In May 2000, Brazil enacted a Fiscal Responsibility Law (LRF) that strengthened fiscal institutions and established a broad framework of fiscal planning, execution, and transparency at the federal, state, and municipal levels. Among other provisions, the LRF requires the presentation of fiscal administration reports at four-month intervals, with a detailed account of budget execution and compliance with the LRF provisions. In terms of expenditure, the LRF sets ceilings on personnel spending—inclusive of pensions and payments to subcontractors—at 50 percent of federal government spending and 60 percent of state and local government spending. If these limits are breached in any given four-month period, the lapse must be redressed within the following eight months. There are strict penalties, including prison terms, for public officials who violate the provisions of the LRF or engage in other proscribed fiscal actions, as legislated in the Fiscal Crimes Law.

In terms of public debt, the LRF and complementary legislation set a ceiling of 120 percent of current revenue at the national and state levels. If this ceiling is breached, the debt has to be brought back within the ceiling over the following 12 months, and no form of borrowing is permitted until that happens. There is also a “golden rule” provision, stating that net borrowing cannot exceed the volume of capital spending. Loans between the national, state, and municipal governments are outlawed.

The LRF contains two escape clauses which suspend the application of the debt ceiling. The first escape clause applies in the case of a congress-declared state of national calamity or state of siege. The second one applies in case of economic recession, defined as a growth rate of less than 1 percent of GDP over a period of one year. In the latter case, the period for redressing a breach in the debt ceiling is doubled to two years. The escape clauses also apply to the limits on personnel spending.