FIVE YEARS OF THE REAL PLAN
STABILITY AND DEVELOPMEN
FISCAL POLICY AND STRUCTURAL REFORMS
1. INTRODUCTION
The Constitution of 1988 imposed severe limits on the Union: an increase in the participation of States and Municipalities in the federal tax collection; a marked increase of the binding of federal revenues; and the granting of a series of social security benefits without due compensation in revenues. The disagreement generated was fully perceived with the stabilization of prices beginning with the Real Plan, when the corrosive mechanisms of expenses ceased being effective, with a resulting increase in public deficit.
With the Debt Refinancing Program for State Governments, the Federal Government eliminated the main financial constraint in that sphere. The volume of debts accumulated in the past was significant and its repayment would make the State’s responsibility of meeting social demands unachievable.
The Federal Government’s aid was accompanied by a wide program for adjustment of the State Governments. This adjustment involved from the modernization of its systems for financial and fiscal administration up to the firm commitment of privatizing state companies. Therefore, besides solving the problem of previous debt, the program in course will allow significant gains in terms of planning capacity and control of public spending. Such gains can be reverted to society in the form of greater efficiency and quality of public spending. A good example of this process is the Government of the State of São Paulo. After a difficult adjustment process, it now has the capacity to recover the investments and expenses aimed at providing for the basic needs of the population of the State.
2. REFORMS
The Federal Government proposed a series of structural reforms to Brazilian society with the following objectives: to reduce the visible public deficit after economic stabilization; to save in personnel expenses and other costs; to increase the quality of public expenditure; and to make the tax system fair, rational and effective.
The reform discussion process ended up demanding too much time, since the reforms deal with issues of great complexity, which involve conflicting and scattered interests in the community. Furthermore, as many proposals entailed constitutional amendments, the processing by the Legislative branch had to respect inherent additional restrictions to parliamentary, political parties and federative structures following the Constitution of 1988.
3. RECOVERY OF THE ROLE OF PUBLIC BUDGET
The stability of prices allowed the recovery of the budget role as an instrument for public expense planning. Now the budget truly expresses the government expenditure policy.
The budget is the main instrument suitable for the Legislative branch to intervene in the public expenditure policy. The strengthening of the budget represents, therefore, the strengthening of the Legislative branch itself, an indispensable condition for the maintenance of the democratic regime.
The transparency of the budget is also an indispensable condition for the Legislative branch, to examine the actions of the Executive branch, by means of the Audit Court of the Union.
4. ADMINISTRATIVE REFORM
The administrative reform enacted by Congress in June, 1998, is of major importance for the Government, in its various spheres, to have the necessary flexibility to carry out the adjustment of its personnel. The full effects of the reform still depend on the approval of several additional measures already presented to the National Congress.
Among those measures the Camata Bill should be emphasized, as well as other related measures, which imposed a limit of 60% of the net revenue for the expenses with personnel. The compliance with that limit is essential to guarantee the balance of public accounts, as personnel expenses place a heavy burden on the budgets of States and Municipalities.
5. SOCIAL SECURITY REFORM
The restructuring of the social security sector, both public and private, is of fundamental importance. Its regulation has been sought not only for the balance in social security accounts, but also with the objective of making financing more equal among the participants and fairer between the two systems (private sector workers and federal, state and municipal public workers).
Constitutional Amendment no. 20 established rigid rules for the concession of retirement for public workers, such as the minimum age of 53 years for men and of 48 years for women. While the number of people entering retirement has not been reduced, the decrease in the deficit will depend on the approval of laws determining the increase of the social security contribution rates of active workers and its extension to those who are inactive.
From the point of view of the social security regime of workers in the private sector, it is necessary to deepen the social security reform, having as a general guideline the greater linkage among the benefits of inactivity and the contribution by the beneficiaries themselves.
6. TAX REFORM
The stabilization of prices highlighted the need for reform in the tax system, as the environment of a high and growing inflation that previously hid the distortions of taxes and effective contribution structures disappeared.
If, on one hand, the tax burden must be better distributed among taxpayers, on the other hand, it would be necessary to reduce the fiscal evasion. At the same time, it would be necessary to simplify, rationalize the tax structure, facilitating the procedures both for individuals, companies and for the revenue bodies. In that sense, a reduction of the burden on the productive process and exports would be necessary.
7. FISCAL STABILIZATION PROGRAM
The fiscal policy strategy in the first years of the Real was marked by gradualism. Such option was made unfeasible by 1997 and 1998 international crises. Thereafter, measures with great impact were adopted in relation with the evolution of public accounts and were designed to demonstrate the Brazilian Government’s firm commitment to a consistent economic policy.
The main measures for curbing federal public expense were as following: the establishment of minimum goals of primary surplus for the consolidated public sector; acceleration of the social security and administrative reforms; creation of new legal instruments capable of promoting tight fiscal policy and fiscal responsibility on the part of State Governments; and continuity in the efforts of privatization and concession of services to the private sector, inducting the adhesion of States and Municipal districts.
In consequence, since the last four months of 1998, the fiscal policy began to be based on the commitment to achieving minimum goals of primary surplus, in the order of 3% of the GDP, with the purpose of stabilizing the relationship between public debt and the GDP throughout the next couple of years.
Regarding the structural and institutional issues, further progress is still necessary with relation to the presentation of the Tax Reform, the deepening of the social security reform, and the approval of the Fiscal Responsibility Law.
8. STATES, MUNICIPALITIES AND STATE-OWNED COMPANIES
Important measures were taken in order to restrict the additional indebtedness of States, Municipalities and public companies by means of loans and the expansion of debts.
State debts were renegotiated and, in September 1997, a law promoting the extension and reduction of financial responsibilities was enacted. In consequence, the governments favored by those measures shall implement fiscal adjustment programs to promote the generation of primary surpluses and commited to reducing their debt/net real revenue ratios. Programs of collaboration with the States were created for the restructuring of personnel and, more specifically, for the clearance of state owned banks.
9. FISCAL RESPONSIBILITY LAW
In April, 1999, draft legislation was presented to Congress with provisions aiming at , among other subjects, the establishment of rigid limits for public indebtedness and for the expenses in the three branches of government. That institutional change shall serve as a basis for the consolidation of the new fiscal regime.