In Brazil, the taxation model is unjust, regressive, and it concentrates income by taxing workers and consumers in an accentuated way, sacrificing the lowest income level and at the same time going easy on big capital, profits, the latifúndios, and inheritances.

Public Debt and the Loss of Human Rights

                                                                                          Maria Lucia Fattorelli Carneiro *

The most recent UN report on social inequality and respect for human rights is a reason for great shame for all of us Brazilians, and requires deep reflection and involvement by civil society in order to demand urgent measures to reverse this unacceptable situation:

- With regard to the distribution of national income, the report points out that Brazil is the eighth country of the world in social inequality, losing the position of world-wide champion in inequality only to Guatemala and six other African countries: Swaziland, Central African Republic, Sierra Leone, Botswana, Lesotho, and Namibia;

- With respect to human rights, Brazil occupies the 63rd position, behind countries that have conditions that are  more complicated in terms of constitutional order, law, and resources, such as Macedonia and Malaysia.

              Unfortunately, we have to admit that such reports reflect the picture of enormous social injustices that we witness in our country: misery, hunger, malnutrition, urban and rural unemployment, slums, illiteracy, violence, absence of health services, and social assistance for a great part of the population.

            What are the reasons for this shameful situation?  If we are a country potentially so rich, if we possess a vast territory that has abundant natural, human, cultural and economic resources in all sectors - industrial, agricultural, commercial, services?

The great knot that ties our country down and doesn’t allow it to move ahead and follow its great national path that guarantees human rights and a worthy life for its inhabitants is the wrong economic model, servile to the interests of national and international finance capital that revolves around the questionable process of the internal and foreign debt.

The current economic model puts aside human goals (for health, education, job, assistance for children and the elderly, access to culture and leisure, etc.) and goals for the development of the country (investment in electric energy, transportation, agrarian reform, economy based on solidarity, etc.), to reach financial goals: for inflation, the primary surplus, and a surplus in the trade balance. The economy ends up being seen, not as a way to achieve greater welfare for the whole of society, but as an end in itself. We pursue these financial goals, sacrificing society and producing inequality. For this reason, Brazil is almost the world-wide champion in inequality and is not doing well in the ranking for respect for human rights.

This knot that prevents our country from growing in a fair way has various faces and acts on the basis of perverse mechanisms and weapons. Among the most important mechanisms that stand out are the process of indebtedness, the tax model, and unjust international trade. The weapons are the policies of "tax inspector adjustment", with prominence for the creation of the primary surplus, a rise in interest rates, and reduction of the State’s role in the economy, through privatization. The country-at-risk is another mighty weapon; a real blackmail that the financial market exerts on the country. But the weapons that mortally wound the Brazilian State are the requirements of the International Monetary Fund (IMF) and the World Bank, so that the country continues with political reforms of neo-liberal implementation: reforms to social security, taxation, syndicalism, labor, university, independence from the Central Bank, and freedom for the flow of capital. 

Tax Model

            The mission of the tax system is to promote the collection of taxes in order to guarantee the financing of the State. A fair system is one that respects the principles of tax-paying ability and progressivism, demands greater participation by the rich, and guarantees relief for the poor, thus promoting a balance in the distribution of national income.

In Brazil, the taxation model is unjust, regressive, and it concentrates income by taxing workers and consumers in an accentuated way, sacrificing the lowest income level and at the same time going easy on big capital, profits, the latifúndios and inheritances.

         The Brazilian tax burden is the highest in the world, around 38% of the Gross National Product (GNP), and is doubly unjust because it falls on the bulk of the poor population, which does not receive a return in quality public services, nor the necessary investments for a healthful economic growth since all the increase of the tax burden in the last years has served to ensure the increase of the target of the primary surplus.

While the elite is exonerated with the exemption from profits distributed to the company’s shareholders, the exemption of the CPMF in the applications in the stock exchange, foreign remittances, and numerous possibilities for deduction and breaches contained in the tax law, a worker who receives R$1,164. 01 monthly, an amount lower than the minimum of subsistence calculated by the DIEESE, is subject to an income tax of 15%. When a person receives a wage above R$2,2326, he starts to pay 27. 5%. The result of this is that the main programs  of the Brazilian government to promote income distribution -- programs Bolsa-Família (Family Bag) and Fome-Zero (Zero Hunger), for example – are ultimately financed by the sector that effectively pays taxes in Brazil, in other words, workers and low-income consumers.

These distortions are disclosed in the last UN report, which divulges that in Brazil, 46.9% of the national income is concentrated in the hands of the riches 10%. Yet the poorest 10% get only 0.7% of the income.

The study also discloses that the transfer of 5% of the income from the  richest 20% of the country to the poor would move 26 million people above the poverty line and reduce the poverty rate of 22% to 7%. The most obvious way to effect this transfer of income would be to tax the rich. However, the government alleges that if big capital were taxed, it would  flee the country. But it is evident that this only occurs due to the irresponsibility of the Brazilian authorities who do not implement a policy of controlling capital. Besides making the implementation of a more equitable tax model impossible, the lack of control over capital leaves the country vulnerable, and has allowed operations of money laundering, fruit of the most diverse crimes. For all these reasons, society needs to demand a change in the perverse current rules of the tax model, together with the implementation of measures to control capital.

Primary Surplus

            One of the biggest traps of the current economic model is the policy of the primary surplus, demanded by the IMF and the international creditors, who want to ensure that the country will be saving resources to guarantee the interest payment on the public debt. This "economy" represents an enormous sacrifice for society; therefore it is affected in such a way by the revenue side – through a constant increase of the tax burden – as well as by the expenditures side, cutting public expenses and investments.

            The goal of the primary surplus has been increasing year after year and all this sacrifice has not reduced the relation between the Debt and the GNP. Therefore it disables economic growth and hinders necessary social spending for the improvement of Brazilians’ standard of living and the guarantee of basic human rights.

In the year 2004, the federal government destined R$ 139 billion to service the internal and foreign debt (which includes interest and principal of the debt), while only R$ 84 billion was destined to the package of corresponding social expenses on health, education, social assistance, public security, culture, urbanism, habitation, sanitation, environment management, science and technology, agrarian organization, energy, and transportation. The primary surplus of federal, state, and municipal spheres reached the historical record GNP of 4.61%, higher than the surplus goal required by the IMF, 3.75% of the GNP. However, not even this high surplus was enough to pay the expenditures with interest that reached 7.29% of the GNP. Despite the voluminous payments, the high interest rates made the Federal Internal Real State Debt rise from R$ 787 billion in December of 2003 to R$ 857 billion in December of 2004.

From January to September of 2005, the federal, state, and municipal governments generated a primary surplus of 6.1% of the GNP, higher than the 4.25% goal established for this year. The federal sphere alone generated a surplus of R$ 53.5 billion in the first nine months of this year. This value is higher than the sum of the expenses of the same period on public safety, health, education, culture, urbanism, habitation, sanitation, environment management, science and technology, agriculture, agrarian reform, energy, and transport.

To reach this record of 6.1% of the GNP, the government has promoted serious cuts in expenses, for example, the strong contingency of $R15.9 billion occurred on February of 2005, right after the approval of the budget by the National Congress. Not even the social programs were saved and some social areas lost almost all their funds; it led to a total loss of character of the previous budget voted by the Legislature. It is up to society to reflect on what it is to be a responsible government. Is it to let the interest rate rise to a point where the economy is plastered and to generate so much unemployment? Is it responsible to make the resources destined for all the social areas (health, education, assistance etc.) and essential investments, contingent?  

For the next year, the LOA proposal (Annual Budgetary Law) sent by the federal government to the National Congress in August of this year reserves R$179.2 billion for the payment of interest, estimated at about 8.4% of the GNP. Where do we go to stop these restrictive policies that give top priority to the satisfaction of the financial market in detriment to meeting the people’s needs?

Public Indebtedness

            The origin of these economic measures, which are harmful to the country and the backdrop of the most serious national problems, is the process of indebtedness which leaves us ever more vulnerable and dependent, faced with the voracity of national and international finance capital. The Brazilian foreign debt is around US$ 201 billion (Source: Central Bank) and the Federal internal debt R$ 975 billion (Source: Secretary of the National Treasure).

In the first place, it is important to point out that debt has not been a mechanism for injecting money in Brazil or in any other country of the Third World, but only to suck it out. To give only one example of the bleeding, in the period of 1979 to 2003, Brazil sent abroad US$ 725 billion to pay interest and principal of the debt, while we received US$ 555 billion from loans. In other words: we promote a liquid transfer to the order of US$ 170 billion and, even then, the external debt jumped from US$52.8 to US$ 229.2 billion in the period.

This behavior is due to the high one-sided interest rates for the U.S.A. at the turn of the decade of 1970/80, the main cause of the debt crisis that we faced in the 80’s and that still determines a great part of the foreign debt that we have today. This unilateral measure was made possible by a leonine contractual clause that anticipated "floating" interest rates. Another factor for the explosion of the foreign debt was the indiscriminate "opening of the ports” by the Collor government, causing a significant increase of imports. It’s worth remembering that such measures provoked bankruptcies in our national industries, in addition to qualified job loss in the country. This problem was aggravated by the Cardoso government, which kept exchange rate artificially high for a long time, stimulating even more imports, which made us take mass loans to finance the torrent of imports during the second half of the 90’s. The high internal interest rates also forced the big banks and companies to search for resources abroad, where the interest rates were lower. This process occurred in a disorderly way, determining great increase in the internal debt, therefore the Central Bank issued bonds of the internal debt to effect the exchange of foreign currency for the national currency.           

While the internal debt provokes bleeding in the public budget, embodied in the policy of the primary surplus, the foreign debt consumes all the resources coming from exports. Although the government celebrates the surpluses obtained in the balance of trade, our foreign accounts continue to present worrying results. From January to September of 2005, the country sent abroad US$ 10.2 billion interest on the foreign debt, US$ 8.5 billion profits from the multinationals, US$ 5.7 billion of services contracted abroad, while the amortization of the foreign debt reached US$ 25.4 billion. All these remittances added up to US$ 49.7 billion, more than the celebrated trade balance of US$ 32.6 billion.  In other words, all our exporting efforts, based in agribusiness - the annihilator of jobs and the environment - has not been enough to pay our foreign expenditures. Therefore, to persist with these policies, we continue to depend on the entry of foreign capital, which makes the country vulnerable to the disposition of the international financial market and its mechanisms, such as the designation of "country at-risk".

Audit of the Debt

             Numerous questions are raised in relation to the process of Brazilian indebtedness. Even in the decade of the 80s, soon after the brief interruption of payments of part of the foreign debt with the banks, a special commission of the Federal Senate analyzed the debt process. The reporter of this commission, the then-senator Fernando Henrique Cardoso, concluded in his report that about ¼ of the sum of the Brazilian foreign debt referred to interest on top of interest, without any return for the country. The senator even raised the co-responsibility of the creditor countries, the IMF, and the commercial banks in this process.

These and other questions created the conditions for the inclusion of the provision in the Federal Constitution of 1988 (article 26 of the ADCT) that specified an audit of the Brazilian foreign debt.

In 1989, another combined commission was formed in the National Congress, but the audit did not get to be carried out. The much-missed senator Severo Gomes issued a profound and important report on legal aspects of the debt, raising numerous nullities, unconstitutionality, and disrespect to our sovereignty. Simulations of the Central Bank, at the time, indicated the possibility of brutal reduction of the debt.

Such irregularities and many others were ignored by the negotiators of the debt in the period of 1989 to 1994, who converted these questionable contracts into stocks or bonds that were negotiable in the financial market.

While the National Congress did not carry out the audit specified in the Federal Constitution, the Campaign Jubilee South-Brazil is carrying out a Citizen’s Audit, which consists of raising information, searching documents, carrying out studies and publishing such information periodically, in order to keep the subject of the debt in discussion and to denounce the true causes of the current state of disrespect for human rights in our rich country.

One of the studies that we have carried out demonstrates that if the creditors had not increased unilaterally the interest rates at the end of the ‘70s and beginning of the ‘80s, the amount that we send to the exterior would have been enough to pay all the debt in 1989, and we would still would be creditors of US$100 billion.

We are also carrying out a study on the illegality of this procedure that violates international law and we are joining with other countries that have also been victims of this process, to make possible joint actions that denounce such facts to the International Court of Justice. 

An unpublished work by the study group of the Citizens’ Audit was the analysis of an external agreement obtained by the Federal Senate, relative to the period of 1964 to 2001. The evidence revealed that the documents found represent only one small part of our indebtedness, in other words, many loans had not been documented, or this documentation not found in the Senate, which by our Constitution would have to authorize all the foreign loans contracted by the State. Documents referring to the loans of the IMF, the ones with the clauses most harmful to our sovereignty, were not found. In the period until 1987, no contract of the federal sphere was located for the biggest parcel of the Brazilian debt. The practice of successive military governments was not to submit decisions to the Legislature.

Spread sheets put together by the Consulter of the Senate, and examined by the Citizens’ Audit study, pointed out the existence of 815 Resolutions of the Senate that had authorized foreign loans in the period, which had added up to a financed value of US$ 219 billion.

         Of this US$ 219 billion, US$ 124 billion is in reference to seven authorizations of the Senate for the issuing of bonds by Brazil, in other words, they did not have debt contracts in these operations but rather bonds that would be controlled by a large number of creditors. A good part of this did not represent new debt contracted by the country, but only the refinancing of previous debts.

From the US$ 95 billion remaining, 238 contracts were found that add up to US$ 42.7 billion, which has been a target of analysis by the group of the Citizens’ Audit.

                      Research in the Federal Senate - 1964 to 2001

            Among this set of contracts that were found, which add up to a sum equivalent to only 20% of the growth of our foreign debt during the period, some clauses offensive to our sovereignty were found. The floating interest rates,  which were mainly responsible for the growth of our foreign debt, appeared in no fewer than 91.8% of the financed value, while the payment of interest on the part of the loans not taken was identified as 58.6% of the values that were loaned.

            The adoption of a foreign forum for the resolution of controversies between creditors and debtors - which means renouncing national sovereignty - was made in almost half of the financed value. Other clauses also stand out: one which imposes the adoption of IMF programs; another prevents Brazil from creating any controls on the movement of capital; one that relates to tax collection with payment of loans, and one which requires that equipment be purchased only from the creditor countries. Many contracts were found that were written only in foreign languages.

         In short, a small sample of debt contracts were enough to demonstrate the unfavorable conditions that we are subjected to by the international creditors.

Faced with  so much plundering, illegitimacies, and illegalities, society should demand that Art. 26 of the Transitory Provisions of our Constitution be fulfilled and the Official Audit of our Foreign Debt take place. This should be a transparent process that should answer where all this debt came from and who has benefited by this process. The people, who are obliged to pay this expensive account, have the right to know all the truth.

* Maria Lucia Fattorelli Carneiro is an auditor-inspector of the Federal Revenue Service (Unafisco) and coordinator of the Citizens’ Audit for the Jubilee South Campaign in Brazil.