Principal investigator: Silvio da Rosa Paula
Article title: The Impact of the Fiscal Responsibility Law on the Financial Performance and Budget Execution of Municipalities in Rio Grande do Sul from 1997 to 2004
Article authors: Sandra Regina Toledo dos Santos and Tiago Wickstrom Alves
Location of the intervention: Rio Grande do Sul, Brazil
Sample size: 419 municipalities in the state of Rio Grande do Sul
Sector: Finances
Type of Intervention: Evaluation of the Fiscal Responsibility Law (LRF)
Primary variable of interest: Financial and budgetary performance indicators
Evaluation method: Experimental Evaluation (RCT)
Evaluation Context
After the end of the high-inflation regime with the consolidation of the Real Plan, new challenges emerged, among them the control of public accounts, which had long been aided by the asymmetrical effects of high inflation on public finances. On the revenue side, the real value of tax collection was reasonably preserved thanks to the indexation mechanisms that had been introduced into tax legislation. On the expenditure side, the government took advantage of inflation to keep accounts under control, given that between the approval of the budget and the actual disbursement of resources, the real value of spending had already been substantially eroded by inflation (ABREU). et al..
In this context, it was already expected that the end of high inflation would bring an expansion in the real value of public spending. Therefore, given the negative financial results of the federal, state, and municipal governments, measured through their balance sheets, it became clear that the focus of public management should be the pursuit of managerial efficiency and the more appropriate use of resources. In light of this reality, in the year 2000, Congress approved the Fiscal Responsibility Law, which would allow for the imposition of strict budgetary restrictions on all three levels of government.
Complementary Law No. 101, of May 4, 2000, known as the Fiscal Responsibility Law (LRF), is a management instrument aimed at public administration, which establishes, on a national level, parameters to be followed regarding public spending by each Brazilian federative entity (federal government, states, and municipalities). In other words, the LRF aims to guarantee the financial health of the federative entities, establishing that each increase in public spending must come from a related source of financing, and managers must respect the issues related to the end of each term, not exceeding the permitted limit and delivering healthy accounts to their successors.NATIONAL TREASURY, 2020).
Methodology Details
The strategy used by the researchers was panel data with a binary variable, which takes the value of 0 for the period before the implementation of the Fiscal Responsibility Law (LRF) and the value of 1 for the period after the implementation of the LRF, which came into effect in May 2000. The use of panel data allows monitoring municipalities over time, in order to better capture their behavior over the years. In general terms, using this method, the researchers seek to identify the effects of the Fiscal Responsibility Law on the financial performance and budget execution of municipalities.
Intervention Details
The analysis focuses on the municipalities of the state of Rio Grande do Sul, for the period from 1997 to 2004. Of the 496 municipalities in the state existing in 2006, 419 were used, excluding 77 municipalities that underwent some territorial change during the analyzed period. The data were obtained from the annual reports of the budget balances and economic indices of the municipalities of Rio Grande do Sul. State Court of Accounts (TCE-RS) and the Brazilian Institute of Geography and Statistics (IBGE).
With the aim of evaluating the impact of the Fiscal Responsibility Law on the financial and budgetary performance of municipalities in Rio Grande do Sul, nine indicators widely used in the literature were chosen for analysis. The indicators used and their descriptions are presented below.
| Additional Credit Indicator (ICA): The objective is to verify whether there has been greater adequacy in budget planning, that is, whether there has been an expansion in the use of additional credits after the implementation of the Fiscal Responsibility Law (LRF), which could indicate difficulties for municipalities in adequately projecting the allocation of public resources, given the expenses incurred in carrying out the public policies undertaken. |
| Indicator of budget revenue achievement (IRRO): This will show whether there was an average increase in the municipalities' budget revenue after the law was implemented. |
| Current Budget Execution Indicator (IEOC): It indicates whether the mechanisms introduced by the LRF (Fiscal Responsibility Law) contributed to increases in current revenues.[1] from the municipalities, which could indicate a containment of expenses, stimulating a greater generation of current savings. |
| Indicator of tax revenue collection (IRRT): This indicator highlights the tax pressure exerted on municipalities as a result of restrictions on revenue waivers and the pursuit of efficiency in this revenue source. |
| Investment indicator (II): This indicator allows us to identify whether there has been a greater capacity to make investments in relation to the local GDP after the implementation of the Law. |
| Primary result indicator (IRP): This study seeks to demonstrate whether, after the implementation of the Fiscal Responsibility Law (LRF), there was an increase in the debt repayment capacity of municipalities. |
| Credit Operations Indicator (IOC): This indicates whether the amount of credit operations is included in the composition of capital expenditures.[2] They decreased or increased after the implementation of the Law. |
| Indicator of the amortization of long-term debt (IADF): highlights the amortizations of the funded debt.[3] with regard to current revenues collected. |
| Indicator of Return of the Tax on the Circulation of Goods and Services and on the Provision of Interstate and Intermunicipal Transportation and Communication Services (IRICMS): This represents the revenue collected from ICMS (a Brazilian state tax) in relation to the resident population of the municipality. |
Results
The results indicate that after the implementation of the Fiscal Responsibility Law, there was an increase in the use of additional credits, as evidenced by (ICA), which could indicate difficulties for poorer municipalities in adequately planning the allocation of public resources. As for (IRRO) indicates that there was an average increase of around 8% in the budgetary revenue of the municipalities. The (IEOCThe analysis indicates that there was an increase of approximately 9% in the generation of current savings, which may be related to the growing results of local revenues and the containment of expenses.IRRT) The evidence shows that the Fiscal Responsibility Law (LRF) stimulated an increase of 0,182 in the average value of this indicator. This result may indicate that the Law's impositions, aimed at combating tax evasion and restricting revenue waivers, ultimately increased efficiency in tax collection.
In the context of investments, looking at the indicator (II), this showed an increase of around 30%, demonstrating that the less economically developed municipalities had greater difficulties in making investments to meet social demands. Regarding the primary result, with the (IRPIt was found that the LRF (Fiscal Responsibility Law) allowed for an increase in the debt repayment capacity of municipalities, resulting from the intensification of the primary surplus. Analyzing the Credit Operations Indicator (IOC), there was a 62% reduction in credit operations in smaller municipalities. As for (IADF), The debt amortization indicator was not statistically significant; however, its relationship with GDP suggests that wealthier municipalities were able to amortize their debts more intensively. Finally, we have the indicator (IRICMS), which shows that after the introduction of the LRF (Fiscal Responsibility Law) there was a significant increase in its estimated coefficient, indicating a higher revenue collected from ICMS (Tax on Circulation of Goods and Services) compared to the resident population in the municipality.
In general terms, after the implementation of the Fiscal Responsibility Law, there was an increase in the efficiency of planning and executing municipal revenues and expenditures, evidenced by the increased capacity to pay debts, the balance of the primary surplus, and the increase in tax revenues in the municipalities of Rio Grande do Sul.
Lessons in Public Policy
The Fiscal Responsibility Law brought transparency to public accounts and contributed to increased participation of civil society in monitoring public resources and combating fraud. Currently, there are several Non-Governmental Organizations (NGOs) and Public Interest Civil Society Organizations (OSCIPs) that monitor public spending in light of the Fiscal Responsibility Law (LRF), preventing millions in losses to public coffers every year.
Reference
DOS SANTOS, Sandra Regina Toledo; ALVES, Tiago Wickstrom. The impact of the Fiscal Responsibility Law on the financial performance and budget execution of municipalities in Rio Grande do Sul from 1997 to 2004. Brazilian Journal of Public Administration, v. 45, n. 1, p. 181-208, 2011.
[1] Current Revenue: It is the sum of tax revenues, contributions, property income, agricultural income, industrial income, service income, and other income.
[2] Capital expenditure: These are expenses related to the acquisition of machinery and equipment, the execution of works, the acquisition of company shares, the acquisition of real estate, and the granting of loans for investment.
[3] Amortization It is the gradual reduction of a debt through periodic payments.
