiscal field. Nonetheless, the sole expectation of problems with the flow of foreign investment to Argentina, changed radically the economic environment in Brazil, the Foreign Exchange Rate soared, the forecasts of inflation became threatening and the whole scenario changed from positive to negative in less than one semester. On top of that the revelation that the country was facing the possibility of a sharp energy shortage contributed to worsen that scenario. The irony here is that the recognition by the Federal Government itself that the energy crisis resulted from the reduction on investment of the Federal Electricity Companies, due to the rigid fiscal goals 14

15 established by the agreement with the IMF. In the last year, once again after a mild beginning, the alleged fear of international investor about the possibility of a left candidate was elected for president triggered another wave of turbulence, that cut the foreign loans to the country, forced it to sign an emergency with the IMF, extending the primary surplus goals for two years ahead the government that took office this year and forcing all candidates to publicly endorse the agreement (and so limiting their choices of economic policies). Despite all these efforts, the Real devaluated wildly, the inflation soared and so the interest rates and the expenditure with interests, forcing the new government to announce an increase in the primary surplus goals. On such an environment the argument that the interests of the State and Local Governments should be submitted to the Federal Government interests, in a almost hierarchical manner, its arguable, to say the least. Undoubtedly, there are substantive issues concerned either the design of the Brazilian Tax System, and the characteristics of our Fiscal Federalism that has to be consistently discussed. The role of the State Governments, the shape and nature of the Intergovernmental Financial Transfer system are only a sample of these matters. For instance, a recent study of the World Bank criticizes the ambiguities of our Federation System. It is reminded that, although the Brazilian Constitution determines which activities should be performed or regulated exclusively by the Union and by the municipalities, the States may carry out all those functions that are not interdicted to them by the Constitution. As a consequence, several activities are executed concurrently by the three levels of government, potentially leading to inefficiency and waste of public financial resources. 19 Therefore, a long postponed discussion of the attributions and responsibilities of each level of government is an urgent and preliminary task. The present discussion and critics of State Governors and Mayors of important cities about the financial squeeze that they are submitted, and the beginning of a new administration, allegedly more open to the political dialogue, could be the ideal opportunity to resume and solve that challenge. Also, as reminded in the World Bank study, the amount of constitutional transfers for the municipalities can be considered excessive, in comparison with international standards. Moreover, considering that these resources are mostly free to be used in any function (with exceptions of mandatory minimum spending in education and health). That system can lead to three negative effects: tend to blur the accountability of the local governments, since they are not collecting taxes from their local constituencies, they tend to be less monitored by the tax payers; tend to under tax the local tax payers, since the local administration can cope with the necessity of financial resources, through intergovernmental transfers; and can lead to overlapping of activities and turn more difficult the setting and coordination of national priorities, since there is no mandatory demand for spending in functions or programs of interest other than that of the local mayor. Here, a trade off could be considered. The municipalities could have a cut in the constitutional transfers, and then loosing some of its autonomy, in favor of a more coordinated and efficient use of resources. This not necessarily imply in reducing the amount of money for the municipalities, but mainly earmarking a greater proportion of these resources, or extending the amount of resources transferred through negotiated agreements. 19 World Bank Report, Brazil Issues in Fiscal Federalism, pp. 27, mimeo, Document of the World Bank, Washington, May

16 However, little can be advanced if the Federal Government and the analysts and specialists insist in reducing the discussion to one of how best to achieve budget surpluses, as if it is a goal itself and not a mean. And here lies the great political change for the new Administration. To really and deeply discuss the nature of the present neo-liberal economic policy. According to its reasoning, the only thing that is up to the government is to have a balanced budget, to open the economy, to extend the market mechanisms, adopt a free floating exchange currency and do not interfere with the flow of foreign capital. Well, this haven t work in Brazil, as argued above. It only produced vicious circles of external dependency of foreign capital, the withdrawing of that capital at slightest sign of crisis, huge devaluation of the local currency, inflation surge, increase in interest rates and the need of biggest primary surplus. Either we go on, believing the at the long run it will work (unless we will be dead at the time) or we seriously think in changes in this model. I will dare to present some suggestions of change, since, in my view, the Federalist Fiscal discussion can only progress if this macroeconomic dilemma is solved. The main challenge is to cope with the causes of the exchange rate volatility, that put press on the inflation, and forces the government to increase the interest rate, and to increase the goal for primary surplus, and so on, and so on. There are two causes for that volatility: one, real, that is the external vulnerability of the country, represented by the deficit in external current account (trade surplus or deficit, plus interests and dividends paid for international investors, plus the surplus or deficit with tourism, freight, etc.), and other financially engineered, that is forced for aggressive speculative operations in the domestic financial market, mainly using the financial derivative instruments. 20 The first cause is already being faced and solved by the real sector of the Brazilian economy. The trade surplus had a spectacular increase in the last year, going from US$ 2.6 billions in the previous year to to US$ 13.1 in Also there was a huge adjustment in the tourism sector. All this being considered the external deficit decreased from 5% of the GDP in June of 2001 to 1,7% of the GDP in December 2002, with prospects that end this year with a surplus. The financial (or virtual cause) has to be faced with decisive initiatives of the Central Bank in order to: 1) control the domestic speculation; 2) establish some kind of control to the flow of international capital. Some of the measures that can be considered (an many of them were used in the past and are used today in other countries) are: 1) to raise the requirements of equity for the Commercial, Investment Banks and Brokers to invest in the derivative markets (since in this market a position can be made without a cash investment, the leverage can be almost unlimited; the requirements would work to limit this leverage); 2) to establish limits for Banks and Brokers carry cash positions with foreign account; presently there is no such limit, so a Bank foreseeing (or planning) a devaluation on the currency can buy un unlimited amount of foreign currency, for speculative purposes, thus pressing the exchange market and increasing volatility; 3) to establish a reserve requirement, in cash, to be deposited at the Central Bank, proportionally to the Notional Amount of the Derivatives Positions (net of assets and liabilities) bear by a Commercial Bank, Investment Bank or Broker (it would work as down payment for the 20 Brazil has a very dynamic and solid derivatives market, with the Futures Exchange of São Paulo (BMF) being ranked among the five top of the World Futures Exchanges, in volume of contracts. 16

17 speculative bet that these economic agents place in the derivative market); 4) adopt some kind of restriction (mild restriction) to the free inflow of foreign investments and to the outflow of currency to the Brazilian residents: 4.1) for the inflow of foreign investors: demand that the foreign investment (not applied if is a direct foreign investment, or investment in the productive sector) is kept for a period of 90 to 180 days in the Central Bank, before it can be used for buying financial assets in the domestic market (obviously, for those that consider that Brazil is a risk to high to wait for 90 or 180 days will not bring their money to Brazil; this, contrary to what is usually said would be good and not bad for the country, since this money usually comes in when its not necessary, and leaves the country when it is most needed); 4.2) for the Brazilian residents that are willing to buy dollars and invest it abroad, for whatever reason, the only demand would be to present a formal declaration of the IRS that the money is honest ; (probably, this sole measure would make that 80% or more of Brazilian s money that left Brazil in the last four years, would find another way, thus not creating an additional pressure to the exchange market). This set of initiatives, most certainly, would stabilize the exchange rate, reduce the volatility, and would allow the government, in the short run, to start cut the interest rates, thus creating a virtuous circle of less spending with interest, more investment in the production of goods and services, with lower interest rates the private sector can resume investments and consumers are motivated to buy using credit, thus increasing the growth rate, creating jobs, increasing the tax collection, cutting the social security deficit, and decreasing the tax burden, giving room for the reconstruction of a more efficient and consistent Tax System, that could contribute to the Brazilian products regain competitiveness, increasing exporting, and so on, and so on, as it was for a century before. None of these recommendations are easy to implement, or free of risk. But to face with complexities of the Public Administration problems and to assume risk is the very nature of the Administrative and Managerial task. To rise up to the greatness of the challenge is what is expected of the new Brazilian Administration. Bibliography Afonso, José Roberto R and Mello, Luiz de, Brazil: Na Evolving Federation, mimeo, paper presented at the IMF/FAD Seminar on decentralization, held in Washington, DC, on November Fábio Giambiagi, "Do déficit de Metas às Metas de Déficit: A Política Fiscal do Governo FHC /2002, Discussion Paper nº 93, mimeo, BNDES, Rio de Janeiro, April Mônica Mora & Ricardo Varsano, Fiscal Decentralization and Subnational Fiscal Autonomy in Brazil: some facts of the nineties, IPEA, mimeo, Rio de Janeiro, December, 2001 Rezende, Fernando and Afonso, José Roberto R., Fiscal Federalism: The Brazilian Case, mimeo, paper presented to the Federalis Workshop, Stanford University, April/2001. Serra, José e Afonso, José Roberto R, O Federalismo Fiscal à Brasileira: algumas reflexões, mimeo, paper presented at the International Conference on Federalism, held by the Forum of Federations, Mont-Tremblant, Canadá, Outubro "Termômetros Fiscais da Tributação e da Decentralização - Posição em Novembro de 2002", BNDES, mimeo, Janeiro, 2002 Varsano, Ricardo, A Evolu;ção do Sistema Tributário Brasileiro ao Longo do Século: anotações 17

18 e reflexòes para futuras reformas, mimeo, Working Paper n. 405, IPEA (Institute of Applied Economics of the Planning and Budget Ministry), Rio de Janeiro, World Bank Report, Brazil Issues in Fiscal Federalism, mimeo, Document of the World Bank, Washington, May Resenha Biográfica José Cezar Castanhar é Mestre em Administração Pública pela EBAPE/FGV; Engenheiro pela Universidade Federal do Paraná; Ex-Diretor Administrativo da Fundação Getúlio Vargas e ex-vicediretor da EBAPE. Professor das disciplinas, Gestão de Recursos Financeiros, Finanças Públicas, Avaliação de Programas Sociais e Formulação, Gestão e Avaliação de Políticas Públicas, nos cursos de Mestrado em Administração e de Especialização da EBAPE; desenvolve linha de pesquisa sobre Avaliação de Políticas e de Programas Públicos, tendo apresentado trabalhos sobre o tem no 36º Congresso Internacional de Finanças Públicas em Jerusalem, Israel, na 8ª Mesa Redonda do International Institute of the Administrative Sciences em Copenhagen, Dinamarca e no 21º Congresso do International Institute of the Administrative Sciences em Viena, Áustria e no VI e VII Congresso Internacional do CLAD, em Buenos Aires e Lisboa. Consultor de empresas públicas e privadas e instrutor de programas de treinamento gerencial para empresas públicas e privadas. 18

19 TABLE I NATIONAL TAX REVENUES AND DISPOSABLE REVENUES: DISTRIBUTION BY LEVEL OF GOVERNMENT CENTRAL STATE LOCAL TOTAL Direct % of % of % of % of % of % of Total % of GDP Proceeds GDP Total GDP Total GDP ,136 64,0 5, ,3 0,8178 4,7 17, ,342 66,7 7,956 30,6 0,702 2,7 26, , ,7 5,292 21,6 0,9065 3,7 24, , ,7 5, ,6 0,6048 2,7 22, ,296 67,0 8, ,6 0,9792 3,4 28, , ,4 7, ,2 1,3608 5,4 25, ,525 66,1 7,275 29,1 1,2 4,8 25, , ,9 8, ,1 1,5198 5,1 29, ,832 67,0 8,14 27,5 1,628 5,5 29, , ,1 8, ,9 1,585 5,0 31, , ,3 9, ,7 1,635 5,0 32, , ,3 9, ,9 1,6368 4,8 34,1 Disposable Revenues ,353 59,5 5, ,1 1,1136 6,4 17, ,808 60,8 7,592 29,2 2,6 10,0 26, ,709 68,2 5, ,3 2,107 8,6 24, , ,1 5, ,6 2, ,3 22, , ,9 7, ,6 3,888 13,5 28, , ,6 7, ,6 3, ,7 25, ,225 56,9 7,025 28,1 3,725 14,9 25, , ,3 7, ,1 4, ,6 29, , ,2 7, ,6 5, ,2 29, ,069 57,0 8,242 26,0 5,389 17,0 31, , ,7 8, ,4 5, ,9 32, , ,8 8, ,3 5, ,9 34,1 1/ = after consideration of intergovernmental financial transfers Source : Fernando Rezende and José Roberto Afonso, The Brazilian Federation: Facts, Challenges and Perspectives,pp , mimeo, Rio de Janeiro, May,

20 Table II Participation of Taxes and Contribution in the Federal Government Disposable Revenues 1988/2000 Year Taxes as a percentage of Total Disposable Revenues 1 Contributions as a percentage of Total Disposable Revenue 2 Total Disposable Revenues (%) ,85% 8,15% ,12% 20,88% ,20% 25,80% ,25% 31,75% ,64% 35,36% 100 1/ Tax revenues, social security contributions and unemployment insurance 2/ Turnover taxes, tax on financial transactions and net profit tax. Source : Fernando Rezende and José Roberto Afonso, The Brazilian Federation: Facts, Challenges and Perspectives,pp. 43, mimeo, Rio de Janeiro, May, Table III Tax Revenues Distribution by level of Government Disposable Revenues 1 Extended Disposable Revenues 2 Central States Local Central States Local ,78% 25,98% 12,24% 61,78% 25,98% 12,24% ,31% 23,96% 12,74% 59,71% 25,05% 15,24% ,78% 24,51% 12,71% 58,71% 25,83% 15,46% ,60% 24,45% 12,95% 58,71% 25,82% 15,48% ,27% 23,72% 13,01% 59,43% 25,01% 15,57% Source: "Termômetros Fiscais da Tributação e da Decentralização - Posição em Novembro de 2002", BNDES, mimeo, Janeiro, / Total revenue after constitutional financial transfers 2/ Total revenue after constitutional and discretionary financial transfers 20