Supporting Implementation of the Expenditure Rule Through Public Financial Management Reforms by Teresa Curristine, Jorge Baldrich, Matthew Crooke, and Fabien Gonguet published by IMF (9/2017).
“Faced with significant economic and fiscal challenges, the Brazilian government is reforming its fiscal framework to promote fiscal sustainability and reduce debt. Since 2015, Brazil has struggled with its deepest economic recession in decades and ongoing political tensions. The fiscal situation has deteriorated sharply with a significant drop in revenues and debt increasing above the emerging market average.
Within the past year, the government has made significant progress in reforming its fiscal framework. In late 2016, a new expenditure rule was established and a new IFI was created. Reforms are also ongoing in several areas, including a new public financial management (PFM) law currently with the legislature.
The new expenditure rule signals the government’s commitment to fiscal discipline. The rule limits the growth in federal expenditures to the rate of inflation for the next twenty years with a possibility of revision after ten years. This medium-term rule establishes multiyear expenditure caps, restricts Congress’ ability for upward adjustment in revenue forecasts and shifts decision making to the budget preparation process. This should help to create more realistic budgets and promote greater prioritization of expenditures. In time, adherence to the rule—to the extent that it supports the achievement of sustained primary surpluses—can assist with stabilizing and reducing public debt.
To successfully implement this rule requires structural, institutional, and procedural changes. An ongoing effort is needed with structural reforms and efficiency measures to stabilize the debt and to create fiscal space. The government has announced a major social security reform which is essential for future adherence to the rule. Institutional reforms are also needed to strengthen medium-term fiscal and budgetary management, notably through the implementation of a medium-term framework and by addressing budgetary rigidities.
This report provides short- and medium-term recommendations (see Table 1) and an Action Plan (see Annex 1) on institutional and procedural changes for operationalizing the rule. The report focuses on three interrelated areas: 1) improving flexibility in the budget; 2) strengthening medium-term fiscal and budgetary management through implementing mediumterm frameworks; and 3) procedural changes for implementing, reporting, and monitoring the rule…”
