The document summarizes challenges facing fiscal relations in Brazil, including a high tax burden, rigid mandatory spending rules, and high levels of state indebtedness. It discusses reforms that have been implemented, such as developing objective borrowing limits for states and standardizing debt analysis methods. Important future reforms proposed include pension system changes, reducing budget rigidity, revising earmarked revenue rules, and creating a fiscal management board to standardize accounting across states.

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
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
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
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
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
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
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
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
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
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. Thank you!