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CIAO DATE: 2/00
Brazil Alert: The Brazilian Congress: Key to Reform
Hemisphere Focus: 1998-2000
February 10, 1999
Overview
Many opinions have been expressed regarding the cause of Brazil’s recent financial crisis. How could this have happened? The Real Plan defeated Brazil’s chronic inflation and brought growth to the country. President Cardoso, the author of the plan is well respected internationally and was reelected by a large majority last October. Why did everything then fall apart?
One plausible answer is the resistance of the Brazilian Chamber of Deputies to approve highly controversial measures without serious negotiations with the executive branch. One could argue that the action by Itamar Franco, former president and current governor of the important state of Minas Gerais, to withhold payments of the internal debt to the Treasury unveiled this crisis. While this may be true, the root of Brazil’s problem is deeper and revolves around the government’s coalition in the Chamber of Deputies and the lack of a wise political advisor in the executive branch to set a timely pace for the necessary reforms. (Cardoso’s coalition has a strong majority in the Senate and this branch readily supports his proposals.)
The Cardoso government has not effectively replaced two key players who passed away within days of each other last year: Sergio Motta, former Telecommunications minister and Cardoso’s chief liaison with the Congress and Luis Eduardo Magalhães, the ruling coalition’s legislative whip, speaker of the Chamber, and son of Antonio Carlos Magalhães, the president of Brazil’s Congress.
Legislative Process
Non-constitutional laws in Brazil can be enacted by an executive decree (medida provisória) or through “ordinary” legislation. Executive orders are, obviously, the fastest way to enact a law. Once ordered by the president, the executive decree has the force of law for thirty days. Although quick, executive decrees are burdensome in that their authority lapses if not renewed monthly. However, since executive decrees cannot be renewed with identical language, each new decree must have some minor variation with the one preceding it. Lapses have sometimes occurred in the past, creating questionable legal loopholes. Of course, the congress can vote to override such an action, but the government usually prefers to renew the medida provisória without negotiating a vote in the Congress.
Medida provisórias are one of the few activities undertaken by a joint Senate-Chamber committee. A Joint Committee (comissão mista) is formed to convert the executive decree into a law passed by the Congress. After language is agreed to, a Joint Session of Congress votes on final passage.
Chamber of Deputies
Once introduced, all draft laws must pass through the Judiciary Committee. After that, a bill is then routed to as many as three jurisdictional committees. A special committee is formed if more than three committees claim jurisdiction. After the committee process, the full chamber then votes on the bill. It is not uncommon for this process to take up to three years.
Both the Chamber of Deputies and the Senate follow the same pattern. If the Senate modifies a bill it is returned to the Chamber for review. There are no conference committees per se in the Brazilian Congress. The Chamber of Deputies can vote to ignore or further modify a Senate bill. It is language agreed to in the Chamber that will determine the final wording of a bill.
Special Committee
Constitutional amendments are addressed in the Special Committee. Once passed by the Judiciary Committee, the proposed constitutional amendment is sent to the Special Committee in the Chamber which is composed of as many deputies as the speaker wishes. Members are appointed by party leaders according to the size of each party’s congressional delegation. The Special Committee may take up to 40 legislative days (sessions) to approve its version of the constitutional amendment. For final passage, the Special Committee’s language must be approved twice by a two-thirds majority in the full Chamber.
Once completed by the Chamber, the same procedure takes place in the Senate. The legal delays caused by parliamentary rules and procedures usually extend this process. If the Senate modifies the Constitutional amendment, the Chamber votes once again on the measure.
Presidential Veto
The President (Article 84, V) can veto a bill totally or in part. The President has 15 working days after he has received the law from the Congress to issue his veto (Article 66). The Congress, in a joint session and by secret ballot, can override the President’s veto with an absolute majority (50 percent + 1).
Despite the procedure, a law in Brazil goes into force only when it is published in the Diario Oficial da União (similar to the U.S. Federal Register). It is after this that the enabling regulations are published. The regulations are extremely important and have sometimes been known to change the spirit, if not the letter, of the law.
Tax Reform
Tax reform is still in the draft stage and there are dozens of proposals before the Congress. This important and complicated issue can be resolved only through the passage of a variety of laws, but would first require amending the constitution. It is also contentious because it strikes at the center of the Brazilian federation. These amendments would modify the distribution of taxes, the jurisdiction regarding which government entity—federal, state, or municipal—could tax and spend, the amount and rate of taxation, and who would collect them.
Even if the government were to submit its plan today, the expedited legislative process would take at least one year. A part of the State Reform that would reform the administration and structure of Brazil’s government by changing the labor relations between the government and civil servants was introduced in October 1995 and the Congress is still in the process of passing the regulations to this constitutional amendment.
Cardoso, however, has introduced a series of executive decrees and bills that have a medium- and long-term impact on public expenditures. Although viewed outside of Brazil as tax reform, they technically only constitute revenue enhancement for the government and do not reform the core of the tax system. On January 27, the Congress passed a bill (referred to in Brazil as an update of the “Camata Law” after its author Deputy Rita Camata [PMDB-ES]) which cuts the percentage of public (federal, state and municipal) spending on public sector employees-active and retired-from 60 percent to 50 percent. The law calls for stiff penalties for noncompliance, including impeachment. Only a few states adhere to the original 60 percent limit. Several states spend over 80 percent of their total spending on employees.
Another key revenue provision, a constitutional amendment, is the “check tax” (imposto sobre movimentacão financeira), that would tax bank withdrawals at 0.38 percent this year and 0.30 percent in subsequent years. The Senate approved this constitutional amendment in January and the Chamber will address it in March. This provision is a key component to the fiscal adjustment agreement with the IMF and, as such, is expected to pass if the executive and legislative branches reach a deal before the new Congress convenes on February 22.
The Congress also plans to address constitutional amendments Nr81/95 and Nr627/98 that deal with fuel distribution tax and limit the wages of municipal lawmakers.
Social Security Reform
The Brazilian government is responsible for bailing out both the public and private social security systems, and collects funds monthly from the private sector (employee and employer), the civil servants and the military. It does not, however, set aside these monies to pay retiree pensions. The Brazilian government’s current budget shows these civil servant expenditures as spending and does not take into account past contributions.
The most recent issue is the requirement that retired federal employess must now join currently employed government workers and contribute to the social security program. According to a new law that will go into effect on May 1 of this year, all current and retired government workers will pay 25 percent on benefits over $1,800 per month. Previously, an 11 percent social security tax was only paid by current government employees.
This reform alone does not change the structure from a pay-as-you-go system to a fund system. Currently, the Brazilian treasury, like its U.S. counterpart, spends the revenue generated by the civil service contributors for other purposes. Reform that would help reduce the government deficit by prohibiting government financing of the social security system is still needed. There has been some movement in this regard. The states of Paraná and Espírito Santo have already begun serious social security reform.
Two additional important draft laws in this area deal with the public employment system and new forms of reducing the civil service work force due to economic necessity, according to the new 50 percent limit imposed by the Camata Law.
New limits and procedures regarding private sector pensions were approved in late 1998 in an effort to reach a balanced budget, or at least to stop the rising deficit that is currently about $3 billion per year.
Even if the Congress can increase revenues and trim the deficit by disposing of the financially draining issue of social security, the expected decline in the country’s GDP in 1999 (about 5-8 percent) will probably maintain the high deficit. Thus, it is important that the Congress address these reforms as soon as possible.
A characteristic of Brazilian politics is party switching. Thirty-four deputies or 6 percent of the 513-member total have switched parties since the election and before the start of the new Congress.
Legislative Calendar
The new Brazilian Congress is scheduled to be in regular session from February 15 until June 30 and from August 1 until December 15. Due to the Carnival recess, it will ostensibly begin its regular session on February 22. The new Congress is currently in extraordinary session and will deal with administrative details, committee assignments and, importantly, to set the March vote on a key element of Cardoso’s package, the “check tax.”
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