Annual Report 2005 – Chapter 4€¦ · the Budget Guidelines Law (LDO) maintained the consolidated public sector primary surplus target of 4.25% of GDP for 2006. A breakdown of

IV Public Finance 75

Public Finance

Budget, fi scal and tax policies

Decree 5,379, dated 2.25.2005, structured executive branch budget and fi nancial programming for 2005, and defi ned the monthly disbursement schedule. Utilization of R$15.9 billion was made conditional to future funding availability, including R$8.7 billion in investments and US$7.2 billion in current expenditure outlays. Following the example of previous years, the limits imposed on spending and fi nancial operations were gradually raised as revenue infl ows reached their projected levels. Of the total amount blocked in February, R$7 billion were released by the end of the year, including current expenditure and investment outlays by federal public sector entities.

Among measures taken in the budget framework, it is important to emphasize that the Budget Guidelines Law (LDO) maintained the consolidated public sector primary surplus target of 4.25% of GDP for 2006. A breakdown of this amount indicates that 2.45 p.p. refers to the fi scal and social security budgets, 0.7 p.p. to the Overall Federal State-Owned Enterprise Spending Program and 1.1 p.p. to states and municipalities. It should be stressed that legislation permits offsetting of programmed expenditure targets defi ned for the federal government budget and for the Overall Spending Program.

Among the innovations introduced by the 2006 LDO, the following deserve mention:a) tax collection ceiling: according to the 2006 budget bill, the estimate of the

federal tax infl ow, net of refunds and fi scal incentives administered by the Federal Revenue Secretariat, may not exceed 16% of GDP. Atypical revenues, those originating in social contributions and their respective legal additions are excluded from the estimate;

b) anti-cyclical adjustment mechanism: the consolidated publicc sector primary surplus target is to be adjusted in the budget proposal and in the third two-month period of each year when budget estimates are revised upward or downward by up to 0.25 p.p. of GDP, depending on the behavior of economic activity. Possible reductions in the primary surplus target depend on continuation of the downward trajectory in the debt/GDP ratio at a rate equal to or greater than the 2004/2005 average;

c) pilot investment bill: the primary surplus may be reduced by up to R$3 billion in order to meet the needs of infrastructure-related programming, to be itemized in a specifi c appendix to the bill and to the 2006 budget law; and

IV

76 Boletim do Banco Central do Brasil – Annual Report 2005

d) spending ceiling: budget allocations authorized for primary current spending specifi ed in the fi scal and social security budgets, excluding constitutional transfers or fund transfers by a specifi c revenue entity, may not exceed 17% of GDP.

Provisional Measure 275 regulated the provision in article 33 of Law 11,196, dated 11.21.2005, which went into effect in early 2006, defi ning new gross revenue brackets and percentages required for classifi cation of micro and small businesses within the Integrated System of Tax and Contribution Payments for Micro and Small Businesses (Simples). For purposes of classifi cation, the limit on gross annual revenues was raised from R$120,000 to R$240,000 in the case of micro businesses, and from R$1.2 million to R$2.4 million for small scale companies. According to the Federal Revenue Secretariat, it is now estimated that approximately 24,000 companies taxed on the basis of real or presumed profi ts may now opt for the Simples. The new classifi cation limits imply a fi scal waiver estimated at R$750 million per year.

By adhering to the Simples system, companies are entitled to unify their monthly payments of the following taxes and contributions: Corporate Income Tax (IRPJ); Social Integration Program (PIS), Social Contribution on Corporate Net Profi ts (CSLL), Contribution to Social Security Financing (Cofi ns), Industrialized Product Tax (IPI), Social Security Contribution, paid by corporate entities (Employer INSS), Education Wage Contribution, Employer Union Contribution, Tax on the Circulation of Merchandise and Services (ICMS) (should an agreement exist with the state) and the Tax on Services (ISS) should an agreement exist with the municipality).

In compliance with the legal provisions in Constitutional Amendment 42, dated 12.19.2003, the National Congress passed Law 11,250, dated 12.27.2005, allowing the federal government through the Federal Revenue Secretariat to formalize agreements with the Federal District and municipalities that opt for inspection and levying of the Rural Land Tax (ITR). The option can not involve reductions in the tax or any type of tax waiver. According to current legislation, the ITR is a federal tax, though 50% of the value collected is transferred to the municipalities.

As far as Social Security legislation is concerned, the National Congress passed, Constitutional Amendment 47, dated 7.5.2005, reinstating several benefi ts for civil service retirees that had been eliminated at the time of the December 2003 Social Security reform (Constitutional Amendment 41/2003). The main benefi ts ensured by the Constitutional Amendment are as follows:a) wage parity for civil servants who retire according to the criteria of Constitutional

Amendment 41/2003 or, in other words, wage increases at the same rates and on the same dates as those granted active employees, provided that the civil servant in question cumulatively satisfy the following requirements: 35 years of contributions in the case of men and 30 years for women; minimum age of 60 years for men and 55 for women; and 20 years in the civil service, 10 years


in the civil service career and fi ve years in the position in which the person retires; and

b) transition rule for civil servants hired up to 12.16.1998, entitled to retire with full pay provided that they cumulatively satisfy the following requirements: in relation to the limits of 60 years of age for men and 55 years for women, minimum age resulting from reduction of one year of age for each year of contribution in excess of 35 years of contributions in the case of men and 30 years of contributions in the case of women; 25 years in the civil service, including 15 in the career and fi ve years in the position in which the person retired.

The government issued Decree 5,447, dated 5.20.2005, with the aim of facilitating acquisitions of medicines, particularly by needy families. This decree exempted approximately one thousand types of medicine from the PIS/Civil-Service Asset Formation Program (Pasep) and Cofi ns. The measure will result in an average reduction of 11% in the retail prices of these products.

As part of an ongoing process of reducing the IPI on capital goods, Decree 5,468, dated 6.15.2005, reduced the then current 2% rate to zero. Previously, Decree 4,955, dated 1.15.2004, had cut the rate from 5% to 3.5%, after which Decree 5,173, dated 8.6.2004, further reduced it from 3.5% to 2%. Capital goods (machines and equipment utilized by industry) are now 99% exempt from the IPI. Initially this goal was to be attained only as of January 2007.

Other economic policy measures

The President of the Republic issued Provisional Measure 255, converted into Law 11,196, dated 11.21.2005, with the objective of stimulating productive investments, Brazilian exports of technological goods and services, technological innovation and digital inclusion. The major provisions of the law are as follows:a) creation of the Special Capital Goods Acquisition System for Exporting Companies

(Recap), granting guaranteed PIS/Pasep and Cofi ns exemptions in acquisitions of machines and equipment by companies with gross export revenues equal to or greater than 80% of their overall gross revenues, when such companies assume a commitment to maintain this export percentage for two years. This period was set at three years for companies initiating their operations;

b) Creation of the Special Taxation System for the Information Technology Services Export Platform (Repes), permitting exemption from PIS/Pasep and Cofi ns contributions on acquisitions of goods and services by software and information technology services exporter companies, with gross export revenues equal to or greater than 80% of their overall gross revenues;

c) creation of fi scal incentives for technological innovations in companies through adoption of the following procedures: for purposes of calculating net profi ts, deduction


of outlays on research and technological innovation; 50% IPI reduction on machines and equipment to be used in research and technological development; accelerated depreciation of machines and equipment used in research and technological innovation development for purposes of IRPJ calculation; Income Withholding Tax (IRRF) credit on amounts paid in the form of royalties, technical or scientifi c assistance and specialized services; reduction of the IRRF rate on remittances abroad to be used for purposes of registration and maintenance of trademarks and patents; for purposes of determining the CSLL calculation base, exclusion of the amount corresponding to up to 60% of outlays on research and technological innovation development from net profi ts, effective as of 2006, with the said percentage rising to as much as 80% depending on the number of researchers contracted by the company; permission for the federal government, acting through science and technology development agencies, to subsidize the earnings of researchers holding masters or doctoral degrees and employed in technological innovation activities in companies located within the boundaries of the nation’s territory, in amounts of up to 60% in the areas covered by the now extinct of the Northeast Region Development Authority (Sudene) and for the Amazon Region Development Authority (Sudam) and up to 40% in all other regions of the country;

d) creation of the digital inclusion program, reducing the rates of the PIS/Pasep and Cofi ns contributions to zero on sales of microcomputers in amounts up to R$2,500.00;

e) incentives to microregions in the areas covered by the now extinct Sudene and Sudam, granting permission to companies located in those areas to accelerate depreciation of capital goods or, in other words, full depreciation in the same year as acquisition for purposes of calculation of the Income Tax; reduction of the period for utilization of PIS/Pasep and Cofi ns credits from 24 to 12 months in cases involving acquisitions of capital goods to be incorporated into fi xed assets; and permission for companies with installation, expansion, modernization or diversifi cation projects registered and approved by 12.31.2013 in sectors of the economy classifi ed as having major importance for regional development, to reduce their Income Tax and additional income tax payments by 75%, calculated on the basis of their operating profi ts;

f) permission for corporate entities taxed on the basis of real profi ts to utilize CSLL-related credits at a rate of 25% of accounting depreciation of machines and equipment;

g) IRRF (Income Tax Withholdings) exemption on capital gains generated by transfers of properties and rights, in which the unit price is equal to or less than R$20,000.00, in the case of shares traded on the over-the-counter market, and R$35,000.00, in all other cases;

h) IRRF exemption on capital gains generated by sales of residential real estate, provided that, within 180 days, the transferring party invest the proceeds of the sale in acquisition of another residential property. In cases involving sale of more than one property, the period for acquiring the other property will be calculated as of the date of the fi rst operation, while the taxpayer will be entitled to make use of this benefi t once every fi ve years;


i) installment payment of municipal INSS debts in up to 240 months, coupled with a reduction of 50% in the value of interest on arrears levied on such debts;

j) permission for participants in benefi t plans operated by private Social Security entities who adhered to such plans by 11.30.2005 to opt for the regressive taxation system, defi ned by Law 11,053, dated 11.29.2004, up to the fi nal business day of December 2005. Within this time span, those participant who adhered to such plans between January 1 and July 4, 2005 may retract the cited option. The regressive system establishes rates varying from 35% for resources with accumulation periods equal to or less than two years, to 10% for resources with accumulation periods of more than 10 years;

k) exemption from the Provisional Contribution on Financial Operations (CPMF) on operations related to transfers of technical reserves, funds and provisions of pension fund-type benefi t plans between complementary pension fund entities or insurance companies, provided that resources are not available to the participant, the party holding the plan has not changed and the transfer is made directly between plans or between plan management entities; and

l) alteration in the periods for deposit of the IRRF, CPMF and Financial Operations Tax (IOF), as regards generating facts that occurred as of 1.1.2006.

Before the provisions of Law 11,196/2005 could go into effect, other presidential decrees were required for purposes of regulation. The following were issued by the end of December:1) 5,602, dated 12.6.2005: regulates the Digital Inclusion Program;2) 5,612, dated 12.12.2005: regulates installment payment of municipal debts with

the Social Security system;3) 5,628, dated 12.22.2005: deals with goods imported by companies located in the

Manaus Free Port;4) 5,629, dated 12.22.2005: deals with the goods covered by Recap, with regard to

which the obligation of contributing to the PIS/Pasep and Cofi ns was suspended;5) 5,630, dated 12.22.2005: deals with reduction in Cofi ns and PIS/Pasep contribution

rates to zero on imports and marketing of fertilizers, etc.;6) 5,649, dated 12.29.2005: regulates Recap;7) 5,652, dated 12.29.2005: deals with the Special Customs System for PIS/Pasep and

Cofi ns contributions on imports of packaging for water and soft drinks; and8) 5,653, dated 12.29.2005: deals with machines and equipment used in the manufacture

of paper for purposes of newsprint or periodicals and for which the obligation of contributing to the PIS/Pasep and Cofi ns was suspended.

Following upon the general rules covering tender offers and contracting of public-private partnerships, instituted by Law 11,079, dated 12.30.2004, Decrees 5,385, dated 3.4.2005, and 5,411, dated 4.6.2005 were formalized. The fi rst of these instituted the Public-Private Partnership Management Committee (CGP), which has the role of selecting priority projects to be targeted for investments. The second authorized payment of Public-Private


Partnerships Guarantor Fund (FGP) quotas, based on shares representing available federal government stock participation in joint capital corporations.

Several years after the bill was introduced, the National Congress passed the Law on Bankruptcy and Corporate Recovery (Law 11,101, dated 2.9.2005), substituting the previous legislation that had been in effect since 1945. Among the major alterations, one should mention substitution of credit composition with extrajudicial or judicial recovery. These mechanisms are considerably broader and guarantee that companies going through diffi culties will have the opportunity of negotiating their debts with creditors. In the case of extrajudicial recovery, agreements may be formalized between creditors and debtors, particularly in less complex situations. In this case, after ensuring compliance with legal procedures, the judge has the sole task of simply approving the agreement. In cases of judicial recovery, other procedures must be followed. In this case, the company submits a recovery plan that must be approved by the General Assembly of Creditors (workers, creditors holding real guarantees and other creditors) within a period of up to six months. If such a plan is not forthcoming, the judge declares bankruptcy once the six-month period has elapsed.

Public sector borrowing requirements

In 2005, the nonfi nancial public sector primary surplus reached R$93.5 billion, equivalent to 4.84% of GDP. This result, the best since the series was fi rst calculated in 1991, reveals the enormous ongoing fi scal effort that has been made to guarantee the sustainability of the public debt. Compared to 2004, the 0.25 p.p. of GDP increase in the surplus refl ected growth in the results registered by regional governments, 0.11 p.p., and state-owned enterprises, 0.21 p.p., coupled with a drop of 0.08 p.p. in the Central Government result, mainly as a consequence of growth in the INSS defi cit. In absolute values, the Central Government surplus reached R$55.7 billion in 2005, closing with a R$93.6 billion Federal Government surplus and INSS and Central Bank defi cits of R$37.6 billion and R$0.3 billion.

Graph 4.1Public sector borrowing requirementsTotal primary in (%) of GDP current prices

-1

0

1

2

3

4

5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


Central Government (National Treasury, Social Security System, Central Bank) revenues totaled R$488.4 billion in 2005, 25.3% of GDP, against R$419.6 billion in 2004, 23.8% of GDP. Nominal 16.4% growth resulted basically from rising business profi ts – the gain in revenues related to the CSLL infl ow and Income Tax accounted for 72.2% of the increased infl ow as a proportion of GDP – and from increased formal employment, with a direct positive impact on Social Security revenues.

Table 4.1 – Public sector borrowing requirements

ItemizationR$ million % of GDP1/ R$ million % of GDP1/

Total nominal 61 614 4.6 79 032 5.1 Central government2/ 10 029 0.7 62 153 4.0 States 43 797 3.3 22 936 1.5 Local governments 7 696 0.6 4 067 0.3 State enterprises 92 0.0 -10 123 - 0.7

Total primary -52 390 - 3.9 -66 173 - 4.3 Central government2/ -31 919 - 2.4 -38 744 - 2.5 States -8 560 - 0.6 -11 916 - 0.8 Local governments -2 073 - 0.2 -1 906 - 0.1 State enterprises -9 838 - 0.7 -13 608 - 0.9

Nominal interest 114 004 8.5 145 205 9.3 Central government2/ 41 948 3.1 100 896 6.5 States 52 356 3.9 34 851 2.2 Local governments 9 770 0.7 5 973 0.4 State enterprises 9 930 0.7 3 484 0.2

(continues)

2002 2003

Table 4.1 – Public sector borrowing requirements (concluded)

ItemizationR$ million % of GDP1/ R$ million % of GDP1/

Total nominal 47 144 2.7 63 641 3.3 Central government2/ 27 033 1.5 73 284 3.8 States 27 497 1.6 4 755 0.2 Local governments 6 485 0.4 661 0.0 State enterprises -13 872 - 0.8 -15 060 - 0.8

Total primary -81 112 - 4.6 -93 505 - 4.8 Central government2/ -52 385 - 3.0 -55 741 - 2.9 States -16 060 - 0.9 -17 194 - 0.9 Local governments -1 422 - 0.1 -4 129 - 0.2 State enterprises -11 245 - 0.6 -16 440 - 0.9

Nominal interest 128 256 7.3 157 146 8.1 Central government2/ 79 419 4.5 129 025 6.7 States 43 558 2.5 21 949 1.1 Local governments 7 906 0.4 4 790 0.2 State enterprises -2 626 - 0.1 1 381 0.1

1/ Current prices.2/ Federal Government, Central Bank and National Social Security Institute.

2004 2005


Central Government spending increased from R$370.2 billion, 20.9% of GDP, in 2004, to R$435.8 billion, 22.6% of GDP, in 2005.

Constitutionally determined revenue-sharing with the states and municipalities totaled R$83.9 billion, for nominal growth of 24.2% over 2004, moving from 3.82% of GDP to 4.34% of GDP. Growth was a direct consequence of the Income Tax and IPI infl ow, used as the basis for calculating revenue-sharing funds, as well as of larger transfers of resources related to the working of oil and natural gas reserves.

Disbursements for payments of personnel and payroll charges totaled R$92.2 billion in 2005, for nominal growth of 10.3% compared to the previous year. This amount represented 4.77% of GDP, the same level registered in 2004.

Outlays on Social Security benefi ts totaled R$146 billion, up R$20.2 billion over 2004, corresponding to 7.55% of GDP against 7.12% of GDP in the previous year. This increase refl ected growth in the value of benefi ts paid, generated by a real increase in the minimum wage and the average number of monthly benefi ts paid.

Table 4.2 – Central government primary resultR$ million

Itemization 2003 2004 2005

(a) (b) (c) (b)/(a) (c)/(b)

Total revenues 356 657 419 615 488 374 17.7 16.4

National Treasury 274 933 324 612 378 548 18.1 16.6

Social security 80 731 93 765 108 433 16.1 15.6

Central Bank 993 1 237 1 393 24.6 12.6

Total expenditures 317 366 370 250 435 782 16.7 17.7


Transfers to states and municipalities 60 226 67 559 83 938 12.2 24.2

Personnel and social charges 75 842 83 655 92 231 10.3 10.3

Other current and capital expenditures 72 451 91 088 111 342 25.7 22.2 National Treasury onlendings to the Central Bank 524 623 554 18.9 -11.1

Social security 107 135 125 751 146 010 17.4 16.1

Central Bank 1 188 1 574 1 707 32.4 8.5

Central government result1/39 291 49 365 52 592 25.6 6.5


Social security -26 404 -31 986 -37 577 21.1 17.5

Central Bank - 195 - 336 - 314 72.5 -6.7

Primary result/GDP – % 2.2 2.8 2.7 - -

Source: Ministério da Fazenda/STN

1/ (+) = surplus (-) = deficit.

Change %


Aside from this, outlays under “other current and capital spending” reached R$111.3 billion, for nominal growth of 22.2% over 2004. As a share of GDP, this result totaled 5.76%, against 5.16% in the previous year. This heading also includes various outlays of an obligatory nature, including payments of benefi ts specifi ed in Social Assistance Law (Loas) and unemployment compensation. Disbursements on “economic subsidies and grants” are another important component of this heading. These outlays rose from R$5.6 billion to R$10.4 billion. The major factors responsible for the aforementioned increase were:a) increase of R$1.5 billion in appropriations of subsidies related to agrarian debt

securitization renegotiated in the 1990s and in 2000;b) the fi scal impact of the writing off of assets as a result of inclusion in debts subject

to judicial execution, involving approximately R$994 million owed by Pesa program debtors;

c) increase of R$638 million in Federal Government Acquisition Program(AGF) operations, particularly involving acquisitions of rice through exercise of the sale option held by farmers and direct purchases of corn and wheat; and

d) increase of R$221 million in outlays on the price support guarantee program due to low prices for several signifi cant products covered by fl oor price policy in 2005.

In 2005, the primary result for regional governments increased 0.11 p.p. of GDP, refl ecting expansion of 0.13 p.p. of GDP in the surplus registered by municipal governments and a drop of 0.02 p.p. of GDP for state governments, despite real growth of 6% in the ICMS infl ow, the major state-level tax. Expanded internal output and international oil prices had a positive impact on the Petrobras result and, consequently, on the surpluses registered by state-owned companies, which rose 0.21 p.p. of GDP in 2005.

Total interest appropriated in 2005 on an accrual basis reached R$157.1 billion, 8.1% of GDP compared to R$128.3 billion, 7.3% of GDP, in 2004. Growth in the volume of interest incorporated was generated primarily by the rise in the cumulative Selic rate from 16.3% in 2004 to 19.1% in 2005. The ongoing process of easing monetary policy, begun in the second half of last year, is expected to generate lesser interest incorporations in 2006.

The nominal 2005 defi cit of the nonfi nancial public sector reached 3.3% of GDP. The Central Government defi cit closed at 3.8% of GDP, while state governments ended with a defi cit of 0.2% of GDP. The result for municipal governments as a whole was neutral, while state-owned companies registered a surplus of 0.8% of GDP. Above all else, the Central Government result refl ected interest appropriations equivalent to 6.7% of GDP and the Social Security defi cit of 1.9% of GDP.

It should be stressed that the Social Security defi cit has increased each year, even though the annual Social Security infl ow has remained in the range of 5.2% of GDP in the last 10 years, rising to 5.6% of GDP in 2005. Basically, the upward trajectory of


Social Security defi cits has been generated by systematic increases in benefi ts, as the life expectancy of the Brazilian population has risen and benefi ts have been extended to the needier segments of the population that did not previously have access to the system.

Regarding the sources of nonfi nancial public sector fi nancing, growth in the securities debt on the internal market corresponded to 8.1% of GDP, while monetary issues came to 0.7% of GDP. Moving in the opposite direction, the external debt decreased at a rate of 3.8% of GDP while bank credits rose 1.8% of GDP.

Graph 4.2Social security

Primary flows in (%) of GDP current prices

4

5

6

7

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Tax revenue Social benefits

Table 4.3 – Uses and sources – Consolidated public sector

Itemization

R$ million % of GDP R$ million % of GDP

Uses 47 144 2.7 63 641 3.3

Primary - 81 112 - 4.6 - 93 505 - 4.8

Internal interest 111 198 6.3 143 219 7.4

Real interest 39 206 2.2 132 412 6.9

Monetary updating 71 992 4.1 10 807 0.6

External interest 17 058 1.0 13 927 0.7

Sources 47 144 2.7 63 641 3.3

Internal borrowing 88 950 5.0 136 366 7.1

Securities debt 68 553 3.9 157 016 8.1

Banking debt 9 449 0.5 - 34 967 - 1.8

Renegotiation - - - -

State government - - - -

Local government - - - -

State enterprises - - - -

Others 10 949 0.6 14 318 0.7

Relationship TN/Bacen - - - -

External borrowing - 41 806 - 2.4 - 72 726 - 3.8

GDP flows in 12 months1/ 1 766 621 1 932 952

1/ GDP at current prices.

2004 2005


Tax and federal contribution infl ow

In the 2005 fi scal year, the infl ow of federal taxes and contributions – excluding Social Security contributions – reached R$360.8 billion, for real growth of 5.6% compared to 2004, using the IPCA as defl ator.

Income Tax (IR) infl ows accounted for 34.3% of the total and reached R$123.7 billion, for 13.1% real growth over 2004. The income withholding tax generated R$65.8 billion while deposits made by corporate entities reached R$50.7 billion, for real growth of 6.9% and 22.5%, respectively. CSLL deposits reached R$25.9 billion, for real growth of 20.6%.

Broken down by economic sector, analysis of the joint infl ow of the IRPJ and CSLL shows that, compared to the 2004 fi scal year, the highest rates of real growth occurred under mineral extraction, 522%; telecommunications, 86.3%; fuels, 26% and electricity, 11.7%. Viewed under this prism, the infl ow from fi nancial entities increased 10%.

Infl ows of Cofi ns and PIS/Pasep registered respective volumes of R$86.3 billion and R$21.8 billion, for real growth of 3.9% and 3.2%. The infl ow from fi nancial institutions increased at a sharper pace than in the case of other companies, reaching 31% in the case of Cofi ns and 27.7% for PIS/Pasep, compared to 2.1% for other companies.

Table 4.4 – Gross federal revenuesR$ million


(a) (b) (c) (b)/(a) (c)/(b)

Income Tax (IR) 92 433 101 386 123 747 9.7 22.1 Industrialized Products Tax (IPI) 19 657 22 695 26 251 15.5 15.7 Import Tax (II) 8 143 9 201 9 074 13.0 -1.4 Financial Operations Tax (IOF) 4 449 5 228 6 092 17.5 16.5 Contribution to the Financing

of the Social Security (Cofins) 59 233 77 918 86 315 31.5 10.8 Social Contrib. on the Profits of Legal Entities (CSLL) 16 613 19 957 25 919 20.1 29.9 Contribution to PIS/Pasep 17 293 19 704 21 762 13.9 10.4 Provisional Contribution on

Financial Transactions (CPMF) 23 045 26 397 29 220 14.5 10.7 Contribution on Intervention in the

Economic Domain (Cide) 7 496 7 668 7 681 2.3 0.2 Other taxes 23 883 28 193 24 743 18.0 -12.2

Total 272 245 318 347 360 804 16.9 13.3

Source: Ministério da Fazenda/Receita Federal do Brasil

Change %


Effective as of August 2004, Decree 5,164, dated 7.30.2004, reduced the Cofi ns and PIS/Pasep rates to zero on fi nancial revenues earned by corporate entities subject to noncumulative levying of the stated contributions. With the exception of fi nancial institutions, this measure encompassed companies in general, thus explaining the discrepancy between the real rates of growth registered in the infl ows of these two segments.

In 2005, the IPI infl ow came to R$26.3 billion, for real growth of 7.8%. The infl ow generated by the automobile industry totaled R$3.7 billion, for real growth of 18.1%, while other sectors (excluding tobacco, beverages and the IPI on import operations) generated R$12.6 billion, for real growth of 13.6%.

Revenues generated by the Import Tax (II) and by the IPI on imports totaled R$9.1 billion and R$5.3 billion, respectively, for annual reductions of 7.5% and 4.3%. This falloff refl ects a combination of various factors: 17.2% growth in the dollar value of imports taxed and 3.5% in the average effective IPI-imports rate; 0.23% reduction in the average effective rate of the Import Tax and 16.8% in the average rate of exchange.

Federal securities debt

Evaluated according to the portfolio position, the federal securities debt outside the Central Bank reached R$979.7 billion, 50.4% of GDP at the end of 2005, against

Table 4.5 – Income Tax and Industrialized Products TaxR$ million

Itemization 2003 2004 2005 Change %

(a) (b) (c) (b)/(a) (c)/(b)

Income Tax (IR) 92 433 101 386 123 747 9.7 22.1

Individuals 5 103 6 136 7 294 20.2 18.9

Corporate entities 33 308 37 710 50 668 13.2 34.4

Financial institutions 5 626 5 575 7 299 -0.9 30.9

Other companies 27 682 32 135 43 369 16.1 35.0

Withholdings 54 021 57 540 65 785 6.5 14.3

Labor earnings 26 428 31 420 35 642 18.9 13.4

Capital earnings 19 032 17 161 19 853 -9.8 15.7

Remittances abroad 5 596 5 562 6 159 -0.6 10.7

Other earnings 2 965 3 397 4 131 14.6 21.6

Industrialized Products Tax (IPI) 19 654 22 697 26 246 15.5 15.6

Tobaco 1 993 2 305 2 304 15.7 0.0

Beverages 1 899 1 988 2 334 4.7 17.4

Automotive vehicles 2 312 2 939 3 727 27.1 26.8

Other taxes 8 887 10 290 12 596 15.8 22.4

Linked imports 4 563 5 175 5 285 13.4 2.1

Source: Ministério da Fazenda/Receita Federal do Brasil


R$810.3 billion, 43.8% of GDP at the end of the previous year. The 6.6 p.p. of GDP rise refl ected both overall net issuances of R$30.1 billion and R$143.9 billion in interest incorporations, producing a R$4.6 billion contractionary impact as a result of appreciation of the real against the dollar.

In December 2005, National Treasury bonds totaled R$1,252.5 billion, of which R$297.7 billion were held by the Central Bank, while the market accounted for R$972.8 billion. Of the securities issued by the Central Bank in previous years, R$6.8 billion were outstanding at the end of 2005, compared to R$13.6 billion at the end of the previous year.

With respect to the distribution of securities by indexing factor, the share of the total securities debt held by fi xed rate securities increased from 20.1% in December 2004 to 27.9% in December 2005. The participation of securities indexed to the Selic rate dropped from 57.1% to 51.8% as a result of net LFT redemptions. The share of bonds tied to the rate of exchange dropped from 5.2% to 2.7%, refl ecting redemptions of NBCE, NTN-D and appreciation of the real against the dollar, while the participation of securities indexed to the Reference Rate (TR) moved from 2.7% to 2.1%, and the participation of infl ation-indexed bonds shifted from 14.9% to 15.5%.

Table 4.6 – Federal securities – Portfolio positionBalances in R$ million

Itemization 2001 2002 2003 2004 2005

National Treasury liabilities 687 329 838 796 978 104 1 099 535 1 252 510

Central Bank portfolio 189 442 282 730 276 905 302 855 279 663 LTN 27 970 45 775 101 376 126 184 119 323 LFT 114 986 145 614 99 646 117 405 120 270 NTN 44 943 89 664 74 026 57 275 36 823 Securitized credits 1 543 1 678 1 857 1 990 3 247

Outside the Central Bank 497 887 556 066 701 199 796 680 972 847 LTN 48 791 13 596 91 055 159 960 263 436 LFT 322 153 372 584 443 180 457 757 504 653 BTN 67 100 74 62 48 NTN 87 488 127 399 126 721 133 700 167 379 CTN/CFT-A/CFT-B/CFT-C/CFT-D/CFT-E 19 366 19 214 18 236 17 343 15 799 Securitized credits 16 044 15 406 15 001 21 103 16 555 Agrarian debt 1 689 5 761 4 879 4 345 1 529 TDA 2 276 2 005 2 052 2 411 3 448 CDP 11 1 1 0 0

Central Bank liabilities 126 198 67 125 30 659 13 584 6 815 LBC - - - - - BBC/BBCA - - - - - NBCE 124 707 67 125 30 659 13 584 6 815 NBCF 1 490 - - - - NBCA - - - - -

Outside the Central Bank – Total 624 084 623 191 731 858 810 264 979 662

In % of GDP 49.7 39.3 45.8 43.8 50.4


Alterations in the securities debt structure refl ected the impact of strategies adopted to improve the debt profi le in previous years. In this sense, it should be stressed that, at the end of 2002, the participation of fi xed rate and exchange-indexed bonds in total debt reached 2.2% and 22.4%, respectively. Consequently, the reversal of these positions had a decisive infl uence in reducing the exposure of the nation’s public accounts to market risk in general and, more specifi cally, to exchange risk.

Graph 4.3Federal public securities

Participation by indexing factor

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005

Foreign exchange Price Indices Over/Selic Preset Others

Table 4.7 – Federal public securitiesPercentage share by indexator – Portfolio position

Index numbers 2001 2002 2003 2004 2005

Total – R$ million 624 084 623 191 731 858 810 264 979 662

Foreign exchange 28.6 22.4 10.8 5.2 2.7

Reference Rate (TR) 3.8 2.1 1.8 2.7 2.1

IGP-M 4.0 7.9 8.7 9.9 7.5

Over/Selic 52.8 60.8 61.4 57.1 51.8

Preset 7.8 2.2 12.5 20.1 27.9

Long-term Interest Rate (TJLP) 0.0 0.0 0.0 0.0 0.0

IGP-DI 3.0 3.1 2.4 1.8 1.1

INPC 0.0 0.0 0.0 0.0 0.0

IPCA - 1.5 2.4 3.1 6.9

Others 0.0 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0 100.0

Graph 4.4Federal securitized debt structure

Share – Portfolio position

0

5

10

15

20

25

30

2002 2003 2004 2005

Foreign exchange Preset


The profi le of the federal securities debt on the market was lengthened in 2005, with 35.2% of the total value to mature over more than two years at the end of the period, compared to 28.7% at the end of the previous year. The average term of the federal securities debt, securities issued in public offers, also improved from 20.6 months in 2004 to 21.8 months in 2005.

At the end of 2005, overall monetary authority exposure in Central Bank swap operations reached R$14.8 billion. This was precisely the opposite position of that registered since implementation of these operations and satisfi ed market demand for protection against exchange risks. In previous years, the market required coverage for risks of exchange depreciation, which had the impact of generating swap stocks worth R$91.1 billion in 2002, and R$82.3 billion and R$38.3 billion in the two subsequent years. When the cash criterion is used, the cumulative result of these operations in 2005, equivalent to the difference between DI profi tability and exchange growth plus coupon, registered a favorable balance of R$2.7 billion for the Central Bank.

Net Public Sector Debt

At the end of 2005, the Net Public Sector Debt (NPSD) reached R$1,002.5 billion, 51.6% of GDP or 0.1 p.p. below the end-2004 ratio. The major factors underlying this result were, on the one hand, the 8.1 p.p. expansionary impact of nominal interest appropriations and, on the other, the contractionary impacts of 4.8 p.p., 2.4 p.p. and 0.9 p.p. generated by the primary surplus, the impact of valued GDP growth and exchange appreciation, respectively.

Table 4.8 – Public sector net debt growth

Itemization 2002 2003 R$ million % of GDP R$ million % of GDP

Total net debt – Balance 881 108 55.5 913 145 57.2

Net debt – Growth accumulated in the year 220 241 9.4 32 035 1.7

Conditioning factors (flows accumulated in the year):1/ 220 241 13.9 32 035 2.0 Public sector borrowing requirements 61 614 3.9 79 030 4.9 Primary - 52 390 -3.3 - 66 173 -4.1 Nominal interest 114 004 7.2 145 203 9.1

Exchange adjustment2/ 147 225 9.3 - 64 309 -4.0

Domestic securities debt indexed to exchange rate3/ 76 662 4.8 - 22 715 -1.4 External debt 70 564 4.4 - 41 594 -2.6 External debt adjustment – Others 753 0.0 16 710 1.0 Acknowledgement of debt 14 286 0.9 604 0.0 Privatizations - 3 637 -0.2 0 0.0

GDP Growfh effect – Debt4/ -4.5 -0.3

GDP accumulated in 12 months – Valued5/ 1 587 584 1 596 841

(continues)


Among the alterations in DLSP components in 2005, the most important were the voluminous exchange of external debt for internal debt, as the former dropped 4.9 p.p. of GDP and the second increased by the same rate.

With respect to gross general government debt, GDP expansion of 2.9 p.p. in 2005 was not targeted to fi nancing defi cits but rather to restructuring of available government funding. This is evident in the 2.2 p.p. of GDP growth in the National Treasury Operating Account. Since assets are not included in the concept of gross debt, growth in available funding does not generate any impact on the gross general government debt, though it does reduce the net public sector debt.

Table 4.8 – Public sector net debt growth (concluded)

Itemization 2004 2005


Total net debt – Balance 956 994 51.7 1 002 485 51.6

Net debt – Growth accumulated in the year 43 848 -5.5 45 492 -0.1

Conditioning factors (flows accumulated in the year):1/ 43 848 2.4 45 492 2.3

Public sector borrowing requirements 47 142 2.5 63 644 3.3

Primary - 81 112 -4.4 - 93 503 -4.8

Nominal interest 128 253 6.9 157 147 8.1

Exchange adjustment2/ - 16 194 -0.9 - 18 202 -0.9

Domestic securities debt indexed to exchange rate3/ - 3 336 -0.2 - 4 554 -0.2

External debt - 12 858 -0.7 - 13 648 -0.7

External debt adjustment – Others 7 137 0.4 - 2 258 -0.1

Acknowledgement of debt 6 516 0.4 3 262 0.2

Privatizations - 753 0.0 - 954 0.0

GDP Growth effect – Debt4/ -7.9 -2.4

GDP in R$ million5/ 1 851 980 1 942 193

1/ Net accumulated debt growth as percentage of GDP when considering all factors taken together GDP, divided by the current GDP accumulated in the last 12 month period valuated, calculated by the formula: (∑CondictioningFactors/GDPAccumulatedIn12Months)*100. Not reflecting debt growth as percentage of GDP.2/ Indicates the sum of the monthly impacts up to the reference month.3/ Includes adjustment of rate between the basket of currencies composing international reserves and the external debt as well as other adjustments in the external area.4/ It takes into account the change in the ratio debt/GDP due to growth observed in GDP, calculated by the formula: Dt-1/(PIB present month/PIB base month)-Dt-1.5/ Annual GDP at December prices deflated by the centered IGP-DI based on a series published by the IBGE.


Social Security System

In 2005, the Social Security system registered a defi cit of R$37.6 billion, corresponding to nominal growth of 17.5% over the previous year. The defi cit represented 1.94 p.p. of GDP, 0.13 p.p. greater than in 2004 when the total came to R$32 billion.

For the most part, growth in the defi cit was caused by increased outlays on Social Security benefi ts which totaled R$146 billion in 2005, R$20.3 billion more than the 2004 result.

Table 4.9 – Net debt of the public sector

Itemization 2004 2005


Fiscal net debt (F=D-E) 699 702 37.8 763 346 39.3

Internal debt adjustment (E) 126 025 6.8 121 471 6.3

Fiscal net debt with exchange devaluation (E=A-B-C-D) 825 727 44.6 884 817 45.6

External debt adjustment (D) 95 988 5.2 80 082 4.1

Inventory adjustment (C) 99 760 5.4 102 068 5.3

Privatization adjustment (B) - 64 482 -3.5 - 64 482 -3.3

Total net debt (A) 956 994 51.7 1 002 485 51.6

Federal government 610 075 32.9 660 186 34.0

Banco Central do Brasil - 8 600 -0.5 4 038 0.2

States 305 961 16.5 305 714 15.7

Local governments 45 098 2.4 44 341 2.3

State enterprises 4 460 0.2 - 11 794 -0.6

Domestic debt 818 062 44.2 952 185 49.0


Banco Central do Brasil 64 480 3.5 129 277 6.7

States 289 981 15.7 292 734 15.1


State enterprises 9 277 0.5 - 171 0.0

External debt 138 931 7.5 50 300 2.6


Banco Central do Brasil - 73 080 -3.9 - 125 238 -6.4

States 15 980 0.9 12 979 0.7


State enterprises - 4 817 -0.3 - 11 623 -0.6

GDP in R$ million1/ 1 851 980 1 942 193

1/ Annual GDP at December prices deflated by the centered IGP-DI based on a series published by the IBGE.


Basically, increased outlays were generated by 7.4% growth in the average value of benefi ts paid, which moved from R$469.00 in 2004 to R$503.80 in 2005; 4.7% expansion in the average number of benefi ts paid, totaling 23.5 million in 2005 against 22.5 million in 2004; and 43.4% growth in judicially determined payments, with an overall total of R$4.4 billion in 2005.

Despite measures taken to decelerate growth in Social Security benefi ts paid, principally in the case of illness assistance, Social Security system payments have continued expanding at a signifi cant pace. These benefi ts increased sharply in recent years, closing 2005 with 17.3% compared to 31.8% in 2004.

Table 4.10 – Gross and net government debt1/

Itemization


Net public debt 956 994 51.7 1 002 485 51.6

Net general government debt 961 133 51.9 1 010 241 52.0

Gross general government debt 1 331 758 71.9 1 453 604 74.8

Internal gross debt 1 111 246 60.0 1 262 912 65.0

Foreign gross debt 220 512 11.9 190 692 9.8


State government 15 980 0.9 12 979 0.7

Local government 2 651 0.1 2 150 0.1

Assets of general government - 370 625 - 20.0 - 443 364 - 22.8

Internal assets - 366 941 - 19.8 - 439 833 - 22.6

Available assets of general government - 175 855 - 9.5 - 229 627 - 11.8

Investment of social security system - 289 0.0 - 343 0.0

Tax collected (not transferred) - 745 0.0 - 882 0.0

Demand deposits - 3 965 - 0.2 - 5 533 - 0.3

Available assets of fed. govern. in Banco Central - 158 232 - 8.5 - 208 476 - 10.7

Investment in the banking system (states) - 12 624 - 0.7 - 14 393 - 0.7

Investment in funds and financial programs - 53 298 - 2.9 - 60 996 - 3.1

Credits with public enterprises - 24 970 - 1.3 - 23 180 - 1.2

Other federal government's credits - 25 800 - 1.4 - 23 003 - 1.2

Laborer assistance fund (FAT) - 87 018 - 4.7 - 103 026 - 5.3

Foreign credits - 3 683 - 0.2 - 3 531 - 0.2

Federal government - 3 683 - 0.2 - 3 531 - 0.2

State government - - - -

Local government - - - -

Banco Central net debt - 8 600 - 0.5 4 038 0.2

Public enterprises net debt 4 460 0.2 - 11 794 - 0.6

GDP in R$ million2/ 1 851 980 1 942 193

1/ Includes federal, state and local government debt, with other economic agents, including the Banco Central.2/ GDP of the last twelve months, at prices of month indicated. Centered IGP-DI deflator (geometirc mean of IGP-DI variation in the month and in the following month.

2005 2004


With respect to the average number of benefi ts paid in 2005 and 2004, the overall increase totaled 452.7 thousand retirement benefi ts, 3.7%; 147.5 thousand death pensions, 2.7%; 274.7 thousand assistance benefi ts based on the terms of Social Assistance Law (Loas), 14.5%; and 212.6 thousand illness assistance benefi ts, 17.3%.

Excluding transfers to third parties, the overall infl ow totaled R$108.4 billion in 2005, for nominal growth of 14.6% over 2004. This result was generated by both the positive formal job market result which, according to the Ministry of Labor’s General File of Employed and Unemployed Persons, incorporated an additional 1.3 million new registered workers in 2005, and adoption of measures targeted at recovering Social Security credits. In this regard, credits recovered generated 2005 revenues of R$7.1 billion, up 18.3% over the previous year.

State and municipal fi nance

Several positive factors, including growth in their own revenues and revenues transferred by the federal government and low IGP-DI infl ation, converged in 2005, resulting in a state and municipal primary surplus higher than in the previous year, accompanied by a drop in the net debt balance. The unifi ed primary surplus increased from R$17.5 billion in 2004, 0.99% of GDP, to R$21.3 billion in 2005, 1.1% of GDP. In the same period, the balance of the net debt dropped from R$351.1 billion, 18.9% of GDP, to R$350.1 billion, 18.1% of GDP.

Table 4.11 – Social Security – Cash flowR$ million


(a) (b) (c) (b)/(a) (c)/(b)

Revenues 122 227 160 000 172 713 30.9 7.9

Banking inflow 86 588 101 126 115 954 16.8 14.7

Other revenues 602 2 610 882 333.4 - 66.2

Revenue anticipation - 3 238 6 885 10 324 - -

Federal government transfers 38 275 49 380 45 553 29.0 - 7.7

Expenditures 123 359 151 742 171 796 23.0 13.2

Social security benefits 107 135 125 751 146 009 17.4 16.1

Non-social security benefits 5 062 8 168 10 001 61.3 22.4

Other expenditures 5 304 10 463 8 267 97.3 - 21.0

Transfers to third parties 5 857 7 360 7 519 25.6 2.2

Cash result - 1 131 8 259 917 ... ...

Social Security balance - 26 405 - 31 985 - 37 574 ... ...

Source: Ministério da Previdência e Assistência Social

Change %


In 2005, infl ow of the ICMS, the major source of state revenues, reached R$155.2 billion, for real growth of 6% in the year using the IGP-DI as defl ator. Analysis shows the following rates of real growth in various states: Rio Grande do Sul, 11.7%; Minas Gerais, 11.9%; Paraná, 5.6%; São Paulo, 4.9%; and Bahia, 3.8%. Moving in the opposite direction, the real infl ow in the state of Rio de Janeiro dropped 3.4%, the only negative result among the various states of the Union.

Direct transfers from the Federal Government to states and municipalities in 2005 totaled R$83.9 billion, 4.34 p.p. of GDP, for nominal growth of 24.2% over 2004 when the

Table 4.12 – Payment of the Tax on the Circulation of Merchandise and Services (ICMS)

R$ million


(a) (b) (c) (b)/(a) (c)/(b)

São Paulo 40 289 45 922 51 001 14.0 11.1

Rio de Janeiro 11 181 13 052 13 396 16.7 2.6

Minas Gerais 11 026 13 222 15 638 19.9 18.3

Rio Grande do Sul 8 989 9 638 11 382 7.2 18.1

Paraná 6 710 7 824 8 760 16.6 12.0

Bahia 5 871 7 133 7 831 21.5 9.8

Santa Catarina 4 663 5 258 5 837 12.8 11.0

Goiás 3 699 3 978 4 224 7.6 6.2

Pernambuco 3 178 3 667 4 346 15.4 18.5

Espírito Santo 2 935 3 732 4 636 27.2 24.2

Other states 20 787 24 833 28 123 19.5 13.2

Total 119 328 138 260 155 172 15.9 12.2

Source: Ministério da Fazenda/Confaz

Change %

Table 4.13 – Federal government onlendings to states and municipalitiesR$ million


(a) (b) (c) (b)/(a) (c)/(b)

Constitutional onlendings (IPI, IR and others) 46 243 51 138 63 756 10.6 24.7

Export Compensation Fund 3 900 4 295 4 757 10.1 10.8

Cide transfers - 1 109 1 776 - 60.1

Others1/10 082 11 015 13 648 9.3 23.9

Total 60 225 67 557 83 937 12.2 24.2

Source: Ministério da Fazenda/Secretaria do Tesouro Nacional

1/ Contribution of education benefit, fund for the maintainance and development of the basic education and enhancement of the teaching career (Fundef), petrol royalties and other onlendings.

Change %


total closed at R$67.6 billion or 3.82 p.p. of GDP. The major factors underlying annual growth were the excellent performances of the Income Tax and IPI infl ows (used as the basis for calculating Revenue-Sharing Funds), generating growth of R$12.7 billion in constitutional transfers; R$2.1 billion increase in transfers of royalties related to the working of oil and natural gas reserves, brought about by growth in output and high international prices; and increased transfers of the Contribution on Intervention in the Economic Domain (Cide-Fuels), considering that no transfers were made in the fi rst quarter of 2004.

Documents

Annual Report 2005 – Chapter 4€¦ · the Budget Guidelines Law (LDO) maintained the consolidated public sector primary surplus target of 4.25% of GDP for 2006. A breakdown of