Responsible researcher: Silvio da Rosa Paula
Article title: THE IMPACT OF THE FISCAL RESPONSIBILITY LAW ON FINANCIAL PERFORMANCE AND BUDGET EXECUTION OF MUNICIPALITIES IN RIO GRANDE DO SUL FROM 1997 TO 2004
Authors of the article: Sandra Regina Toledo dos Santos and Tiago Wickstrom Alves
Location of intervention: Rio Grande do Sul, Brazil
Sample size: 419 municipalities in the state of Rio Grande do Sul
Sector: Finance
Type of Intervention: Assessment of the Fiscal Responsibility Law (LRF)
Variable of main interest: Financial and budgetary performance indicators
Evaluation method: Experimental Evaluation (RCT)
Assessment Context
After the end of the high inflation regime with the consolidation of the Real Plan, new challenges emerged, including the control of public accounts, which had been helped for a long time by the asymmetric effects of high inflation on public finances. On the revenue side, the real value of revenue 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 its accounts under control, considering that between the approval of the budget and the actual disbursement of resources, the real value of expenditure had already been substantially eroded by inflation (ABREU et al. , 2014).
In this context, it was already expected that the end of high inflation would bring an expansion in the real value of public expenditure. Therefore, given the negative financial results of the Union, states and municipalities, measured through balance sheets, it became visible that the focus of public management should be the search for managerial efficiency and the use of resources more appropriately. Faced with this reality, in 2000, congress approved the Fiscal Responsibility Law, which would allow strict budget restrictions to be imposed on the three levels of government.
Complementary Law No. 101, of 05/04/2000, known as the Fiscal Responsibility Law (LRF), is a management instrument aimed at public administration, which establishes on a national basis, parameters to be followed regarding the public expenditure of each entity Brazilian federation (union, states and municipalities). In other words, the LRF aims to guarantee the financial health of federative entities, establishing that each increase in public spending must come from a related source of financing, and managers must respect issues related to the end of each mandate, not exceeding the permitted limit and delivering healthy accounts to their successors ( TESOURO NACIONAL, 2020 ).
Methodology Details
The strategy used by the researchers was panel data using a binary variable, which assumes the value of 0 for the pre-implementation period of the LRF and assumes the value of 1 for the post-implementation period of the LRF, which entered effective in May 2000. The use of panel data allows municipalities to be monitored over time, in order to better capture their behavior over the years. In general terms, using this method, 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 municipalities in 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 in the period analyzed. The data were obtained from the annual reports of budget balances and economic indices of the municipalities of the State Court of Auditors ( TCE -RS) and the Brazilian Institute of Geography and Statistics (IBGE).
With the aim of evaluating the impact of the Fiscal Responsibility Law in the municipalities of Rio Grande do Sul on financial and budgetary performance, nine indicators widely used in the literature were chosen to be analyzed. The indicators used and their description are presented below.
| Additional credits indicator (ICA): aims to verify whether there was a greater adequacy of budget planning, that is, whether there was an increase in the use of additional credits after the implementation of the LRF, which could indicate difficulties for municipalities in adequately designing the allocation of public resources, in view of expenses in carrying out assumed public policies. |
| Indicator of budgetary revenue realization (IRRO): shows whether there was an average increase in the municipalities' budgetary revenue after the implementation of the law. |
| Current budget execution indicator (IEOC): indicates whether the mechanisms introduced by the LRF contributed to increases in the municipalities' current revenues [1] , which could demonstrate a containment of spending, encouraging greater generation of current savings. |
| Tax revenue realization indicator (IRRT): this indicator highlights the tax pressure exerted on municipalities as a result of restrictions on revenue waivers and the search for efficiency in this source of revenue. |
| Investment indicator (II): this indicator allows identifying whether there was a greater capacity to make investments in relation to local GDP after the implementation of the Law. |
| Primary result indicator (IRP): shows whether after the implementation of the LRF, there was an increase in the municipalities' debt payment capacity. |
| Credit operations indicator (IOC): indicates whether the amount of credit operations in the composition of capital expenditure [2] reduced or increased after the implementation of the Law. |
| Funded debt amortization indicator (IADF): shows the amortization of the funded debt [3] in relation to current revenues. |
| Tax Return Indicator on Circulation of Goods and Services and on Provisions of Interstate and Intermunicipal Transport and Communication Services (IRICMS): represents the revenue made with ICMS in relation to the resident population of the municipality. |
Results
The results found indicate that after the implementation of the Fiscal Responsibility Law, there was an increase in the use of additional credits, evidenced by the ( ICA ), which could indicate difficulties for the poorest municipalities in adequately designing the allocation of public resources. ( IRRO ) points out that there was an average increase of around 8% in the municipalities' budget revenue. The ( IEOC ) 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. The analysis of ( IRRT) shows that the LRF stimulated an increase of 0.182 in the average value of this indicator. This result may indicate that the impositions of the Law, in order to combat tax evasion or evasion and restrict the foregoing of revenue, ended up increasing efficiency in tax collection.
In the context of investments, looking at indicator ( II ), this showed an increase of around 30%, demonstrating that less economically developed municipalities had greater difficulties in making investments to meet social demands. With regard to the primary result, with the ( IRP ) it was found that the LRF allowed an increase in the municipalities' debt payment capacity, 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 gives evidence that the richest municipalities were able to amortize their debts more intensely. Finally, we have the indicator ( IRICMS ), which shows that after the introduction of the LRF there was a significant increase in its estimated coefficient, indicating greater revenue from ICMS compared to the population residing in the municipality.
In general terms, after the implementation of the Fiscal Responsibility Law, there was an increase in the efficiency of planning and execution of municipal revenues and expenses, evidenced by the increase in the capacity to pay debts, the balance of the primary surplus and the increase in tax revenues in Gaucho municipalities.
Public Policy Lessons
The Fiscal Responsibility Law brought transparency to public accounts and contributed to increasing civil society participation in monitoring public resources and combating fraud. Currently, there are several Non-Governmental Organizations (NGOs), and Civil Society Organizations of Public Interest (OSCIP) that monitor public spending in light of the Fiscal Responsibility Law (LRF), avoiding million-dollar 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, no. 1, p. 181 to 208-181 to 208, 2011.
[1] Current Revenue: is the sum of tax, contribution, property, agricultural, industrial, service and other revenues.
[2] Capital expenditure: these are expenses related to the acquisition of machinery and equipment, carrying out works, acquiring shareholdings in companies, acquiring real estate, granting loans for investment.
[3] Amortization is the gradual reduction of a debt through periodic payments.
Check the Institution's registration in the e-MEC System here
© 2025 All Rights Reserved
