What is fiscal pedaling? A manual for non-economists

What is fiscal pedaling? A manual for non-economists

This week, the Court of Auditors rejected the budgetary execution of 2014 from the federal Government. The report mentions that "systematic and comprehensive 2014was a violation of basic principles governing public administration." One of the basic points to this rejection were the so-called "tax cycling". But what are these cyclingand why the Government used them?

What are tax cycling?

Cycling are atypical operations, tax not provided for in legislation, used to make upthe outcome of the public accounts. A clear example of that occurred through the distribution system of social benefits by the Government. The population receives these benefits in Caixa Econômica Federal agencies and the Federal Government, for its part, has a contract with the box which provides compensation to the Bank by the operating costs of this distribution.

As the beneficiaries receive money from social programs by box, the Federal Government must keep, by that financial institution, an account with a positive balance formaking such payments. As payments are made, the Government must systematically depositing more money in these accounts, maintaining a positive balance. Below that, historically, that model worked well. Despite brief debts with the box (which usually lasted no more than one month), the Government between 2004 and 2012 maintained a public bank balance.

box

However, from the last quarter of 2013 the Government went on to Accumulate large debts in your balance with Caixa Economica Federal. See below.

pedaladasfiscais

But which is why that is? The best indicator of fiscal soundness of Government is the difference between what the Government collects with taxes and everything that the Government spends before paying the interest on the public debt – called in economês of "primary outcome". And what does all this have to do with the Governmenttransfers with the box? – You may be wondering.

The point is that when the Government fails to compensate for the box through these systematic deposits, the rulers are artificially inflating the Government's primary result. How? The point is that, despite the social spending have effectively occurred,he hasn't come out of the Federal Government – and the box. As the federal Government just paid off his debt to 2013 with the box in January 2014, for example, the result of 2013 was artificially inflated. Also, the result of the first half of 2014, used as a reference for the presidential elections, gave the impression that the Government's fiscal situation was better than it really was.

But what's wrong with that?

The Fiscal responsibility law prohibits, in its article 36, that a public bank to financegovernment spending controls. In the case of the box, the entity controlling the Federal Government, but it also applies to State Governments. For example, the Government of Rio Grande do Sul could not have their primary expenditure financed by Banrisul.

The idea behind such a ban has two main axes. The first is to encourage the variouslevels of Government to have budgets more streamlined, with primary spending financed with primary revenues, with no big debts left to future administrations.

The second is the result of inflationary brazilian experience. Until 1984, one of the causes of high systemic inflation in Brazil was the fact that the State and federal governments can finance spending through public banks. After this financing, the bankswere recapitalised by the Central Bank through a complicated mechanism called "conta-movimento" (to understand more about this part of the story, click here), which in practice meant that State and federal politicians could print unlimited amounts ofcurrency, generating huge inflation. To avoid such problems in the past, the law of Fiscal responsibility brings this ban-which is quite reasonable.

The Court of Auditors considered that the constant and systematic Government delay in your balance with the box was equivalent to a financing of public expenditureby box. That's because the Government ended up forcing the box using own resources to pay obligations that were his. The scheme is summarized in the figure below,available on page 600 of TCU's report on the accounts of 2014.

credit

The box should be number intermediary--that is, a service provider that uses its network of agencies to distribute benefits financed with government resources deposited in a specific account. But, with these robust and long delays, she had to use own resources to pay days these primary expenditure of the Union with social spending.This cycle is what characterizes the illegal financing – the rag tax ".