Transcript Slide 1

Presidential Power, Fiscal
Responsibility Laws, and the
Allocation of Spending:
The Case of Brazil
Lee Alston
Bernardo Mueller
University of Colorado
University of Brasília – UNB
Marcus Melo
Carlos Pereira
Federal University of Pernambuco
Michigan State University – MSU
São Paulo School of Economics - FGV
The Role of Budgetary Policy:
• Brazil has undergone, and is still undergoing, a
deep process of change that has fundamentally
altered the nature of its economy, politics and
society.
• The changes are not ephemeral or temporary but
rather a definitive switch to a higher social
order.
• We provide an explanation of how the budgetary
rules helped the changes to take place given that
the default seems to be otherwise.
Net Debt of the Public Sector
(percent of GDP)
Puzzle:
• By simply looking at policy outcomes one will miss much
of the underlying context through which policymaking
has evolved over the period since 1988.
• Given the country’s image as an underperformer in this
area, it was not an easy task and most prognoses were
pessimistic.
• Nevertheless, the government met the challenge.
• Starting in 1999 and lasting to the present day, the
government has consistently set and met extremely
tough primary surplus targets.
• Brazil’s institutions have evolved in a manner that has
convinced the top 4 credit ratings agencies to raise
Brazilian debt to “investment grade”.
Country Risk, Exchange Rate and
Commodity Prices for Brazil
Stable and adaptable macroeconomic policy
Primary surpluses
6
5
3
Actual
2
Target
1
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
% GDP
4
-2
Year
Source: Banco Central do Brasil, Boletim de Finanças Públicas.
Fiscal Responsibility Law
•
Passed in May 2000, in the wake of the 1999
banking and currency crises
•
Has been effective in constraining state and
municipal governments expenditure
•
Law of Fiscal Crimes (623 politicians have
been banished from politics)
•
The main objective is to constrain the
behavior of the state governments
•
Eliminates the possibilities of bailouts
•
So far evidence is positive
Fiscal performance of the
subnational governments improved
• Primary surplus grew by 22.2 percent (20022006), climbing to 0.70 percent of GDP
• States’ nominal deficit fell from 2.96 to 0.59 in
the same period
• The overwhelming majority of states were
meeting the targets for the ratio of net debt to
total net revenue
Compliance with
FRL by Brazilian
states (30/08/2004)
% Personnel
expenditures in
current revenue
Political Institutions in Brazil
• Executive preponderance
• What can the President do?
▫
▫
▫
▫
▫
▫
▫
Line-item veto
Decree power
Discharge committees
Cabinet
Patronage (20,000 federal jobs)
Pork
Agenda control and ease to build and maintain a majority
coalition.
• What does the President want?
▫ Macroeconomic stability
▫ Economic growth.
• Why these preference?
▫ Electorate and memory of inflation.
▫ Globalized financial markets.
Political Institutions in Brazil
• Congress:
▫
▫
▫
▫
▫
▫
Veto President – simple majority.
Weak committees.
Weak parties in electoral arena.
Strong parties in the legislative arena.
Preferences for geographic redistribution.
Result: Exchange of pork for policy leading to high
levels of governability.
Political Institutions in Brazil
• Other political actors as veto points:
▫
▫
▫
▫
▫
▫
▫
Judiciary (independent but slow).
Ministério Público (Public prosecutors).
Governors (little power at federal level).
Tribunal de Contas da União.
Regulatory agencies.
Constitution of 1988.
Independent media
General characteristics of PMP
• High level of governability and ability to
implement reforms.
• Good ability to respond to political and
economic shock
•
•
•
•
Devaluation of the Real in 1999.
Election of Lula
Corruption scandal in 2005-2006
Current financial crises
Rules of the Budgetary Process
• The executive crafts the budgetary bill
• Legislators can amend the bill, but an
astonishingly small part of it (investment), with
individual and collective amendments
• The executive may veto any undesirable changes
that Congress may inflict on its proposal
• The budget law approved by Congress is not
mandatory
• Rather it merely authorizes the executive to
execute the budget based on the availability of
resources collected during a specific fiscal year.
Specification
1996
PLO
LOA
Appropriated
1997
PLO
LOA
Appropriated
1998
PLO
LOA
Appropriated
1999
PLO
LOA
Appropriated
2000
PLO
LOA
Appropriated
2001
PLO
LOA
Appropriated
2002
PLO
LOA
Appropriated
2003
PLO
LOA
Appropriated
2004
PLO
LOA
Appropriated
Personnel
Interest on the
Debt
Local/State
Transfers
Investments
%
Capital
Investments
Debt
Amortization
Total
41.346,5
39.685,3
40.900,9
22.262,2
22.262,2
19.492,0
111.097,2
104.633,2
92.392,7
8.122,6
8.832,2
5.706,4
2.64
2.94
1.98
11.267,0
10.927,3
13.290,7
114.134,0
114.134,0
116.785,3
308.229,5
300.474,1
288.568,0
42.576,8
45.060,8
44.530,0
25.252,8
25.252,8
21.033,2
113.654,3
113.015,3
105.764,2
7.747,4
9.901,2
7.537,9
1.83
2.31
2.22
10.779,2
11.519,1
13.290,7
223.806,1
223.806,1
147.040,0
423.816,6
428.555,3
339.196,0
48.172,9
48.175,6
47.946,5
37.162,3
37.162,3
30.812,5
120.440,1
119.141,5
120.384,8
8.353,7
11.110,0
8.284,6
1.92
2.54
1.66
21.834,1
21.122,5
71.343,9
199.534,1
200.187,4
221.150,9
435.497,2
436.899,3
499.923,2
52.170,6
50.570,1
51.571,0
50.323,0
50.178,2
45.355,6
125.154,1
120.876,8
131.408,8
4.934,0
7.887,6
6.955,3
0.91
1.46
1.18
14.473,0
14.169,9
56.348,8
295.098,9
295.243,8
296.423,3
542.153,6
538.926,2
588.062,9
52.116,4
52.086,8
58.240,6
78.123,0
78.123,0
38.834,8
142.063,3
143.565,0
152.925,5
6.756,9
12.448,8
10.099,1
0.67
1.24
1.64
15.872,6
11.572,1
11.420,8
707.897,7
709.072,8
344.861,6
1.002.829,9
1.006.868,5
616.382,5
59.569,6
59.483,7
65.449,4
67.801,5
70.299,5
52.816,4
183.442,8
174.649,5
175.412,8
12.129,8
18.268,9
14.564,9
1.30
1.93
2.41
14.574,2
14.962,9
20.446,1
594.495,2
607.537,0
274.681,4
932.013,1
945.201,5
603.371,0
--68.497,8
75.029,0
--58.452,2
55.260,7
--204.354,5
208.782,9
--17.649,5
10.126,8
2.71
1.50
--16.864,7
20.936,2
--277.697,9
304.792,3
--650.409,6
674.928,0
76.892,6
77.046,2
78.974,7
93.644,1
93.644,1
65.706,8
213.302,2
223.972,4
239.237,6
7.350,8
14.180,2
6.452,1
0.73
1.37
0.74
23.054,4
24.376,3
23.440,7
582.315,1
582.315,1
462.644,6
1.009.532,2
1.036.056,1
876.456,6
84.291,1
84.120,0
89.431,6
117.829,6
117.769,8
74.373,4
263.291,3
273.628,6
275.905,8
7.823,8
12.370,0
10.866,0
0.54
0.84
1.20
32.752,8
33.249,4
21.580,7
926.097,6
925.989,9
436.020,3
1.457.686,7
1.469.087,4
908.177,7
In fact Appropriated versus Modified by
Congress
1.40
1.30
1.20
1.00
0.90
0.80
0.70
0.60
Appropriated law/ bill modified by Congress
Bill modified by Congress/ executive proposal
2004
2003
2002
2001
2000
1999
1998
1997
0.50
1996
Ratio
1.10
Four Categories of Policy
•
Stable and adaptable: macroeconomic policy.
•
Exchange of pork (other benefits) for policy.
•
Residual policy:
▫
Rigid policy insulated in the budget


▫
Health
Education.
Volatile: contingent on fiscal imperative and
subject to political shocks



Poverty alleviation
Infrastructure
environment, etc.
Game (Gains from trade):
• Sequential; where the executive has the agenda-setting power.
• Restrictions with budget implications:
▫ External shocks (e.g. monetary devaluation em 1999, Lula’s election,
mensalão, etc.)
▫ Veto points (judiciary, Public Prosecutors, General Accounting Office)
• President exchange national policies by pork and/or patronage with
governing coalition members keeping them disciplined.
• The leftover of this major relationship the executive spends with
social and infrastructure policies. That is why they are understood
as a residual.
• In the absence of a shock the executive would have more leeway
with social policies. That is why these policies oscillates from an
administration to the other.
Rigid policy insulated in the budget
Evolution of Earmarking of Budgetary Revenues, 1979-2003.
100
60
Earmarked
transfers to states
and muni.
Earmarked
revenues
40
De-earmarked via
DRU
%
80
Not earmarked
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
19
79
0
Year
Source: Brasil. Secretaria de Orçamento Federal. (2003) "Vinculações de Receita dos Orçamentos
Fiscal e da Seguridade social e o Poder Discricionário de Alocação de Recursos do Governo Federal“
- Volume 1, N.1, Brasília, SOF, pg. 6. This graph does not include revenues from government bonds or privatization.
Rigidity in the Budget
• Two types of rationales for budgetary rigidities:
▫ Pre-commitment device (health and education)
▫ Spin-offs of opportunist interaction and logrolls
between subnational and federal governments.
• Costs of rigidity (efficiency losses):
▫ Revenue increases get automatically transformed into
higher expenditures
▫ Less incentives for efficient expenditures
▫ Spending expenditures that are not protected (Free
resources) before rigid resources.
Conclusion:
• Tradeoff between governability and a more
important role played by legislatures in the
budget.
• The current rules generate gains from trade and
equilibrium
• Without other reforms (electoral, partisan, etc.)
is too risk to have mandatory budget.
• Tradeoff between rigidity (hardwire and
earmark) and volatility