I - The Economy

3. Fiscal Situation

The fiscal situation continues to be the principal challenge to the Real Plan and to sustained growth.

In 1996, the accumulated public sector operational deficit was equal to 3.89% of GDP. The states and municipalities accounted for the largest part of this deficit, i.e., 1.89% of GDP; the central government accounted for 1.67%, and the public enterprises for 0.33%.

Graphic 17

The 1996 results stem from several factors. First, the operational deficit, which includes interest payments on the public debt, could not improve more, relative to 1995, because real interest rates remained high. They did so due to the rapid decline in inflation. That is, although nominal interest rates fell throughout 1996, real interest rates remained high because of the faster drop in inflation.

Second, the 1996 operational deficit was not lower than in 1995 because the primary accounts did not produce a surplus as they had in 1995. Rather, they were in balance, generating neither

a surplus nor a deficit. They did not produce a surplus principally because of the increase in personnel outlays that stemmed from the salary raises granted in 1995. These raises, affecting both state and local governments, had their full impact in 1996.

Finally, the volume of tax receipts in 1996 was disappointing. The small size of the increase was due to the relatively low level of economic activity (GDP grew only some 3%, which was less than that of 1995). Although the government had adopted additional measures in both 1995 and 1996 to improve tax collections, those measures did not have the expected immediate impact.

To resolve the public deficit issue, the government has been implementing a series of measures at the same time that it works with Congress to secure passage of the social security and the administration reforms. The passage of these two reforms is essential for any lasting solution to the public sector deficit.

With a view to improving the public sector primary and operational budget results in 1997, the government is implementing the following measures:

a) Containment of personnel costs by using the Voluntary Retirement Program (Programa de Demissão Voluntária) to reduce the number of civil servants and by strengthening control of salary payment procedures;

b) Acceleration of the privatization program with the consequent reduction of the debt and the public deficit, transferring to the private sector such significant economic activities as Vale do Rio Doce, the federal railway system, and the ports;

c) Improvement of the fiscal provisions regarding personal income taxes and social levies on net corporate profits;

d) Incentives for the states to adopt fiscal reform programs;

e) Reform of the budgetary process for 1997, providing more realistic projections for receipts and expenditures, including a projection for a federal government primary surplus equal to about 0.8% of GDP;

f) Approval of the Global Expenditure Program (Programa de Dispêndios Globais) of federal government enterprises, seeking to obtain an improvement in the primary results of these firms equal to 0.25% of GDP;

g) Implementation of the Brazil in Action program so that the allocation of 1997 budget resources will encourage more public sector investment;

h) Increased social security tax receipts by expanding the tax base and by raising the tax rate charged on sales of agricultural products; and also constrain outlays by modifying the legislation governing social security benefits.

The implementation of these measures to contain expenditures, to improve public sector efficiency and to increase receipts at all levels of government will require a marked improvement in the performance of the tax authorities. These measures, combined with the benefits from privatizations (which should reduce the public debt), will help to make the government's activities more dynamic and more compatible with a modern economy, something Brazilian society deeply desires.

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I - The Economy 4. Foreign Sector