“ Medium-Term Fiscal Framework in Brazilian States ”

1. “Medium-Term Fiscal Framework in BrazilianStates” “Medium-Term Fiscal Framework and Performance Management in Central andSubNationalGovernments” Seoul - July/2013 • Celia Carvalho • President of theFinanceState Managers’ Group

2. Contents Context State Governments current situation in Brazil CooperationandcoordinationamongStates Negotiationsunderwaywiththe Federal Government

3. Brazil’sFeatures • Federal structure • Central Government • StateGovernments(27) • 26 States • Federal District • Municipal Governments (5,570) • Population – 193.9 million • GDP * - US$ 2.48 trillion • GINI Index (2012)* – 51.9 • Baddistribution of family income • 5th largest country in the World • * Source: The World Bank

4. BrazilianFederalism – 1988 Federal Constitution Administrative and Fiscal autonomy of Subnational governments (States, Federal District and municipalities) Definitionof: Taxcompetencies (own-sourcerevenues) Responsibilities Taxrevenuesdistribution (Federal transfers) Articulation and dialogue among long, medium and short-termplanningandthe budget.

5. StateGovernments’ currentsituation in Brazil Own-source Revenues are not enough to finance Responsibilities; Taxbasiserosionofthestates’ mainrevenuesource, theBrazilian VAT, called ICMS; Heavy dependanceof some states on federal transfers (more than 50% oftheirrevenues), such as theredistributivefundcalled FPE (States’ ParticipationFund); Excessiveearmarkingand a greatamountofrevenuesalreadycommittedtomandatoryexpenditures; Substantialincrease in debt; Scarceresourcestoincrease social andinfrastructureexpenditures.

6. Dependanceofthe States on FPE FPE

7. 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 debtcompared to “Real Net Income” (RLR: in Portuguese); Primaryresults; Own-sourcerevenuecollection; Personnelexpenditures in Real Net Income %.; Privatization, permissionandconcessionofpublicservices; Investments in Real Net Income %.

8. Fiscal Adjustment: AdjustmentofStatesandMunicipalities fiscal management to Fiscal Responsibility Law (2000): Elaborationofthe Fiscal TargetsAnnexoftheAnnual Budget Guidelines Law (withestimates): Revenuesandexpenditures; Nominal andPrimaryresults; Publicdebt; Compliancewithpreviousyear´s fiscal targets; Fiscal risksAnnexoftheAnnual Budget GuidelinesLaw. 3 fiscal years

9. Fiscal adjustment: Adoptionofstrategicplanning, result-oriented strategic management, contractualization and public management quality assessment programs; Use ofmethodologyof fiscal scenariosconstruction; Monitoringandassessmentof budget plans; Modernizationofexisting financial execution systems (27 SIAFs); Increasedtransparencyandaccountabilityofpublicaccounts; Costsreduction; ArticulationandCooperationamongcouncilsandStates.

10. CooperationandcoordinationamongStates New demands for StateGovernments Changes in thefederativepactandbecause CONFAZ deals only with harmonization of VAT CreationoftheFINANCE STATE MANAGERS’ GROUP - GEFIN in 2004 eachofthe 26 statesandthe Federal Districtappointtheirownrepresentatives.

11. GEFIN – General objectives The pursuit of fiscal balance in state public accountsthrough: 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. "

12. GEFIN – Especificobjectives 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.

13. Negotiationswith Federal Government The State´s VAT (ICMS) - Fiscal competition, whichconcentrates its taxbasisonelectricenergy, fuelandtelecommunications; reformhasbeenfailed to pass in Congress - federative fiscal deadendstreet. State´sPublicdebtrenegotiation - Federal GovernmentsubmitteddebtrestruturingproposaltoCongress. Still in debate.

14. SubnationalDebtRefinancing ( Laws 8727/93 and 9496/97)

15. Negotiationswiththe Federal Government FPE – federal redistributivetransfertostatesaimedatreducingbadincomedistribution; distributioncriteriaandamounts are tobereviewed (deadline wasJune, 30th 2013). Judiciarybonds– in discussion: criteria for payments, compensationsandcorrection index ofdebt stock werejudgedunconstitutionalbysupremefederal court .

16. 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.

17. Thankyou. • Celia Carvalho • President of theFinanceState Managers’ Group • celia.carvalho@fazenda.mg.gov.br