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[Indian Journal of Federal Studies]

 

 

 

 

 

 

 

 

Indian Journal of Federal Studies
1/2004

South American Federations:
Allocation of Major Policy Areas and Fiscal Balance Between Responsibilities and Revenues

 - B r a z i l

  1. Brazil's official name is the Federal Republic of Brazil (República Federativa do Brasil, in the official language Portuguese) encompassing the union, (central federal government), the states, the federal district and the municipalities. All members of the federation are autonomous according to Art. 18 of the 1988 Constitution.
  2. Any change to the original division of the country into states or municipalities is only possible if authorized by the directly affected populations through a public ballot. The creation, division or merging of any municipality or state has to be approved by a complementary law passed by Congress, requiring a two-thirds majority in both houses, twice.
  3. At all federal levels (The union, states, municipalities and the federal district), it is strictly forbidden to specify any religious preference, either subsidizing or preventing entirely free functioning, except in the public interest. Likewise, no distinction between races or racial groups or distinctions among any Brazilian citizens is permitted.
  4. Brazil occupies 47.7 per cent of the South American continent, covering a total of 8.511.966 square kilometres. It is the fifth largest country in the world, after Russia, Canada, China and the United States. According to recent demographic estimates, Brazil's population totaled 177.174.7 in 2002. Annual population growth has been dropping steadily from a 2.48 percent growth rate in 1970 to 1.32 percent in 2002. Its workforce stood at 83.2 million in 2001.
  5. The Brazilian Federation consists of 26 states plus the federal district. They are grouped into five major regions: North (N), North-East (NE), Centre-West (CW), South-East (SE) and South (S). The population is concentrated in the South-East (42.6 percent), North-East (28.5 percent) and South (15 percent). The capital is Brasília, with a population of approximately 2 million, on the central plateau. The largest cities are São Paulo (10.4 million), Rio de Janeiro (5.8 million), Salvador (2.4 million) and Belo Horizonte (2.2 million). The rural population, which in 1940 accounted for sixty-nine percent of the total population, had fallen to twenty-one percent by 1995.
  6. Brazil has a presidential system of government. The president and vice-president are elected by direct ballot for a four-year term. They are assisted by twenty seven ministers of state, all directly appointed by the president. Together they make up the executive branch of power at the federal level. State governors and municipal mayors are also elected by direct vote.
  7. The legislative branch consists of the bicameral National Congress, where the lower Chamber of Deputies represents the population as a whole, and the upper house, the Federal Senate, represents the states of the federation. The Chamber of Deputies currently has 513 members elected for four-years terms by a system of distribution, which is proportional to the population of each state and the federal district. The eighty-one senators in the Federal Senate, on the other hand, are elected by majority vote (three per state) and serve an eight-year term. Each four years, two thirds of the members of the Federal Senate are replaced and four years later one-third.
  8. The highest court in the judiciary branch is the Federal Supreme Court whose duty it is to safeguard the Federal Constitution. The Court is made up of a panel of eleven judges appointed by the president of the Republic upon approval by the Federal Senate.
  9. Brazilian history can be divided into four main periods: The Pre-Colonial period, from the discovery of Brazil by the Portuguese on 22 April 1500 to 1530. The Colonial period, from 1530 to the proclamation of Brazil's independence in 1822. In 1808, Dom João VI and the entire Portuguese court moved to Brazil which became the seat of the monarchy. On 7 September 1822 his son, Dom Pedro I, officially proclaimed Brazil's independence from Portugal. The Imperial period, from 1822 to the Proclamation of the Republic on 15 November 1889 and the Republican period which is divided into the First Republic (1889-1930), The Vargas era (1930-1945), the Second Republic (1945-1964), the Military Regime (1964-1985) and re-democratization (1985-onwards).
  10. As regards the economy, Brazil's gross domestic product (GDP) was growing at an annual average rate of 9.32 percent in the 1970's. Job creation did not, however, keep pace and was insufficient to absorb the growing workforce. Economic growth was concentrated in capital- intensive sectors such as mining, heavy industry and import substitution industries. Employment expanded most in the services sector.
  11. The 1980's marked the longest period of economic stagnation in Brazil's history. According to Brazil's Central Bank, annual GDP growth averaged 2.3 percent whereas per capita GDP fell by 2.7 percent. By the end of the decade, the fiscal deficit had surged to almost seven percent of the GDP. The crisis besetting the economy spread to engulf state-owned enterprises while all levels of public administration were virtually paralyzed. Government proved unable to perform its basic functions in the social sphere, failing to guarantee the investment required for maintenance and expansion of infrastructure, especially in sectors where it retained a legal monopoly.
  12. The economic scenario began to change in the 1990's, clearing the way for monetary reform and an economic stabilization plan. This was introduced in 1994 and became known as the "Plano Real" and the Real became the new currency. In spite of the monetary reform introduced by the Real Plan, GDP annual growth rate for the period from 1995 to 2002 remained unstable.
  13. Amendments to the Constitution can be proposed by a minimum of one- third of the members of Congress (Chamber of Deputies plus the Federal Senate), by the President of the Republic, or by more than half of the State Assemblies. The decision of each is obtained by a simple majority of its members. According to Art. 61, any initiative by the populace to alter the Constitution must be submitted to the Chamber of Deputies, duly signed by one percent of the voting population, distributed in a minimum of five states, representing at least three-tenths of one percent of its voting population.
  14. The judicial system is not entitled to change the Constitution. The Federal Supreme Court has the responsibility of looking after the Constitution alone. Whenever a legal initiative poses a threat to the Constitution, the Federal Supreme Court is called to rule on the issue.
  15. The constitutional redistribution of powers and responsibilities has evolved mainly by means of initiative from the President of the Republic and from Congress. The economy (taxation and the tax sharing system) has always been the subject of most change.
  16. The central government experienced a weakening of its fiscal power with the promulgation of the 1988 constitution. However, by introducing economic and social contributions, not taxes, it has recovered its fiscal strength.
  17. No international organization can influence any constitutional or political change that could alter the distribution of powers and responsibilities.
  18. Political parties, special interest groups and economic development have been the principal driving forces of change to the constitution.

FISCAL BALANCE:

  1. According to the 1988 Constitution, each order of government has its own independently elected officials who are selected without interference from other orders of government.
  2. Territorial autonomy is also granted by the Constitution. Any attempt to introduce any boundary change requires a referendum held among the populations involved which is then submitted to Congress. Congressional procedures requires a Complementary Law which requires a majority vote in both houses ( Deputy Chamber and the Federal Senate). According to Art. 60 of the Constitution, Congress is unable to accept any proposal which attempts to abolish the federative form of government, the direct, secret, universal and periodic voting system, the separation of powers ( the executive , the legislative and the judiciary) and the guarantees and rights of individuals.
  3. Amendments to the Constitution can be proposed by either a minimum of one third of the members of Congress ( Chamber of Deputies plus the Federal Senate); or by the President of the Republic, or by more than half of the State Assemblies, where a simple majority among its members is obtained.
  4. The Constitution grants the authority to levy taxes to each level of government. Some taxes are exclusive to one level, others are collected by one but shared with the other sub national levels of government; others are collected by the States and shared with the municipalities.
  5. No new tax can be introduced without a Constitutional amendment. According to tax legislation established by the Constitution, rates and regulations for certain taxes are determined at federal level; local taxes can have their rates and rules implemented locally.
  6. The Union has the power and the responsibility to implement the following taxes:
    • import tax (II);
    • export tax(IE);
    • income tax (IR);
    • tax on industrialised goods (IPI);
    • credit, exchange rate and insurance operations tax (IOF);
    • rural property tax (ITR);
    • large fortune tax (IGF), depending upon Complementary Law for its implementation;
      Additional forms of taxation may occur. In the case of gold, when considered a financial asset, an IOF tax rate is incurred . The proceeds are shared by the States (30 per cent) and the Municipalities (60 per cent).
  7. The States have only three types of taxes:
    • Value Added Tax ( ICMS) , the tax which brings in the most nationally
    • property transfer tax ( causa mortis)(ITCD)
    • motor vehicle tax ( road tax) (IPVA).

    • The Federal Senate is responsible for supervising and representing the interests of the States in any taxation matter concerning any of the States' taxes.
  8. Similarly to the States, the Municipalities have the power to levy three taxes:
    • urban property tax (IPTU);
    • property transfer tax ( inter vivos) (ITBI);
    • tax on services of any kind ( ISS).
  9. The tax sharing system comprises transfers from the central government to the States and Municipalities and from the States to the municipalities. The following tax revenues belong to the States and the Federal District :
    • the total amount of income tax withheld by the States or any of their institutions;
    • twenty per cent of any tax imposed by the Union, through a Complementary Law.

    The Municipalities receive the following tax revenues:

    • total amount of income tax withheld by any of its administrative institutions, direct or indirect administration, public companies or foundations:
    • fifty per cent of the revenue from ITR;
    • fifty per cent of the revenue from IPVA;
    • twenty five per cent of therevenue from ICMS;
  10. Constitutional Transfers are an important element in the Brazilian federative system. The Union transfers forty seven per cent of the total tax revenue from IR and IPI, as follows:
    • twenty one per cent to the States and to the federal District;
    • twenty two and a half per cent to the Municipalities;
    • three per cent to Investment Funds for the North, North-East and Centre-West regions;
    • ten per cent of IPI revenue to the States and the Federal District, according to their proportional share of exports of manufactured products. The total average yearly transfers from central government to States and Municipalities correspond to 7.7 per cent of GDP, while payments from lower levels of government to the central government, due from official credit operations and financial debt re-structuring, corresponds to nearly 1 per cent of GDP.
    .
  11. Borrowing by each level of government is regulated by the Law of Fiscal Responsibility , passed by the Congress in the year 2000.
  12. The assignment of government responsibility in Brazil:

Level of government

Responsibility

Union responsibility

Foreign relations, defence, monetary affairs, exchange rate, banking and financial markets rules, water resources, transportation system, national and regional planning, oil and gas exploration(either directly or through concession of services), urban development regulations, postal service, federal police, customs service, labour relations, citizenship, social security, statistics and regulations for the educational system.

Shared responsibilities: central, states and municipalities

Health system, help for the disabled, maintenance of historical, artistic and natural heritage, education and science, environment preservation, housing and sanitation, local civil police, traffic control, tourism, small business incentives.

State responsibilities

States are authorized to organize themselves according to their own constitutions, observing the principles of the Federal Constitution. Ultimately, responsibilities of the states are those not vetoed by the Federal Constitution.

Local responsibilities (some cases are shared)

Pre-school and primary education, local and emergency health care, preservation of historical sites.

Exclusively local

Land use, inner city transport

 MEXICO

Since 1883, commerce has been assigned radically into the hands of the Federal Government. In this respect, there is no difference between interstate commerce or internal or even international commerce, for all commerce in Mexico is a federal concern and everything related to it, like corporations, taxation, regulation. The issue more than a federal conflict has sprung from a debate in the separation of powers: commerce regulated by Federal Congress is passing more to the President's duties. The conflict began with the establishment of free trades areas along the Mexico-US border in 1869 and the President had reservations on the authorization by Congress to the bordering State of Tamaulipas. That free trade zone lasted until 1908 with the reticence of the Executive Branch.

Despite the tradition of the presidency linked to authoritarianism in Mexico, the 1857 Constitution that settle once and for ever the issue of adopting the federal system in the Country devised the predominance of the Legislative Branch upon the Executive, without resorting to a parliamentarian system, by making Federal Congress not only the Legislative Assembly with expressed and exclusive powers granted by the Constitution, but the final authority for many of the administrative subjects: commercial, administrative, civil (contracts, public works) and the like issues that gradually were transported into the Executive Branch during the large administrations of President Porfirio Diaz (1876-1911).

Even the Mexican Revolution was fought against Diaz, his legacy survived entirely the twentieth century and commercial matters were handled by the office of the incumbent President. Article 131 of the Constitution guaranteed to the Executive the full power to restrict and regulate international commerce, without Congressional intervention.

Nowadays, Congress has the power of regulation, under the influence of the President who may introduce bills about economic issues and the same Assembly approves the federal budget and the income laws to levy the corresponding taxes: however, even with the 2000 scenario of plurality and political diversity that is entrenched in the Mexican politics, we witness the expanding role of Executives in this process exercising the veto upon the budgets approved by State Assemblies so far, but there is no guarantee that in the future a conflict like that may arise between the President and Federal Congress. In such cases the Judiciary would play a intervening role in solving the conflicts.

Fiscal federalism has been the most centralized topic of all the agenda in the federal system in Mexico. If the distribution of powers tries to make a clear cut enunciation of powers for the two spheres of government in order to avoid any possible conflict as well as concurrence. The fiscal powers granted to the Federal Government by the Constitution are without limits, because article 73, section VII, establishes the privilege for Federal Congress to approve any tax in order to get the appropriate income to get the federal budget accomplished.

In this respect, there is no limit for the Federal Government to impose whatever taxation, even on subjects that belong substantially to the State's jurisdiction. A further step was taken in 1980 when a system called "fiscal coordination" endeavored for "the sake of the taxpayer", to coordinate the imposition of taxes between the States and Federal Governments and to create a sole agency for collecting the taxes and after to distribute them among all the parties involved. Being the Federal Government the sole tax collector as well as the dispenser of all the revenue sharing among the States.

The scheme is still in force and Congress is studying from most of the parties represented a solution to introduce equality in the fiscal distribution of powers. We can grossly appreciate that from all the revenues collected in Mexico, 80% are channeled to the Federal expenditure, 16% for the States and 4% to the Municipalities. This disproportion creates inequality and dependence in a pyramidal way from the local governments towards the upper federal government.

This monopoly of the total revenue creates a vicious circle in the federal system in which most of the powers are assigned to the Federal Government and the State partners are reduced to the humble situation of mere enforcer of the great federal policies with little margin of policy making in the overwhelming environment of the all-encompassed federal powers.

 

Copyright (c) Center for Federal Studies, Jamia Hamdard, New Delhi, India