Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
BRASIL - MINISTÉRIO DA FAZENDA SEMINAR ON ECONOMIC POLICIES POLICY RESEARCH INSTITUTE MINISTRY OF FINANCE JAPANESE GOVERNMENT FISCAL POLICY IN BRAZIL AND JAPAN WHAT CAN BE LEARNED Name of Participant: MÁRIO FALCÃO PESSOA – Chief of Division Name of Organization: Ministry of Finance – National Treasury Secretariat Name of Country: BRAZIL Tokio - 31st May 2004 0 BRASIL - MINISTÉRIO DA FAZENDA CONTENTS 1. Introduction ……………………………………………………………………………. 2 2. Fiscal Policy and Fiscal Deficit: Theory and Practice ……………..…………………... 5 3. Brazil: Fiscal Policy from 1998 until now ………………………………………………16 4. Japan: Fiscal Policy from 1997 until now ……………………………………………... 27 5. Brazil: Results of its Fiscal Policy …………………………………………………….. 32 6. Japan: Results of its Fiscal Policy ……………………………………………………… 38 7. What can be Learned …………………………………………………………………… 41 Bibliography ………………………………………………………………………………. 45 Tables ……………………………………………………………………………………… 47 1 BRASIL - MINISTÉRIO DA FAZENDA 1. INTRODUCTION Japan and Brazil experienced a remarkable growth from the 1950s to the 1970s. In both countries this period was known as ‘economic miracle’. But since the first oil shock in 1972/73 governments have adopted different strategies to maintain the same level of development of the previous years. Japan decided to move its economic development based in its internal savings and used public debt to finance infrastructure projects. In the case of Brazil, due to the lack of internal savings, it has experienced a significant increase in its external debt because country assumed that external savings could be directed to finance its investments. But the consequences to Brazil were dramatic because during the second oil shock in 1980 and then at every crisis in the international financial market it has been exposed to the changes in the sudden movement of external private capital that has resulted in raising inflation rates, unstable exchange rate and high interest rates resulting in permanent difficulty to finance its current account. In this sense the 1980s is considered a lost decade. For Japan the consequences were a continuous stagnation in economic growth, disinflation and a remarkable increase in public deficit and public debt. Figure 1: Real Growth Rate as a Proportion of GDP % – Japan and Brazil – 1957-2003 Japan and Brazil - Real GDP Growth Rate - 1957-2003 15.0 1,200.0 1,000.0 800.0 % 5.0 600.0 19 5 19 6 1957 5 19 8 5 19 9 6 19 0 1961 6 19 2 6 19 3 6 19 4 1965 6 19 6 6 19 7 6 19 8 1969 7 19 0 7 19 1 7 19 2 1973 7 19 4 7 19 5 7 19 6 1977 7 19 8 7 19 9 8 19 0 1981 8 19 2 8 19 3 8 19 4 1985 8 19 6 8 19 7 8 19 8 1989 9 19 0 9 19 1 9 19 2 1993 9 19 4 9 19 5 9 19 6 1997 9 19 8 9 20 9 0 20 0 2001 0 20 2 03 0.0 400.0 -5.0 200.0 -10.0 0.0 Year Real GDP Growth Rate % Growth Rate % Cumulative GDP 1956=100 2 GDP 1956=100 Cumulative GDP Index 10.0 BRASIL - MINISTÉRIO DA FAZENDA One issue that has significantly been considered as an important factor to allow countries promote economic growth in a sustainable basis is the way fiscal policy is conducted. This paper will be concentrated in analyzing fiscal policies during the last 10 years for the two countries. In Brazil it has been implemented a very important structural change in its budget and fiscal policy since a Fiscal Responsibility Act (LRF in Portuguese) was approved in year 2000. This law was largely influenced by a similar experience in New Zealand and is considered a milestone in Brazilian public financial management, helping to create a sound environment for future economic development. On the other hand, Japan has adopted different strategies in relation to its fiscal policy in the late 1990s and beginning of the 21st century especially considering its necessity to use fiscal policy as a Keynesian mechanism to promote economic recovering. Due to a strong support from its internal savings Japan has been able to finance its public debt in a more stable basis. But Japan was not successful in building a legal and institution framework to control public deficit despite many times targets have been established by the government. In the case of Brazil, public debt has been used basically to guarantee payment of financial expenditure. For Japan public debt has been also used to finance capital investment and current expenditure. A sequence of external crisis and a small domestic saving have affected the capacity of Brazil finances its debt. Due to these factors and a resilient inflation, the country needed to maintain a significant restrictive monetary policy paying real interest rates of more than 3% per year for more than a decade. It was not the situation of Japan that has been financed by its huge internal savings paying a very low rate of interest. But, because the size of the public debt has increased sharply in recent years it could represent a future threat to Japanese development. So, it is important for both countries improve their fiscal policies in a way to be more effective to control the negative effects of the public deficit. 3 BRASIL - MINISTÉRIO DA FAZENDA Table 1: General Government Gross Debt in Relation to GDP - Japan and Brazil 1985-2003 Year Japan – Debt/GDP Ratio - % Brazil - Debt/GDP Ratio - % 1985 50.0 1986 54.0 1987 55.2 1988 53.3 1989 50.2 1990 48.2 1991 47.6 1992 49.5 1993 55.7 1994 59.4 1995 65.3 1996 69.1 1997 74.6 1998 85.4 1999 96.3 2000 104.4 2001 121.2 2002 134.4 2003 145.1 Source: Brazil - Central Bank of Brazil; Japan - Ministry of Finance 52.6 49.4 50.3 46.9 40.2 40.6 37.9 37.2 33.0 29.2 30.5 33.3 34.3 41.7 48.7 48.8 52.6 55.5 58.7 Figure 2: Public Debt as a Proportion of GDP - Japan and Brazil – 1985/2003 Year Japan - % 4 Brazil - % 20 03 20 01 19 99 19 97 19 95 19 93 19 91 19 89 19 87 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 19 85 % Japan and Brazil - General Government Gross Debt to GDP - % - 1985-2003 BRASIL - MINISTÉRIO DA FAZENDA As it could be seen in figure 2 and table 1, Brazil and Japan have been suffering from a significant increase in the Public Debt/GDP ratio in the last ten years. Brazil came from a ratio from 29% in 1994 to 59% in 2003, and Japan from 60% to 145% at the same period. What this paper will try to demonstrate is what policies have been implemented in both countries and what results have been achieved until now considering factors such as legislation background, level of transparency, financial system framework, external factors and political and institutional aspects related to the budget. In other words, the theoretical analysis is mainly related to the aspects emphasized by the public choice approach. The paper is organized in this way. In section 2 it is discussed theory and practice facing fiscal deficit and what has been the experience worldwide to tackle this problem. Section 3 presents the Brazilian fiscal management, the Fiscal Responsibility Act and the main strategies to reduce the vulnerabilities of the country in financial terms. Chapter 4 shows the main fiscal policies adopted by Japan since the middle of the 1990s until now. Chapters 5 and 6 demonstrate the main results of fiscal policy in Brazil and Japan until 2003. Chapter 7 tries to show what can be learned from each experience and what can be done in the future to improve fiscal policy in both countries. 2. FISCAL POLICY AND FISCAL DEFICIT: THEORY AND PRACTICE Attention to fiscal problems encompassing public deficit and public debt is something that has been object of study both in theoretical and empirical terms. It has also been affecting nearly all countries either developed or developing ones particularly during the 1980s and in the final years of the 1990s. As a consequence, what can be noticed worldwide is a shift to a more active and explicit fiscal policy by using specific rules that include fiscal targets to be achieved, ceilings in expenditure 5 BRASIL - MINISTÉRIO DA FAZENDA that cannot be overdone and even sanctions and penalties to punish or impose restrictions to the government. These policies, of course, have consequences not only to the economy but also in relation to the political environment. So, it is fundamental to identify which factors count when a sustainable fiscal policy would like to be used. In this case institutional framework, the way budget is proposed and approved, the existence of legal constraints to control the deficit and external factors effectively matters. High and rising levels of public debt and large and persistent government deficits are matters of concern due to the fact that could rise doubts about the soundness of currencies, represent a pressure over general interest rates in the economic, could represent a threat to private investment related to the crowding out effect, rise worry about future tax increasing, impact economic growth and create a fear of producing a Leviathan state that could damage the private sector and political freedom in the future. Specifically after the world depression in the 1930s it was considered that public expending financed by public debt could have a positive effect in the short term to increase aggregate demand and help countries to overcome their economic problems. It is known as a Keynesian policy and it has been considered responsible for the overcome of the global economy during the 1930s and after the World War II until the 1970s when oil shock impacted the world economy. Moreover, public debt used to be considered as a remedy to help economic recovery or at least minimize the impacts resulted from recession and raises in unemployment. But it seems that this policy has a limit in terms of effectiveness and sustainability. In the first case it has been observed that when public deficit increases permanently it can harsh private investment and reduce public confidence over government as soon as people realize that future tax will have to be increased or default over payment of public bonds could be expected. Additionally, 6 BRASIL - MINISTÉRIO DA FAZENDA during many years it was considered that public debt was neutral in terms of economic consequences. Due to this fact, politicians have been using public deficit as a way to promote development by means of financing public works such as roads, house construction, power generation, building of schools and other capital investment. The driven idea is that as soon as economy recovers the expected effects over tax revenues should be enough to compensate increasing in expenditure and generating at least enough resources to pay for the interest on the debt. But when the investment has a poor rate of return the impacts over economy could be less than expected without creating the multiplier effect to increase general outcome. In the other hand, controlling permanent increase in public spending is largely influenced by political will. Depending on the way electoral and legislate system is build it could be more difficult or easier to introduce corrective measures to balance the budget in a sustainable basis. For example, if the electoral system is based in a framework in which regional factors have an outstanding importance, then eventually certain programs and projects with small economic impact could be financed by the budget only to please political influence. In other words, not always political agenda fits with economic needs and this could have serious consequences. In that situation sometimes it is advisable to impose a legal barrier to discipline political behavior as for example establishing ceilings over public debt and cost-benefit analyses for each project included in the budget. Showing his concern about the question, Kirchgassner (2002) argues that: “The fact that the public deficit and the (rising) public debt were one of major concerns of the literature can on the one hand be explained by the rising public debt following the acceptance of Keynesian policy prescriptions in the 1950s and 1960s. On the other hand there was (and still is) a strong political belief that a large deficit indicates a mis-functioning of the political system. The share of the government may be high, but as long as the citizens 7 BRASIL - MINISTÉRIO DA FAZENDA are willing to pay the corresponding taxes there is no reason to be concerned about this. If, however, government spending exceeds tax revenue in the long run, there might be some kind of tax illusion which can be exploited by a Leviathan government. In such a situation it would make sense to search for (constitutional) constrains to tame Leviathan.” In the same direction Hagen and Harden (1996) assert that: “A general characteristic of modern finances is that government activities tend to be targeted at specific groups while being paid for by the general taxpayer. The incongruence between those who benefit and those who pay implies that policymakers systematically overestimate the net marginal benefit of increasing public spending and, hence, tend to increase spending beyond the level that equates social marginal costs and benefits.” This effect is generally known as the common pool problem of government budgeting that result in excessive spending and deficits. Poterba and Hagen (1999) conclude that there is an emerging consensus that persistent budget deficits can be modeled as the result of a rational choice by self-interested political actors. Deficits arise because the government’s general tax fund is a ‘common property resource’ from which projects of public policy are been financed, much like the aggregate stock of a resource in resource economics. At the same time, higher levels of transparency are associated with lower budget deficits and fiscal institutions have important impact on fiscal policy outcomes. Additionally, Hallerberg and von Hagen (1999) when considering political influence over fiscal policy conclude that electoral systems of proportional representation are more prone to high levels of public debt than majority systems, and in order to reduce public deficit it is not necessary to change from a system of proportional representation to a majority system, if the appropriate budgetary rules are implemented. 8 BRASIL - MINISTÉRIO DA FAZENDA “Commitment is appropriate for countries with a proportionality rule, which tends to produce coalition governments. Delegation is the choice for countries with plurality rule or other systems that produce single party governments (or are functional equivalent – government where the same parties run together election after election, as in France and Germany).” Of course it is not the intention of this paper to propose any political reform in Brazil or Japan, but it is very important understand that it could be easier or more difficult to implement fiscal reforms depending on political framework and these factors should be considered when preparing the strategies to be used to promote any fiscal policy. In relation to the institutional framework Kirchgassner (2002) considers also that: “1. Balanced budget rules and limitations of expenditure, taxes and deficits have in most cases proved to be effective in cutting down public expenditure, revenue and debt. However, at least in some cases this leads to a deterioration of the quality of the publicly provided services, especially with respect to schooling. 2. Budgetary procedures matter, and the interaction between budgetary procedures and the electoral system also matters: not all budgetary procedures have the same effect in all electoral systems. They might be less effective than constitutional or statutory balanced budget or tax and expenditure limitation rules, but in a situation where it is impossible to introduce such rules they might show a feasible second-best way to reach fiscal sustainability. 3. A ‘first-best solution’ might be to give the citizens direct political rights in the budgetary process. As has been shown, citizens demand fewer public services and seem to force a 9 BRASIL - MINISTÉRIO DA FAZENDA sounder fiscal policy in systems with direct legislation than in purely parliamentary systems. This results in a lower public debt per capita under direct democracy. 4. Though it is not overwhelming, there is some evidence that fiscal federalism itself leads – ceteris paribus – to a smaller size of the government.” Despite there is not a conclusive reaction among authors about effectiveness in relation to the existence of constitutional rules limiting on borrowing, Bohn and Inman (1996) have founded that: - “balanced-budget constrains that apply to an audited, end-of-year fiscal balance are significantly more effective than constraints requiring only a beginning-of-the-year balance; - all state balanced-budget rules are ultimately enforced by state’s supreme court. Those states whose supreme courts are directly elected by citizens have ‘stronger’ constraints compared to those states whose supreme court justices are political appointments of the governor or legislature; - constraints grounded in the state’s constitution are more effective than constraints based upon statutory provisions; - budget surpluses in strong balance-rule states are slightly less responsive to cyclical swings in income and unemployment than are surpluses in states with weak requirements.” Another issue that should be considered is that local or regional interest groups have a significant political capacity to increase expenditure to favor their areas of influence. Doi and Hohori (2002) found that empirical evidence indicates that lobbying activities of local interest groups was exaggerated in the 1990s, which is the main reason why fiscal reconstruction did not perform very well in the 1990s in Japan. Moreover, budget institutions and budget process have also an important role as long fiscal management is concerned. Hagen and Harden (1996) present a table suggesting three prototypes of a 10 BRASIL - MINISTÉRIO DA FAZENDA budget process at government stage. The first is a strategically centralized procedure, characterized by the existence of a strong central power shaping the outcome of the process. The second type is a guided decentralized procedure. It contains a weaker, but still significant central force and has elements that guide the participants through the procedure. The third, a decentralized procedure has no significant centralizing mechanism. It seems that as more centralized budget process is, more easily government can manage its fiscal policy. Table 2: Classification of Budget Structures Step Event Strategically Centralized G1 Budget Targets Type A: Prime and Guidelines Minister or Finance Minister Type of Procedure Guided Decentralized Decentralized Strong but alterable Cabinet no biding guideline adopted by target adopted Cabinet based on proposal or information by Finance Minister Type B: binding target from collective bargaining G2 Budget Bids Spending Ministries Spending Ministries Spending Ministries G3 Compilation of Finance Minister in Finance Minister serving Finance Minister, Draft bilateral negotiations as intermediary between simply collecting bids spending ministers and Cabinet G4 Reconciliation Prime Minister or Senior Cabinet Cabinet Senior Cabinet Committee or Cabinet Committee G5 Finalization Cabinet Cabinet Cabinet Source: Table 3: Structure of government Stage in Hagen and Harden (1996), pp. 6. In a similar approach, Woo (2003) demonstrates, by a cross-country analysis involving 57 developed and developing countries, that: sociopolitical instability, income inequality, a large size of the cabinet, and the lack of central authority in the fiscal decision-making process are strongly negatively associated with the public surplus. While proportional parliamentary regimes tend to run larger deficits, government weakness or regime type does not seem to be consistently associated 11 BRASIL - MINISTÉRIO DA FAZENDA with deficits. Also the budgetary institutions and government institutions in general matter for the fiscal stance. Moreover, Giavazzi and Pagano (1990) are specially concerned about ‘confidence crisis’ defined as a critical change in expectations about the behavior of policy-makers, capable by itself of precipitating a policy regime shift or at least of increasing the chances that it will take place. According to them, what the models reveal is that the probability authorities will withstand a confidence crisis is critically affected by the extent to which they have to appeal to the market at each given date to roll over public debt. This depends on three factors: the amount of debt outstanding, its average maturity and the time pattern of maturing debt. In a situation where the stock of debt is high, the average maturity is short and maturing debt is concentrated at few dates, the Treasury has to borrow huge amounts from the market at those dates. If on one of those dates a confidence crisis occurs, the Treasury finds itself in the critical situation of refinancing a large portion of its debt on unfavorable terms. This leads the public to expect a higher probability of a regime shift if a confidence crisis occurs. Of course, one fundamental factor is related to the development of the financial system. It is evident that if the country has a strong and reliable financial system that is able to finance public debt, it is easier for the government promotes a sustainable fiscal policy. In this case, it is relevant the size of the internal savings, the attractiveness of its interest rates and the existence of a well developed secondary market in which internal and external investors can guarantee liquidity and protection in relation to exchange rate changing and other macroeconomics movements. In this regard, in its 2003 annual report, World Bank asserted that financial systems that develop unevenly and lack transparency and proper regulation are more vulnerable to financial shocks and prone to distress. 12 BRASIL - MINISTÉRIO DA FAZENDA Moreover, Schmidt-Hebbel and Serven (1997) in a study for the World Bank have identified that long-term saving rates and growth rates are positively correlated, long-term saving rates and income levels are positively correlated, long-term saving and investment ratios are strongly positively correlated and there is no robust association between long-term saving rates and income inequality. In other words: “Ensuring an adequate supply of savings is also a central policy objective for reasons other than its direct growth impact. A national saving ratio broadly in line with the economy’s investment needs is a key ingredient to reduce countries’ vulnerability to unexpected shifts in international capital flows. As illustrated by Mexico’s recent experience, low domestic saving can exacerbate the likelihood and negative consequences of sudden capital outflows that may be driven by factors such as herd behavior or self-fulfilling expectations on the part of international investors. Under increasing international financial integration, high domestic saving contributes to ensure macroeconomic stability, itself a powerful growth factor.” Finally, it should be mentioned that external factors have important role in relation to fiscal policy particularly if the country has a significant part of its debt financed by external investors. During international crisis (for example Mexico - 1994, Russia - 1996, Asia - 1997, Brazil - 1999 and Argentina - 2000) countries that have shown a healthy fiscal situation were more prepared to deal with the consequences in terms of monetary and exchange rate policies and could manage more properly the outcomes. For these reasons, International Monetary Fund, World Bank and other international organizations usually impose a severe commitment in relation to fiscal control over expenditures and management of the public deficit. It could be noticed as well as that huge amount of financial resources generally are necessary to cope with interest payments over previous debt to 13 BRASIL - MINISTÉRIO DA FAZENDA allow countries avoid default and these factor generally have very significant impact in deficit and debt management. In these circumstances, size, composition and maturity of the debt is very important. In relation to the legal framework to support sound fiscal policies adopted by many countries, New Zealand took the leading position in 1994 when has passed the so-called Fiscal Responsibility Act that has began to establish specific numerical targets consistent with the principle that control over public debt should be maintained at least by a certain period of time. The main achievements were improving transparency in relation to fiscal data to the Parliament and the society as a whole, control public deficit and increase reliability in relation to the sustainability of the fiscal policy. In 1996, due to its fiscal crisis, Sweden has passed a Fiscal Budget Act setting nominal expenditure limits and maintaining general government surplus of 2% of GDP. In 1997, United Kingdom adopted a golden rule that do not allow that government borrow to fund current spending and in 1998, Australia has established a Charter for Budget Honesty, that requires the Government to prepare an annual fiscal strategy statement outlining long-term fiscal policy objectives and fiscal targets for the following three years. The same has been imposed by the Maastricht Treaty in 1992 for the countries in the Euro area establishing a 3% of GDP ceiling on general government net borrowing, a 60% of gross government debt-to-GDP ratio norm and a close to balance or surplus target. Poland has been even more restricted by approving a constitutional target setting a limit of 60% of GDP for total public debt showing great commitment in relation to its intention in maintaining fiscal debt permanently controlled1. All these aspects could be considered important factors when appraising public fiscal management effectiveness because it has been demonstrated that the sustainability and the capacity 1 Tanaka, Hideaki (2003) Fiscal Consolidation and Medium-Term Fiscal Planning in Japan. Appendix Table IV.A.1 Changes in the fiscal framework since the 1990s. 14 BRASIL - MINISTÉRIO DA FAZENDA of implementing rigid fiscal policies depends on various conditions. But it is also true that each country has its own historic and economic reality and it is necessary understand which factors are more important. This paper will show which factors have a more strong influence in Brazil and Japan and identify how the policies have been influenced by them. The factors considered as relevant are: - institutional factors: empirical evidence demonstrates that institutions matter in terms of budgetary process that are more influencing in controlling public deficit; - medium voters positions: evidences demonstrate that direct participation on public budget result in better fiscal structure and lower fiscal deficit or lower tax increase; - fiscal systems in federal structure: federalism leads to a smaller government structure, so more effective in fighting public deficit and increase in public debt; - transparency: democratic states are more subjected to public pressure in a way to avoid public over-expenditures that is not considered appropriate or consistent with economic growth or some social targets used to justify the deficit; - legislation: it has been shown that constitutional provision establishing rules to promote budgetary equilibrium are more effective than statutory rules; - centralization and decentralization: empirical evidence shows that centralization of budget process has positive effects in relation to increasing control over public deficit and public debt; - electoral system: proportional representation have less commitment to public deficit than majority systems because representatives tend to be more pressured by their constituencies and have more difficulties to increase taxes or reduce spending; 15 BRASIL - MINISTÉRIO DA FAZENDA - external factors: international crisis and pressure of other countries or international organizations play an important role in relation to the adoption of a more restrictive fiscal policy; - presidential and parliamentary systems – it is considered that presidential systems used to be more effective in controlling public deficit than parliamentary systems; - financial system – it is relevant understand the strengths and weaknesses of the financial system in financing public debt including size of internal savings and capacity to mobilize external resources. 3. BRAZIL: FISCAL POLICY FROM 1997 UNTIL NOW In 1994, Brazil implemented a monetary reform to control hyperinflation. These measures were known as ‘Real Plan’ (in a reference to the new denomination of the currency that since than is ‘Real’) and has controlled inflation bring it from a level of more than 2000 % per year to an inflation of less than 10% per year. But to allow maintain stability of the currency and a sustainable economic growth and improve progressively living standard of the population, it was necessary to conduct other structural reforms. The second phase was denominated ‘Fiscal Stability Program’ that included among other measures: - re-scheduling of state and local government public debts; - reform and privatization of state banks; - reform in public accounting by recognition of hidden liabilities; - measures to control public debt/GDP ratio in 44%; - increase in transparency of budget and public finance; 16 BRASIL - MINISTÉRIO DA FAZENDA - maintain fiscal primary surplus to achieve sustainability in public debt; - reduce expenditure by means of an institutional reform; - improve control over budget and revitalize public planning as an important tools for promoting medium and long-term economic and social development; and - increase revenues particularly to cope with pension system disequilibrium. At the same time, in November 1998, the Government of Brazil requested support from the International Monetary Fund for an amount equivalent to SDR 13,024.80 million (US$ 18,032.21 million), in the form of a stand-by arrangement (SBA) for a period of 36 months to deal with shortage of international credit after Mexican, East Asian and Russian crisis. In its letter of intentions send to IMF in March 2000, it was considered that the year 1999 marked a major turnaround in Brazil's fiscal performance. The targeted shift of the primary balance of the consolidated public sector from near-equilibrium in 1998 to a surplus equivalent to 3.1 percent of GDP in 1999 was achieved against a background of declining domestic demand and imports. The government also made significant progress in its structural fiscal reform agenda, which were considered essential to ensure the sustainability of the fiscal adjustment over the longer term. One of the objectives assumed by the Brazilian government in relation to the IMF was to enact the Fiscal Responsibility Act in 2000 as a clear demonstration of commitment in relation to fiscal stability in the medium and long term. The fiscal imbalance, or expenses systematically higher than the revenues, has been prevailing in the Brazilian public administration lately. The economy was adversely affected by the consequences thereof, the impacts of which, in some cases, last for more than one generation. The uncontrolled inflation until Real became effective in 1994, the considerably high interest rates, the 17 BRASIL - MINISTÉRIO DA FAZENDA significant public indebtedness, and the high tax burden, when compared to other countries in Latin America, are some of said consequences. This reality led the public finance to such a limiting situation that meeting the basic needs of the people such as health, education, housing, sanitation, etc, became a difficult task, adversely impacting the poorer classes of the society, which suffer the consequences of the lack of governmental investments in those areas. Table 3: Main Events in Fiscal Policy – Brazil – 1994-2003 Year Main Events 1994 July Stabilization macroeconomic plan was enacted. So called “Real Plan” it resumed hyperinflation in the country 1998 September Ministry of Finance presents the Fiscal Stability Program to promote structural Reforms November Brazil sign a stand-by agreement with the International Monetary Fund for 36 months 1999 January End of controlled exchange rate to a free exchange rate system 2000 May “Fiscal Responsibility Act” was enacted October “Fiscal Responsibility Sanctions Act” was approved by Congress 2002 November Brazil renewed its stand-by agreement with the IMF until the end of 2004 2003 September Social Security Reform was approved by Congress December Tax Reform was approved by Congress In this scenario, the Fiscal Responsibility Act (LRF), approved by Brazilian Congress in 2000, represents an instrument to help the government with the management of the public resources, according to a set of clear and accurate rules applied to all of the public resource administrators and in all spheres of the government, concerning the administration of the public revenues and expenses, the indebtedness and the administration of the common wealth. Additionally, the Law consolidates the transparency of the administration as a social control mechanism, through the publication of 18 BRASIL - MINISTÉRIO DA FAZENDA reports and statements of the budgetary execution, explaining to the taxpayer how the resources she/he makes available for the officials are used. Among the set of rules and principles set forth in the Fiscal Responsibility Act, some of them must be emphasized: • personnel expense limit: the law provides limits for this kind of expense in relation to the current net revenue for the three Branches (Executive, Legislative and Judiciary) and for each governmental level (Federal, 27 States, and 5,500 Municipalities). For the federal government the limit is 50% and for the State and Municipalities the limit is 60% in relation to the current net revenue; • public debt limit: the limit is determined by the Federal Senate upon a proposal from the President. Nowadays is 1.5 times annual revenue for municipalities, 2.0 for States and 3.0 for federal government; • definition of annual fiscal goals: it should be identified annually for the three following fiscal years; • compensation mechanisms for permanent expenses: the official may not create a continuing expense (for more than two years) without indicating a source of revenue or reducing another expense; and • mechanism to control the public finances in election years: the Law prohibits credit operations from being contracted through advance of approved budgeted funds in the last year of term of office, and also does not allow increase of personnel expenses during the 180 days prior to the end of the office. The compliance with these new rules is allowing a permanent tax adjustment in Brazil, once the fiscal discipline introduced by the LRF is enabling an improvement in the financial condition of 19 BRASIL - MINISTÉRIO DA FAZENDA the entities of the Federal government. It is expected that this will increase the availability of resources for investments in social and economic development programs in the future. THE PLANNING PROCESS2 The Budget Directive Law The Budget Directive Law is annually prepared and stipulates the general rules for the preparation of the Budget of the next year. The Attachment of Fiscal Goals is included in said Law, and, among other issues, it must contain: a) the annual goals, in current and constant values, related to revenues, expenses, nominal and primary results and public debt amount, for the fiscal year they refer to and for the two subsequent years, which, in practice, are triennial goals; b) the evaluation of the achievement of the goals of the previous year; c) the evolution of the net equity, the origin, and the application of privatization resources, if any; and d) estimation and compensation of the fiscal waiver and the margin of expansion of the mandatory continuing expenses. The Annual Budget Law The bill of the Annual Budget Law for the Federal Government, States and Municipalities are prepared by observing the guidelines and priorities set forth in the Budget Directive Law as well as the parameters and limits stipulated in the Fiscal Responsibility Act. 2 Brazil (2002), Ministry of Planning, Budget and Administration. Fiscal Responsibility Law: Primer on the Fiscal Responsibility Law. Brasilia. At www.planejamento.gov.br website. 20 BRASIL - MINISTÉRIO DA FAZENDA The Annual Budget Law contains attached thereto, the statement confirming the compatibility of the budget with the objectives and goals defined in the Attachment of Fiscal Goals of the Budget Directive Law. The Annual Budget Law must contain the contingency reserve, defined as percentage of the current net revenue, necessary to cover expenses not provided for in the Law, such as public calamity. The purpose of the Fiscal Responsibility Act is to strengthen the budgetary process as a planning tool, avoiding undesirable imbalances. Additionally, the Act intends to be an instrument of representation of the officials’ commitment to the society. Revenues and Fiscal Waiver The Federal Government, the States and the Municipalities are responsible for implementing, stipulating, and effectively collecting all of the levies under their constitutional competence. It means that each sphere of the government will have to properly explore its tax basis and, consequently, be able to estimate its revenue. This facilitates the compliance with the fiscal goals and the allocation of revenues to different expenses. Expenses and Compensation Mechanisms In addition to the expenses provided for in law, there are some that the officials may incur due to the creation, expansion, or improvement of the government action. However, according to the Fiscal Responsibility Act, they must be accompanied by an estimation of the budgetary-financial impact for 3 years, and by a statement confirming their compatibility with the Fiscal Responsibility Act and their observance of the Annual Budget Law. 21 BRASIL - MINISTÉRIO DA FAZENDA Personnel Expenses Limits In the federal sphere, the maximum limit to be spent with personnel is 50% of the Current Net Revenue. In the States and Municipalities, the maximum limit to be spent with personnel is 60% of the Current Net Revenue. Deviation Corrective Mechanisms If the total personnel expense exceeds ninety-five percent (95%) of the limit, the Branch or body responsible for the excess is prohibited from performing the following: • granting benefit, increase, adjustment, or correction of compensation for any purpose; • creating office, job, or function; • changing career structure, implying expense increase; • providing public offices, admission, or hiring personnel for any purpose, except for the replacement due to retirement or death of the workers of the educational, health and security areas; • overtime, except in the situations set forth in the Budget Directive Law. The Public Debt The Fiscal Responsibility Act defines concepts and rules to be observed by all Federal Governmental entities as to public debt, security debt, credit operations and guarantees. The limits to the debt amount (inventory) will be established based on the consolidated debt of the Federal Government, States and Municipalities, which includes the debt of the direct administration, autarchies, foundations, and dependent state companies – always in relation to the Current Net Revenue. 22 BRASIL - MINISTÉRIO DA FAZENDA Credit Operations The Ministry of Finance check the compliance with the limits and conditions of the execution of credit operations of the Federal Government, States and Municipalities, including those of the companies directly or indirectly controlled by them. The execution of credit operations is subject to the observance of the Annual Budget Law, additional credits or specific law, as well as to the compliance with the limits and conditions set forth by the Federal Senate. According to the Fiscal Responsibility Act, the “Golden Rule” must always be observed. Said rule stipulates the following: contracting of credit operations in each fiscal year is limited to the amount of the capital expense. Granting of Guarantees The Federal Government, States, Federal District and Municipalities may grant guarantees in internal or external credit operations, since they observe the rules related to the contracting of credit operations. Regarding the Federal Government, the limits will be established by the Senate. Transparency and Social Control The transparency in the fiscal administration is the main instrument for the social control. In the preparation, approval and implementation of the Budget Directive Law and of the Annual Budget Law, as well as in the annual rendering of accounts, transparent procedures will be used, that is: publication and full disclosure of proposal summaries laws, and rendering of accounts, including through electronic means, indicating the objectives, goals, expected and verified results. 23 BRASIL - MINISTÉRIO DA FAZENDA Scope and Bookkeeping Applicable to all federal, state and municipal public administration, in addition to autarchies, foundations and state companies dependent on resources from Federal, State and Municipal Treasuries; • all expenses will be registered on an accrual basis; • Social Security revenues and expenses will be registered in accounts separated from the others; and • General rules for consolidation of public accounts will be defined by a Fiscal Administration Council, or, while it is not constituted, by the Federal central accounting agency. Budgetary Execution Summarized Report The Fiscal Responsibility Act provides that the Budgetary Execution Summarized Report must be published by all Branches and by the Public Prosecution up to thirty days after the end of each two months. Fiscal Administration Report At the end of each four months, the Fiscal Administration Report will be issued and signed by all leaders of the Branches and bodies of federal entities. The report will be published up to thirty days after the end of the period it refers to, with full public access, including through electronic means. The noncompliance with the stipulated terms will prevent, until the situation is regularized, the Federal Government, States and Municipalities from contracting credit operations, except those related to refinancing of the adjusted principal of the respective security debt. 24 BRASIL - MINISTÉRIO DA FAZENDA Inspection Checking the observance of the rules and limits of the Fiscal Responsibility Act is the responsibility of the Legislative Branch (directly or in collaboration with Audit Courts) and of the Internal Control System of each Branch and Public Prosecution. The Audit Courts will inform the Branches, Federal governmental entities or bodies, when they verify that the expense level is close to the limits established by the Fiscal Responsibility Act. The Audit Courts are also responsible for checking the calculations of the limits of the total personnel expense of each Federal governmental entity Branch. Institutional and Personal Sanctions In the event of noncompliance with its rules, the Fiscal Responsibility Act establishes several institutional and personal sanctions. Examples of institutional sanctions: • suspension of voluntary transfers for the government that does not implement, stipulate and collect the taxes under its competence; • regarding personnel expense limits, if the rules of the Fiscal Responsibility Act are not observed, and while the adjustment is not accepted, or should there be excess in the first four months of the last year of term of office, the following will be suspended: - voluntary transfers; - obtaining guarantees; - contracting of new credit operations, except for debt refinancing and reduction of personnel expenses. Also regarding personnel expense limits, it is legally void the act that: 25 BRASIL - MINISTÉRIO DA FAZENDA - does not fulfill the compensation mechanism (permanent revenue increment or permanent expense reduction); - does not comply with the legal limit of commitment applied to expenses with inactive workers; and - increases the personnel expense 180 days prior to the end of the term of office. • in relation to debt inventory limits, once the term to return to the maximum limit has expired and while the excess remain, voluntary transfers from the Federal Government or from the State may not be received; • for irregular credit operations, while the deviation corrective mechanisms (operation cancellation and reserve constitution) are not executed, receiving voluntary transfers, obtaining guarantees, and contracting new credit operations is prohibited, except for debt refinancing and reduction of personnel expenses; • in the granting of guarantees, should the correction mechanisms and their terms not be observed, the entity whose debt has been borne by the Federal Government or by the State will have its access to new credits or financing suspended until the debt is paid. In addition to the institutional sanctions, it has been established personal sanctions, set forth in a statutory law bill called “Fiscal Responsibility Crimes Act”, which determines that the officials may be personally held responsible and punished for their acts, by being removed from their offices, prevented from occupying public offices, going to prison and paying fines. Society’s Contribution to the Success of the Fiscal Responsibility Act The Fiscal Responsibility Act defines how the public accounts will be consolidated and disclosed to the population. It creates the Fiscal Administration Report, which shall submit, in a simple and objective language, the accounts of the Federal Government, each State and 26 BRASIL - MINISTÉRIO DA FAZENDA Municipality. People will have full access, including through electronic means. From that time on, the society is also responsible for demanding the necessary actions from the officials and judging whether they are proceeding responsibly with the fiscal administration. 4. JAPAN: FISCAL POLICY FROM 1997 UNTIL NOW Japan enjoyed a relatively sound fiscal position with a budget surplus of 2% of GDP in 1990. With the burst of bubble economy, however, revenue felt, recession began and government tried to enlarge aggregate demand by means of tax reduction, increase spending in public works and current expenditure in a typical Keynesian counter-cyclical approach. In 1994, a major tax reduction was carried out with the gap financed by the deficit-financing bonds. The government initiated various economic measures including a series of large-scale public works programs from 1992 to 1995. But on the other hand it became to be clear that government should control increasing budget deficit because population aging will produce important effects in the long-term and it could undermine Japanese economy and society in the future if it is not found a way to finance pension system in a sustainable basis. In 1997, government decided to raise the consumption tax rate from 3% to 5% and initiate a thorough examination and revision in expenditure. To enable fiscal consolidation, the Fiscal Structural Reform Act - FSRA was enacted in 1997. The main targets of such a law were: - fiscal deficit – the fiscal deficit as a percentage of GDP, currently around 6%, should be brought down to 3% or less by FY 2003 (section 1, article 4, chapter 1); 27 BRASIL - MINISTÉRIO DA FAZENDA - special deficit-financing bond issues – the amount of special deficit-financing bond issuance should be reduced every fiscal year and its issuance should be terminated by FY2003 (section 2, article 4, chapter 1); - spending limits on major programs – for fiscal year 1998 through 2000 (defined as the intensive reform period), the magnitude of expenditures in major programs is subject to a numerical “Cap” (chapter 2); and - guideline for fiscal policy – fiscal policy will be conducted in such a manner that sum of taxes, payroll contributions, and fiscal deficit as percentage of national income will not exceed 50% (section 1, article 6, chapter 1). However, after the enactment of FSRA, Japanese economy continues to suffer from bad performance (deflation, recession and raise in unemployment), some financial institutions went in bankrupt and Asian countries faced a severe financial and economic turmoil in 1997/98. As a result, government initially proposed an extension in the target date by two years and then in 1998 decided to suspend the reform for a while until economic and financial conditions improve. Since then fiscal reform has been mentioned as a political target including the establishment of targets and measures to tackle the problem. For example, in 2001, government has prepared a so called “Structural Reform of Japanese Economy: Basic Policies for Macroeconomic Management” that encompassed: - promotion of privatization, deregulation, assistance to business entrepreneurs and fiscal reform; - resolve bad loans problems; - establishment of corporate reconstruction funds; - improve unemployment insurance and retraining; 28 BRASIL - MINISTÉRIO DA FAZENDA - expect the Bank of Japan to make timely decision on quantitative credit easing; - limit new issue of Japanese government bonds to 30 trillion yen from FY2002; - turn primary balance of national budget into surplus; and - achieve economic growth led by private sector demand. In 2002, government released a new report in which it was established that it could be expected a balance surplus in the early 2010s. Unfortunately, bad economic performance does not allowed government to achieve its target of maintaining a limit in government bonds issuance at 30 trillion yen level per year. For 2004, it seems that perspectives are better due to economic recovering. So far government is demonstrating commitment to put fiscal reform ongoing by means of privatization, reduction over issuance of public bonds and restriction in relation to financing new public works. Tanaka (2003) summarizes the main developments in public management in Japan as follows: Table 4: Main Events in Fiscal Policy – Japan – 1995-2003 Year Main Events 1995 June The Decentralization Promotion Law was put into effect 1996 November The Administrative Reform Council was established December “Fiscal Restructuring Targets” decided by the Cabinet 1997 June “Consolidation and Rationalization Plan of Public Corporations” was adopted by the Cabinet November The Fiscal Structural Reform Act was enacted December The final report was released by the Administrative Reform Council 1998 May The Fiscal Structural Reform Act was amended June The Basic Law on the Administrative Reform of the Central Government was put into effect December The Fiscal Structural Reform Act was suspended 1999 March “Second Decentralization Action Plan” was decided by the Cabinet 29 BRASIL - MINISTÉRIO DA FAZENDA 2000 April 2001 January April June December 2002 January June The National Public Service Ethics Law was put into effect The Administrative Reform of the Central Government was put into effect Independent Administrative Institutions (IAIs) were established The law Concerning Access to Information Held by Administrative Organs was put into effect “Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management” was decided by the Cabinet “Consolidation and Rationalization Plan of Public Corporations” was decided by the Cabinet “Structural Reform and Medium-term Economic and Fiscal Perspective” was decided by the Cabinet “Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002” decided by the Cabinet 2003 January FY2002 revision of “Structural Reform and Medium-term Economic and Fiscal Perspective” Source: Tanaka (2003) Box 1. Chronology of Main recent developments in public management But that are some weaknesses in institutional aspects related to the budget that has been identified by Wright (1999): “Central government budgeting in Japan is complex, and the processes of making budgets opaque. Besides the main (General Account) budget, there is the Fiscal Investment Loan Program (FILP), the so-called second budget, and the budgets of 38 special accounts with hypothecated revenues and specific expenditures. Each year there is at least one, sometimes several supplementary budgets. In addition, there are 91 public corporations, part of whose capital expenditures and trading losses are defrayed from the main budget and FILP. Social security contributions are not counted as general revenues, but paid into separate special accounts, which are, however, partly subsidized by transfers from the main target. There are annually, numerous complex cash flow transfers of revenues and expenditures between the main budget, supplementary budgets, and FILP and between them and the 38 special 30 BRASIL - MINISTÉRIO DA FAZENDA accounts and the public corporations. There is a considerable potential for the manipulation of those transfers to relieve spending pressures on the main budget.” In this sense, however, there is one important characteristic of the Japanese government that should not be forgot related to the existence of a very particular system to finance public expenditure which is associated to 38 special accounts and 11 government-affiliated agencies accounts that supports a so called Fiscal Investment and Loan Program – FILP responsible for managing financial resources equivalent to more than 25% of GDP. According to Shibata (1993), FILP is considered the ‘Second National Budget’ and has represented a key tool to finance development programs and public debt due to the fact that government has access to huge amounts of money that come from households savings and revenues received by public pensions programs paying small amounts of interest rates, enjoying credibility and public support in a long-term maturity basis. In addition to tax revenues, postal savings, public pension funds and life insurance funds are all important financial sources within the national scheme. These financial sources can then be used for specific policy objectives by making loan and investing in organizations that promote specific policy objectives. The FILP was constructed to foster investment and loan money. The FILP provides financing for the investments of government enterprises, including some local governments. It provides also loans to selected private businesses that are regarded as having special importance for the purpose of development. A portion of the funds are devoted to purchase public bonds directly from the general account. To have an idea of the importance of the Trust Fund Bureau, more than 34% of the government bonds in 1990 were in their hands which represent the larger holder of public bonds in Japan. It means that the Japanese government counts on a permanent and reliable source to finance its debt representing an outstanding strength in terms of fiscal management. 31 BRASIL - MINISTÉRIO DA FAZENDA Table 5-Japan-Holding Ratios of Government Bonds – 1990 -2003 - % Trust Fund Bank of Financial Securities Bureau Japan Institutions A A1 B C D 1990 38.5 34.6 5.1 30.6 2.6 1991 41.1 37.4 4.8 28.2 2.9 1992 39.5 36.4 5.2 30.3 2.6 1993 37.3 32.1 6.8 30.3 3.6 1994 34.4 27.4 7.9 30.6 4.3 1995 35.9 27.5 7.8 31.2 2.6 1996 35.8 26.0 10.5 26.8 2.8 1997 40.4 29.5 11.2 22.8 1.8 1998 42.2 29.8 10.6 21.4 2.3 1999 36.7 21.7 16.6 23.3 1.7 2000 32.3 18.3 14.9 30.6 2.1 2001 35.2 16.2 12.6 22.4 2.2 2002 14.4 13.3 13.4 22.4 1.4 2003 11.2 10.8 12.9 24.2 1.4 Source: Ministry of Finance – Japan Year Government Others E 23.2 23.0 22.4 22.0 22.8 22.5 24.1 23.8 23.5 21.7 20.1 27.6 48.4 50.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 5. BRAZIL: RESULTS OF ITS FISCAL POLICY It is clear that since the enactment of the Fiscal Responsibility Act, Brazil improved significantly in terms of its fiscal management and control over public debt and public deficit. But some other factors are important as well. Brazilian budget system is very centralized in the Ministry of Planning and include a medium term planning of four years (Pluriannual Plan), a law establishing clear limits to the presentation of the budget (Budget Directive Law) and a consolidated budget (Budget Annual Law) encompassing all expenditure and revenues of the direct and indirect administration including funds and investments of the public enterprises, giving an overall pictures about the federal public fiscal status. 32 BRASIL - MINISTÉRIO DA FAZENDA Relevant legislation has been approved in the last 5 years, allowing the government, particularly the Ministry of Finance, to establish very sound and reliable fiscal targets. This kind of legislation is helping government to fight against political tendency to increase expenditure or relax taxation, showing that on the medium and long term it will permit that country attract more international capital and avoid risks of being influenced by eventual international financial turmoil. Moreover, as international confidence increases, there is a tendency to finance the public bonds in a more reasonable basis by reducing interest burden that will allow further increase in spending in social programs. Another positive characteristic is associated with transparency. Public accounts and the budget itself in all levels of government are very open, timely and transparent giving to the public, the media and the members of Parliament and parties to appraise public performance permanently. It could be considered that country has achieved a remarkable position in relation to the openness of its public accounting. Figure 3: Brazil - Net Public Debt and Primary Surplus in Relation to GDP % – 1995-2003 Net Public Debt x GDP Public Sector Consolidated Fiscal Result 15% % GDP deficit 10% 5% 0% superavit dez/95 dez/96 dez/97 set/98 dez/98 dez/99 -5% -10% Nominal Primary 33 Juros nominais dez/00 dez/01 mai/02 BRASIL - MINISTÉRIO DA FAZENDA However, there are some weaknesses that should be considered in future improvements in legislation and institution structuring. The first one is related to the direct participation of the population in the discussion and preparation of the budget. Because the people is very far from this kind of intervention, sometimes it is difficult to involve the society in the construction of general solutions to tackle, for example, the financing of the pension system, the tax system, the selection of public works, and other important issues that do not seems to be clearly understood as a political and social problem. Another important negative characteristic is related to the political and electoral system. There are many parties in Brazil, and it is quite difficult to understand which are the main differences and similarities among them. In other words, it is not clear which are the ideologies of each participant in the political arena. As a consequence, it is very difficult to build up a consensus in relation to the policies that has to be supported by the coalision government and discussion and approval of any kind of legislation consume more time and undermine public authority much more than it should be expected. It is possible to resume Brazilian main characteristics of its institutional, political and legislation framework as follows: Table 6: Brazil – Main Characteristics of Fiscal Framework Item Characteristic Institutional Budget is proposed by the Ministry of Planning in consultation with the Factors Ministry of Finance. Spending Ministries has to observe ceilings established by MP and MOF. Parliament cannot increase total budget Medium Voters There is no direct participation of voters in the definition of the budget. Only Positions few and small local authorities use or consult population for selecting projects Fiscal System in Recent tax reform has enlarged the power of federal government and reduced Federal Structure tax fighting among states and municipalities Transparency Fiscal Responsibility Act has imposed a large degree of transparency both to proposed budget and ex-post implementation accounting. Many reports has to be published by the three levels of government 34 BRASIL - MINISTÉRIO DA FAZENDA Legislation Constitution and Complementary Law establish rules to enhance fiscal control Centralization and There is an important centralization over budget execution and fiscal and Decentralization financial control in all levels of government. MOF can control expenditure based on real cash flow. Electoral System It is adopted a proportional system of voting. Pluralism in number of parties has not allowed building majority without coalision among many parties. External Factors International crisis have impacted balance of payment and currency. Brazil is under IMF supervision and financial support. Presidential and The System of government is Presidential. The President is both the chief of Parlamentary State and Government but cannot dissolve Parliament. Financial System Internal Savings are not large enough to finance public debt and the interest rates are very high representing a significant weakness. The Brazilian government has announced a target of 4.25 % of GDP for the primary surplus of the non-financial consolidated public sector (general government) in 2003. This target aims at ensuring a favorable dynamic for the public-debt-to-GDP ratio, taking into account the fiscal realities and the social priorities of the country. The commitment with the fiscal target, together with the reform of key aspects of the economy, are the cornerstone for vigorous economic growth and price stability in coming years, freeing the country from any fiscal trap. Fiscal strength helps reduce interest premia and rates. Actions to address the fiscal problem will be accompanied by reforms aiming at improving access to credit, and expanding investment, employment and income. These goals, together with an affordable, efficient and targeted social safety net are at the core of the new economic policy. The Executive Board of the International Monetary Fund – IMF (2004) has issued the following appraisal about the Brazilian performance under an SDR 27.4 billion (about US$40.2 billion) Stand-By Arrangement that is under implementation since 2002: “The recovery of growth owes much to the sound economic policies pursued by the government. The solid fiscal outturn in 2003 and the government’s commitment to a strong fiscal stance in 2004 have ensured that debt dynamics remain on a steady downward path. 35 BRASIL - MINISTÉRIO DA FAZENDA The cautious response of monetary policy to the monthly inflation rates seen over the past three months has been appropriate and demonstrates the authorities’ commitment to ensuring that inflation hits the mid-point of the target range in 2004.” In relation to transparency, the Ministry of Finance is publishing annually both its strategic report about debt management and the results from previous year. It is planned to refinance R$ 252.9 billion (US$ 86.5 billion) in 2004 with a net reduction of R$ 73.5 billion (US$ 25.1 billion) that will come from the primary surplus. It gives to the financial system an important instrument to plan their strategy in relation to the use of public bonds as a financial protection and identify clearly the size of the effort in relation to the fiscal policy. It was also established the following targets related to the types of indexes used to establish the interest rate to remunerate the public bonds: Table 7: Brazilian Debt Management Plan 2004 Description December 2003 Minimum 2004 Federal Public Bonds in Market billion R$ 965,8 1,080 Average maturity – months 39 40 % to be negotiated in 12 months 30.7 26 Maximum 2004 1,150 45 32 Composition of Public Bonds by type of interest rate index Fixed rate 9.5 9 Central Bank prime rate 46.5 39 Exchange Rate 32.4 24 Consumption Price Index 10.3 12 Other Indexes 1.3 1 Source: Ministry o Finance – National Treasury – Annual Plan of Financing 2004 19 47 30 17 3 Finally, if it is used the Domar’s test for fiscal sustainability, it is possible to conclude that Brazilian fiscal situation is close to the sustainability because it has been possible to maintain a primary surplus in a consistent basis during the years, as it could be seen in table 8 and figure 4. Now it is necessary to control the level of increase in the debt/GDP ratio in a way to be smaller than the level of GDP growth. 36 BRASIL - MINISTÉRIO DA FAZENDA Table 8 - Brazil: Debt/GDP Ratio and Primary Surplus - 1983-2003 Debt/GDP Primary Year Increase Year Ratio Surplus/ GDP Debt/GDP Ratio % % % 1983 51.5 1.70 1984 55.8 4.20 8.35 1985 52.6 2.60 -5.73 1986 49.4 1.60 -6.08 1987 50.3 -1.00 1.82 1988 46.9 0.90 -6.76 1989 40.2 -1.00 -14.29 1990 40.6 4.60 1.00 1991 37.9 2.71 -6.65 1992 37.2 1.57 -1.85 1993 33.0 2.19 -11.29 1994 29.2 5.21 -11.52 1995 30.5 0.27 4.45 1996 33.3 -0.09 9.18 1997 34.3 -0.95 3.00 1998 41.7 0.01 21.57 1999 48.7 3.23 16.79 2000 48.8 3.46 0.21 2001 52.6 3.70 7.79 2002 55.5 4.01 5.51 2003 58.7 4.32 5.77 Source: Ministry of Finance - National Treasury Secretariat Figure 4: Brazil – Primary Surplus and Government Debt – 1983 - 2003 Brazil - Primary Surplus/GDP x Public Debt/GDP % - 1983-2003 6.00 5.00 Primary Surplus/GDP % 4.00 3.00 2.00 1.00 0.00 0.0 10.0 20.0 30.0 40.0 -1.00 -2.00 Government Debt/GDP % Year 37 50.0 60.0 70.0 BRASIL - MINISTÉRIO DA FAZENDA 6. JAPAN: RESULTS OF ITS FISCAL POLICY It is possible to resume Japanese main characteristics of its institutional, political and legislation framework as follows: Table 9: Japan – Main Characteristics of Fiscal Framework Item Characteristic Institutional Budget is proposed by spending Ministries and consolidated by the Ministry Factors of Finance. Spending Ministries have relative power to avoid restrictions established by MOF. Parliament can increase total budget. Medium Voters There is no direct participation of voters in the definition of the budget. Positions Fiscal System in Tax system is very centralized in the central government and local authorities Federal Structure do not have power to issue debt bonds without approval of Ministry of Home Affairs. Transparency The budget is considered complex and not unique with 37 special accounts and other funds. Legislation Fiscal Structural Reform Act was enacted in 1997 but suspended in 1998. Every budget has a different approach in relation to fiscal targets. Centralization and Budget execution and fiscal and financial control is decentralized among Decentralization spending Ministries reducing the power of MOF to control over expenditure based on real cash flow. Electoral System It is adopted a district system of voting. There are only 5 parties in the Parliament but to have majority it is necessary to build coalision among three parties. External Factors International crisis have not affected balance of payment and currency in Japan. Presidential and The System of government is Parliamentary. The Prime Minister is both the Parliamentary chief of State and Government and can dissolve Parliament and ask for new elections. Financial System Japan has a large internal saving and do not depend on international support to finance its public deficit leading to an independent policy with very low interest rates to finance the debt. Aging society could harm savings in the future. Even considering that Japan has a stable, one-party majority government and a centralized budget system, Ministry of Finance has not succeeded in reconstructing the fiscal system and achieving its policy aims of reducing the deficit and level of accumulated debt. According to Wright (1999) the reasons were: 38 BRASIL - MINISTÉRIO DA FAZENDA - failure to persuading politicians to elaborate a more radical tax reform; - difficulties to reconcile the contradictory aims of economic policy, need for increasing public expending and tax cuts (international pressures) to stimulate the economy with the fiscal aims of reconstruction, countercyclical measures; - conflict in relation to political-electoral strategic aims; - the nature of budget that allows spending ministries to negotiate supplementary resources during the year; - lack of power of MOF to avoid spending ministries having more resources to support their expenditure; and - small commitment in relation to the question of “how to pay for it” than other G7 countries. Tanaka (2003) asserts that is faced with considerable difficulties in achieving both the shortterm objective of economic recovery and the medium-term objective of fiscal consolidation. At the same time, huge amount of internal savings has been able to finance huge public deficit at an extremely low interest rate of less than 2% for the ten-year Japanese government bond. There are some remedies that are suggested as, for example, reduce public expenditure, increase efficiency of public expenditure, increase transparency in relation to the formulation of the budget and accountability of public finance and enhance the power of the Ministry of Finance in its role to define and establish fiscal targets. Ihori et al (2003) has assessed fiscal sustainability of Japanese current debt trend and concluded that despite government solvency seems not been a problem, further fiscal expansion may cause a public crisis to occur in the near future. Moreover, the effect of fiscal policies was too marginal to stimulate macroeconomic activity. Finally, Japan would face more difficult economic problems in the future since the population is aging very rapidly and the Japanese market system is 39 BRASIL - MINISTÉRIO DA FAZENDA behind the ‘global standard’. It is recommended, as a conclusion, that it is necessary to promote fiscal reforms including increasing tax revenue and reducing expenditure. So, it is important to emphasize that present trend in Japanese growth of fiscal deficit represents also a moral hazard for the society in the medium and long-term because it could be necessary to apply a severe monetary and fiscal policy much deeper in the future. It is very important to promote some reforms as soon as it is identified signals of economic recovery to avoid that fiscal debt could represent a threat to economic growth because a crowding out effect could increase the level of interest rate in a way that impact sustainable recovery of the economy. Table 10 - Japan: Debt/GDP Ratio and Primary Surplus - 1983-2003 Debt/GDP Primary Year Increase Year Ratio - % Surplus/ Debt/GDP GDP - % Ratio - % 1983 41.0 -2.1 1984 45.0 -1.0 9.76 1985 50.0 -0.3 11.11 1986 54.0 0.3 8.00 1987 55.2 1.3 2.22 1988 53.3 2.1 -3.44 1989 50.2 2.3 -5.82 1990 48.2 2.9 -3.98 1991 47.6 2.5 -1.24 1992 49.5 -0.4 3.99 1993 55.7 -1.4 12.53 1994 59.4 -2.4 6.64 1995 65.3 -3.4 9.93 1996 69.1 -3.3 5.82 1997 74.6 -2.6 7.96 1998 85.4 -4.3 14.48 1999 96.3 -5.7 12.76 2000 104.4 -4.3 8.41 2001 121.2 -4.1 16.09 2002 134.4 -5.3 10.89 2003 145.1 -5.4 7.96 Source: Ministry of Finance 40 BRASIL - MINISTÉRIO DA FAZENDA Figure 5: Japan – Primary Surplus and Government Debt – 1983 - 2003 Japan - Primary Surplus/GDP x Public Debt/GDP % - 1983-2003 4.0 3.0 2.0 Primary Surplus/GDP % 1.0 0.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 Public Debt/GDP % Year 7. WHAT CAN BE LEARNED The first conclusion that should be emphasized is that a lot of factors count when fiscal policy is concerned. It includes general economic and historic background of a country, the level of domestic savings and its dependence from external financial resources, its institutional framework and characteristics of political system. But these factors have different impacts depending on each country reality. In relation to Brazil, its external vulnerabilities have imposed a more complex approach to deal with fiscal crisis in a more permanent basis. It was necessary to build up a series of policies involving a radical change in Constitution and other relevant financial laws, have a permanent necessity to negotiate thoroughly each fiscal and economic reform in Congress due to the weaknesses in the political scenario represented by a fragile coalision government, increase the power of the Ministry of Finance and Ministry of Planning to manage the budget in a more 41 BRASIL - MINISTÉRIO DA FAZENDA restrictive manner, and build a permanent dialogue with the financial system to demonstrate permanent commitment to fiscal stability. Apart from that, it has been necessary to negotiate a large financial support by the International Monetary Fund to give some financial strength to maintain the capacity of the country to pay its external debt, manage the current account and avoid being exposed by severe and rapid changes in the international financial market. Due to a severe fiscal policy Brazil will resume the support of the IMF in December of 2004. In relation to the destabilizing effects of capital movements Iwami (1995) identified that: “Capital flows tend to amplify any real imbalance, as syndicate loans to the LDCs [less developed countries] and foreign investment in US bonds illustrate, and sometimes to destabilize the floating exchange-rate system as well. But it is irrational to reduce the current capital flows back to the scale of, say, the 1960s. The developing countries, including the East Europeans, need foreign investment to realize their growth potential, while developed countries still need to finance their current account deficits, at least temporarily. The supposed destabilizing effects of capital movements are rather reflections of fundamental imbalances. Indeed, the USA will have to reduce its fiscal deficits in the long run in order to stabilize the dollar exchange rate.” So, it could be asserted that permanent imbalances and huge fiscal deficits in the developed nations (USA and Japan, for example) can represent a threat to global economic growth and developing countries need to learn how to deal with this scenario. In relation to Japan, due to the internal capacity to finance its debt using the huge domestic savings paying a small interest rates and counting with a relatively long maturity of the government bonds, the other factors such as eventual fragility in the budget system, lack of political will to support more radical and structural reforms and a complex political environment where groups of 42 BRASIL - MINISTÉRIO DA FAZENDA interests have significant power, have not been strong enough to impose any important threat to the fiscal and financial stability of the country. But there is a kind of a moral hazard due to the fact that fiscal policy is unsustainable particularly if it is considered the consequences of the aging society (more expenses in the future) and the difficulties to achieve a consistent growth rate. There is also an important consideration that should not be forgotten. It is related to the decline in individual saving rates in Japan. Nowadays, the level of individual saving is less than 10% while during the 1970s it was more than 20% and more than 10% in the 1980s. If this trend continuous it is possible to get a reduction in the overall value of the savings leading to an expanding difficulty to finance public debt in the future. The reasons behind this tendency are in part due to aging society, continuous stagnation of economy and also changing in labor market and behavior of the youngest generation that could not be comfortable in increasing their savings to face higher taxation or reducing social benefits when they retire. So, recovering domestic saving ratio remains as a challenge to be faced by the Japanese government in its fiscal policy. For Brazil, certainly the most significant lesson is related to the necessity to develop more strongly a domestic saving strategy to give financial stability to the country. In this case, the other factors, particularly those referred by the legal apparatus, will be an advantage because it can compensate eventual fragility in the political arena. If the internal savings increase, the use of external sources will be an opportunity and not a necessity. For Japan, it is important to take in account that it is necessary to avoid being put in a fragile situation if the public debt continue to increase in a trend which could be unsustainable particularly if were necessary to increase the interest rates and the level of expenditure related to the pension system and external pressure from other developed nations and international organizations weaken the credibility of the Japanese financial system. 43 BRASIL - MINISTÉRIO DA FAZENDA So, for Brazil it is recommended that a reform in the financial system would be conducted in a way to incentive domestic savings and decrease dependency of international resources. In terms of debt management it is important to increase the maturity of the public bonds and decrease its relationship to the exchange rate and interest rates maintained by the Central Bank to manage the monetary policy. It is important to avoid the contamination of the public deficit resulting from the huge amount of interests that should be financed by the budget. These measures can give some opportunities to the government increase the investment in infrastructure and social development. At the institutional level it is important to reduce the rigidity of the budget and create incentives for the public organizations save resources in the budget if there are guarantees that the amount saved will be incorporated in future budget as a result of a more efficient management of the resources. Nowadays legislation has established only punishment without any provision for rewarding good management. Finally, increase the direct participation of the society in the discussion of the budget is important to enhance commitment of the tax payer in relation to the financing of the public expenditure. For Japan, it is recommended to increase the power of the Ministry of Finance in relation to the proposal and implementation of a more balanced budget. It seems that despite of establishing some fiscal targets, there is not a legal and institution framework that allows MOF guarantee the achievement of the target. At the same time, it is important to increase transparency in relation to the financial information and have a consolidated budget that should be discussed by the Diet before the approval of each special account. It is likely that a more transparent discussion about the overall budget will give opportunity to promote structural reforms as soon as members of the Diet, the media and the society as a whole realize that a permanent growth in fiscal deficit could represent a threat to the economy of the country in the future. As society aging is an inevitable trend, it should 44 BRASIL - MINISTÉRIO DA FAZENDA be considered an increase in the tax and a reduction in expenditure to bring fiscal deficit to a more balanced framework. BIBLIOGRAPHY BOHN, H. and INMAM, R.P. (1996) Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States. Carnegie-Rochester Conference Series on Public Policy, 45, 13-76. BRAZIL (1988) Constitution of the Federative Republic of Brazil. 1997 Revised Edition. Brasilia. Brazilian Senate. English Version. BRAZIL (2000) Complementary Law no. 101, Fiscal Responsibility Act. Brasilia. Brazilian National Congress. English Version. BRAZIL (2003) Fiscal Target for 2003. Ministry of Finance website. Brasilia. BRAZIL (2002) Ministry of Planning, Budget and Administration. Fiscal Responsibility Act: Primer on the Fiscal Responsibility Law. Brasilia. www.planejamento.gov.br CARGILL, Thomas F. and YOSHINO, Naoyuki (2003) Postal Savings and Fiscal Investment in Japan: The PSS and the FILP. Oxford University Press. DOI, Takero and IHORI, Toshihiro (2002) Fiscal Reconstruction and Local Interest Groups in Japan. Journal of the Japanese and International Economics 16, 492-511. Academic Press. DOI, Takero (2004) To Establish Sustainability of Government Deficits: Methodology and Application. PRI Discussion Paper Series (no. 04A-04). Research Department Policy Research Institute. Ministry of Finance. Tokio. GIAVAZZI, Francesco and PAGANO, Marco (1990) Confidence Crises and Public Debt Management in Public Debt Management: Theory and History. Rudiger Dornbush and Mario Draghi (eds.). Cambridge University Press. HAGEN, Jurgen von (1992) Budgeting Procedures and Fiscal Performance in the EC, Commission of the European Communities Directorate for Economic and Financial Affairs, Economic Papers, vol. 96. HAGEN, Jurgen von and HARDEN, Ian (1996) Budget Process and Commitment to Fiscal Discipline. IMF Working Paper 96/78. 45 BRASIL - MINISTÉRIO DA FAZENDA HALLERBERG, M. and von HAGEN, J. (1999) Electoral Institutions, Cabinet Negotiations, and Budget Deficits in European Union in J. Poterba and J. von Hagen (eds.), Fiscal Institutions and Fiscal Performance, Chicago: Chicago University Press and NBER, pp. 209-32. IHORI, Toshihiro, NAKAZATO, Toru and KAWADE, Masumi (2003) Japan’s Fiscal Policies in the 1990s in Symposium Japan’s Lost Decade: origins, Consequences and Prospects for Recovery. The World Economy vol. 26 no. 3. Blackwell Publishing. IMF (2004) International Monetary Fund - Press Release No. 04/59 March 26, 2004. IMF Executive Board Completes Sixth Review of Brazil's Stand-By Arrangement. Washington. IWAMI, Taru (1995) Japan in the International Financial System Studies in the Modern Japanese Economy. General Editors: Malcolm Falkus & Kojiro Niino. London. Macmillan Press Ltd. KIRCHGASSNER, Gebhard (2002) The effects of fiscal institutions on public finance: a survey of the empirical evidence in Political Economy and Public Finance: The role of political economy in the theory and practice of public economics. Edited by Winer, Stanley L. and Shibata, Hirofumi. The International Institute of Public Finance. Edward Elgar, pp. 145-77. OHKAWA, Masazo and IKEDA, Kotaro (1993) Government Bonds in Japan’s Public Sector: How the Government is Financed ed. By Tokue Shibata. University of Tokio Press. Tokio. POTERBA, James M. and HAGEN, Jurgen von (1999) Fiscal Institutions and Fiscal Performance. The University of Chicago Press.Chicago and London. SCHIMIDT-HEBBEL, Klaus and SERVEN, Luis (1997) Saving across the World: Puzzles and Policies. World Bank Discussion Paper no. 34. The World Bank. Washington. SHIBATA, Tokue (1993) The Economy and the Public Sector in Japan’s Public Sector: How the Government is Financed ed. By Tokue Shibata. University of Tokio Press. Tokio. TANAKA, Hideaki (2003) Fiscal Consolidation and Medium-term Fiscal Planning in Japan. OECD Journal on Budgeting – Volume 3 – no. 2. WOO, Jaejoon (2003) Economic, political, and institutions determinants of public deficits. Journal of Public Economics 87 (2003) 387-426. North-Holland. WORLD BANK (2004) The World Bank Annual Report 2003. The World Bank. Washington. WRIGHT, Maurice (1999) Coping with Fiscal Stress: Illusion and Reality in Central Government Budgeting in Japan, 1975-1997 in Fiscal Institutions and Fiscal Performance. The University of Chicago Press. Chicago and London. 46 BRASIL - MINISTÉRIO DA FAZENDA Tables Brazil - Main Economic Indicators GDP Net Year GDP per Income Send million Capita Abroad 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 US$ A 17,568 12,810 15,792 17,883 18,215 19,968 24,014 21,664 22,765 28,540 31,262 34,135 37,392 42,576 49,162 58,753 84,086 110,391 129,891 153,959 177,247 201,204 223,477 237,772 258,553 271,252 19,459 189,744 211,092 257,812 282,357 305,707 415,916 469,318 405,679 387,295 429,685 543,087 US$ B 275 195 233 256 254 270 316 277 283 345 367 390 415 457 515 601 839 1,075 1,234 1,427 1,603 1,776 1,925 2,005 2,133 2,190 1,497 1,468 1,599 1,915 2,057 2,186 2,923 3,180 2,706 2,544 2,781 3,464 % GDP C 0.33 0.64 0.63 0.69 0.51 0.84 0.53 0.54 0.92 0.80 0.95 0.80 0.76 0.88 0.95 0.96 0.87 0.83 1.36 1.52 1.61 2.32 2.73 3.26 4.23 5.32 6.25 6.31 5.63 4.66 3.93 4.23 3.32 2.45 2.26 1.93 2.52 1.69 General Investment Export Import % GDP E 14.88 16.80 17.78 15.55 12.95 15.35 16.86 14.80 14.60 15.79 16.08 18.55 18.96 18.66 19.91 20.33 20.37 21.84 23.33 22.41 21.32 22.26 23.35 22.87 24.31 22.99 19.93 18.90 18.01 20.01 23.17 24.32 26.86 20.66 18.11 18.42 19.28 20.75 % GDP F 5.57 5.72 5.95 5.32 5.79 6.66 8.64 6.52 7.61 6.49 5.72 5.96 6.27 6.56 6.46 7.27 7.84 7.67 7.22 7.01 7.24 6.69 7.24 9.04 9.62 7.90 12.24 15.04 12.95 9.22 9.83 11.67 8.93 8.20 8.68 10.87 10.50 9.51 % GDP G 6.15 6.09 6.58 6.40 6.19 8.02 9.02 5.62 5.40 5.77 5.78 6.72 6.21 6.95 8.19 8.86 9.01 13.29 11.02 9.40 7.90 7.88 9.32 1.29 10.01 8.59 9.66 8.79 7.50 6.64 6.43 6.10 5.46 6.96 7.91 8.39 9.10 9.16 Consumption % GDP D 83.23 82.21 80.08 84.07 85.33 83.67 82.34 82.24 79.37 80.85 83.79 81.78 75.11 76.89 80.48 80.38 79.12 81.31 78.10 79.36 78.64 78.17 78.96 78.94 75.93 78.06 79.03 76.13 74.16 77.38 73.43 70.11 69.67 78.59 79.47 78.58 77.75 77.50 47 Foreign Gross Savings Savings % GDP H -1.34 -0.15 -1.25 0.47 -1.10 -0.18 -0.33 -2.44 -5.28 -2.69 0.69 1.19 -2.14 -0.39 1.31 1.66 0.33 3.98 2.79 3.28 1.57 2.71 5.03 4.99 4.39 6.37 5.16 1.25 -2.27 2.03 0.51 -1.37 -0.25 1.07 1.17 -0.92 0.76 0.92 % GDP I 16.22 16.94 19.03 15.08 14.05 15.53 17.19 17.24 19.88 18.48 15.39 17.36 21.10 19.05 18.60 18.67 20.04 17.86 20.54 19.13 19.75 19.55 18.32 17.87 19.92 16.62 14.77 17.66 20.28 17.98 22.26 25.69 27.11 19.09 18.60 19.86 20.09 21.23 Real GDP Tax Growth % GDP J 8.38 10.50 9.50 9.59 8.75 6.51 0.36 3.58 2.42 6.76 4.43 9.70 9.39 10.35 11.44 11.91 13.94 8.05 5.22 10.34 4.88 5.02 6.76 9.17 -4.28 0.81 -2.92 5.39 7.91 7.50 3.61 -0.05 3.20 -5.05 1.03 -0.54 4.92 5.85 Burden % GDP K 16.66 18.70 17.90 17.42 16.38 15.76 16.05 17.02 19.71 22.13 21.62 24.30 25.91 25.98 25.26 26.01 25.05 25.05 25.22 25.14 25.55 25.70 24.66 24.45 25.18 26.24 26.84 24.19 23.83 26.50 24.25 23.36 23.74 27.94 24.38 25.15 25.92 28.87 BRASIL - MINISTÉRIO DA FAZENDA 1995 1996 1997 1998 1999 2000 2001 2002 705,449 775,475 807,814 787,889 536,554 602,207 510,360 450,882 4,436 4,809 4,942 4,755 3,195 3,539 2,961 2,582 1.57 1.57 2.00 2.32 3.50 2.96 3.78 3.86 79.48 80.99 80.87 81.06 81.38 79.97 79.79 78.17 20.54 19.26 19.86 19.69 18.90 19.29 19.47 18.32 48 7.72 6.99 7.51 7.42 10.28 10.66 13.22 15.49 9.49 8.90 9.88 9.60 11.82 12.18 14.22 13.41 2.82 3.15 4.14 4.32 4.73 4.22 4.45 1.24 19.47 17.77 17.35 16.80 15.43 17.33 16.75 18.51 4.22 2.66 3.27 0.13 0.79 4.36 1.31 1.93 30.64 28.63 28.58 29.33 31.07 31.61 33.40 34.88 BRASIL - MINISTÉRIO DA FAZENDA Main Indicators of Japanese Economy - 1956-2003 Year Real GDP Cumulative Bond Bond Bond Nominal Primary Real Operational Nominal Debt/GDP Growth GDP Dependancy Issuance Outstand Interest/ Surplus/ Interest/ Surplus/ Surplus/ ratio GDP GDP GDP GDP GDP % % % % % -5.4 -4.7 -5.3 -4.8 -4.9 -4.2 -3.8 -3.1 -2.1 -1.0 -0.3 0.3 1.3 2.1 2.3 2.9 2.5 -0.4 -1.4 -2.4 -3.4 -3.3 0.8 1.3 1.9 2.6 3.3 4.4 5.6 6.6 7.7 8.7 9.7 10.2 10.4 10.5 10.6 10.8 11.0 10.8 10.6 10.7 10.7 10.7 Rate % 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 7.5 7.3 11.2 12.2 11.7 7.5 10.4 9.5 6.2 11.0 11.0 12.4 12.0 8.2 5.0 9.1 5.1 -0.5 4.0 3.8 4.5 5.4 5.1 2.6 2.8 3.2 2.4 4.0 4.2 3.2 5.1 6.3 4.9 5.5 2.5 0.4 0.4 1.1 2.5 3.4 1956=100 100.0 107.5 115.3 128.3 143.9 160.8 172.8 190.8 208.9 221.9 246.3 273.4 307.2 344.1 372.3 391.0 426.5 448.3 446.0 463.9 481.5 503.2 530.3 557.4 571.9 587.9 606.7 621.3 646.1 673.3 694.8 730.2 776.2 814.3 859.1 880.5 884.1 887.6 897.4 919.8 951.1 trillion Y$ % 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25.3 29.4 32.9 31.3 34.7 32.6 27.5 29.7 26.6 24.8 23.2 21.0 16.3 11.6 10.1 10.6 9.5 13.5 21.5 22.4 28.0 27.6 5.3 7.2 9.6 10.7 13.5 14.2 12.9 14.0 13.5 12.8 12.3 11.3 9.4 7.2 6.6 7.3 6.7 9.5 16.2 16.5 21.2 21.7 trillion Y$ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.9 1.6 2.1 2.5 2.8 4.0 5.8 7.6 9.7 15.0 22.1 31.9 42.6 56.3 70.5 82.3 96.5 109.7 121.7 134.4 145.1 151.8 156.8 160.9 166.3 171.6 178.4 192.5 206.0 255.2 244.7 49 -1.5 -0.7 -1.6 -4.5 -4.7 -6.0 -6.5 % 64.6 61.1 63.5 69.0 73.9 80.4 86.5 BRASIL - MINISTÉRIO DA FAZENDA 1997 1998 1999 2000 2001 2002 2003 0.2 -0.8 1.9 1.7 -1.3 953.0 945.4 963.3 979.7 967.0 967.0 967.0 23.5 40.3 42.1 36.9 35.4 41.8 44.6 18.5 34.0 37.5 33.0 30.0 35.0 36.4 258.0 295.2 331.7 367.6 392.4 428.0 450.0 -2.6 -4.3 -5.7 -4.3 -4.1 -5.3 -5.4 50 10.6 10.8 10.5 10.0 9.4 9.0 9.1 -5.3 -6.7 -8.1 -7.9 -7.6 -8.2 -7.7 92.0 103.0 115.8 123.4 132.6 142.7 151.0 BRASIL - MINISTÉRIO DA FAZENDA Main Indicators of Brazilian Economy - 19562003 Year Real GDP Cumulative Bond Bond Bond Nominal Primary Real Operational Nominal Debt/GDP Growth GDP Dependancy Issuance Outstand Interest/ Surplus/ Interest/ Surplus/ Surplus/ ratio GDP GDP GDP GDP GDP % % % % % 50.80 7.60 5.80 -1.70 -4.20 -2.60 -1.60 1.00 -0.90 1.00 -4.60 -2.71 -1.57 -2.19 -5.21 -0.27 0.09 Rate % 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 8.4 10.5 9.5 9.6 8.8 6.5 0.4 3.6 2.4 6.8 4.4 9.7 9.4 10.4 11.4 11.9 13.9 8.1 5.2 10.3 4.9 5.0 6.8 9.2 -4.3 0.8 -2.9 5.4 7.9 7.5 3.6 -0.1 3.2 -5.1 1.0 -0.5 4.9 5.9 4.2 2.7 1956=100 100.0 108.4 119.8 131.1 143.7 156.3 166.5 167.1 173.0 177.2 189.2 197.6 216.8 237.1 261.7 291.6 326.3 371.8 401.7 422.7 466.4 489.2 513.7 548.5 598.8 573.1 577.8 560.9 591.1 637.9 685.7 710.5 710.1 732.9 695.8 703.0 699.2 733.6 776.5 809.3 830.8 % mi US$ mi US$ 51 4.70 6.90 7.00 5.20 4.50 5.70 5.90 3.30 2.90 3.32 2.98 4.07 5.26 3.30 3.00 2.70 4.40 3.60 5.50 4.80 6.90 -1.30 0.19 1.75 0.79 -1.14 4.99 3.39 45.50 7.20 5.90 % 51.5 55.8 52.6 49.4 50.3 46.9 40.2 40.6 37.9 37.2 33.0 29.2 30.5 33.3 BRASIL - MINISTÉRIO DA FAZENDA 1997 1998 1999 2000 2001 2002 2003 3.3 0.1 0.8 4.4 1.3 1.9 -0.2 858.0 859.1 865.9 903.7 915.5 933.2 931.1 388,667 516,579 563,164 660,867 881,108 913,145 5.10 7.90 13.80 8.00 7.20 8.50 9.60 52 0.95 -0.01 -3.23 -3.46 -3.70 -4.01 -4.32 3.35 7.42 6.64 4.64 5.15 4.40 4.95 4.30 7.41 3.41 1.18 1.45 0.39 0.63 6.10 7.90 10.50 4.50 3.60 4.60 5.20 34.3 41.7 48.7 48.8 52.6 55.5 58.7