“Medium-Term Fiscal Framework in Brazilian States” Celia Carvalho President of the Finance State Managers’ Group “Medium-Term Fiscal Framework and Performance Management in Central and SubNational Governments” Seoul - July/2013

Contents Context State Governments current situation in Brazil Cooperation and coordination among States Negotiations underway with the Federal Government

Brazil’s Features Federal structure Central Government State Governments (27) 26 States Federal District Municipal Governments (5,570) Population – million GDP * - US$ 2.48 trillion GINI Index (2012)* – 51.9 Bad distribution of family income 5th largest country in the World * Source: The World Bank

Brazilian Federalism – 1988 Federal Constitution Administrative and Fiscal autonomy of Subnational governments (States, Federal District and municipalities) Definition of: Tax competencies (own-source revenues) Responsibilities Tax revenues distribution (Federal transfers) Articulation and dialogue among long, medium and short- term planning and the budget.

State Governments’ current situation in Brazil Own-source Revenues are not enough to finance Responsibilities; Tax basis erosion of the states’ main revenue source, the Brazilian VAT, called ICMS; Heavy dependance of some states on federal transfers (more than 50% of their revenues), such as the redistributive fund called FPE (States’ Participation Fund); Excessive earmarking and a great amount of revenues already committed to mandatory expenditures; Substantial increase in debt; Scarce resources to increase social and infrastructure expenditures.

Dependance of the States on FPE FPE

Fiscal Adjustment (1997 onwards): Fiscal Adjustment and Restructuring Program (PAF in Portuguese) signed by 25 Brazilian states (1997) for renegotiating the debts. New goals : Financial debt compared to “Real Net Income” (RLR: in Portuguese) ; Primary results; Own-source revenue collection; Personnel expenditures in Real Net Income %.; Privatization, permission and concession of public services; Investments in Real Net Income %.

Fiscal Adjustment: Adjustment of States and Municipalities fiscal management to Fiscal Responsibility Law (2000): Elaboration of the Fiscal Targets Annex of the Annual Budget Guidelines Law (with estimates): Revenues and expenditures; Nominal and Primary results; Public debt; Compliance with previous year´s fiscal targets; Fiscal risks Annex of the Annual Budget Guidelines Law. 3 fiscal years

Fiscal adjustment: Adoption of strategic planning, result-oriented strategic management, contractualization and public management quality assessment programs; Use of methodology of fiscal scenarios construction; Monitoring and assessment of budget plans; Modernization of existing financial execution systems (27 SIAFs); Increased transparency and accountability of public accounts; Costs reduction; Articulation and Cooperation among councils and States.

Cooperation and coordination among States New demands for State Governments Changes in the federative pact and because CONFAZ deals only with harmonization of VAT Creation of the FINANCE STATE MANAGERS’ GROUP - GEFIN in 2004 each of the 26 states and the Federal District appoint their own representatives.

GEFIN – General objectives The pursuit of fiscal balance in state public accounts through: the study and improvement of legislation and the models of public finance management; the exchange of experiences, solutions and systems in the areas of: fiscal management, program and financial management, budget execution, bookkeeping and consolidation of public finances, debt, quality of public spending, revenues, expenditures, as well as legislation on public finances. "

GEFIN – Especific objectives Follows the policy of public finances and assesses their impacts on local governments; Stimulates the policy of mutual cooperation through the interaction with International Organisms, Councils, Federal Governments, aiming at the best solutions in Public Finances.

Negotiations with Federal Government The State´s VAT (ICMS) - Fiscal competition, which concentrates its tax basis on electric energy, fuel and telecommunications; reform has been failed to pass in Congress - federative fiscal dead end street. State´s Public debt renegotiation - Federal Government submitted debt restruturing proposal to Congress. Still in debate.

Subnational Debt Refinancing ( Laws 8727/93 and 9496/97)

Negotiations with the Federal Government FPE – federal redistributive transfer to states aimed at reducing bad income distribution; distribution criteria and amounts are to be reviewed (deadline was June, 30th 2013). Judiciary bonds – in discussion: criteria for payments, compensations and correction index of debt stock were judged unconstitutional by supreme federal court.

Final Remarks Consistent and reliable estimates of revenues and expenses and the preparation of medium-term fiscal scenarios to improve the quality of state budget plans; Continuous monitoring and evaluation of budget instruments in order to adjust them to reality (revenues and expenditures); Commitment to medium-term goals and promotion of sustainable growth and development of all Brazilian states. Cooperation and coordination to solve federative problems.

Thank you. Celia Carvalho President of the Finance State Managers’ Group