central bank reports, respectively, but are not incorporated in these estimations. Regarding the golden rule, as it is applied in Brazil, capital depreciation expenditures are not deducted from the gross investment figures, implying that indebtedness might end up being higher than the level consistent with an efficient distribution across generations of the cost of current public investment projects. Hence, capital expenditures figures should refer to the net of depreciation charges in order to maintain the public sector’s net worth constant.<sup>21</sup> Considering that the net public capital stock to GDP is approximately 40 percent of GDP and the average depreciation rate is 2.5 percent of GDP,<sup>22</sup> the indebtedness limit should be of the order of .8 percent of GDP per year lower than the limit actually used. These calculations and discussions should be made public and reported transparently jointly with the rest of the debt operations that are already disclosed.

61. To improve the fiscal decision-making process, Wyplosz (2003) proposes delegating the task of setting the primary surplus to a committee of experts that would have fixed-term appointments. The objective of this delegation would be to isolate this decision from the influence of particular interest groups, and draws from the success of monetary policy in defeating inflation throughout the world. Taxation levels and public expenditure composition should be decided through the normal democratic processes. There is no example in the world of a delegation of this kind, though the Maastricht Treaty can be considered a delegation to a supranational authority to impose limits on the size of the overall fiscal balance and the public debt.

62. The design of a fiscal rule that explicitly and effectively binds the primary surplus to some **_medium term_** objective would be an alternative institutional commitment arrangement. Brazil, has advanced in this respect, as the 2004 Budget Directives Law (Ley de Directrices Orcamentarias, LDO) already postulates a target debt level of 51% of GDP for 2006. As mentioned before, progress can be made by making this target binding, and by explicitly stating how the primary surplus would evolve to meet the medium term objective. Nevertheless, the current approach is right on the mark, as it pays attention to first-order considerations, such as the importance of reducing the debt level, though it might neglect other issues. It would be desirable to advance in this same direction with any additional work on this topic.

63. There are many considerations and features that fiscal commitment mechanisms should have (Kopits and Symansky, 1998; Buiter, 2003). We will focus in a few. In particular, rules should be well defined in terms of clarifying differences between the objectives and the policy instruments; rules should also be well defined regarding the institutional coverage, and exit clauses. As mentioned before, the FRL is exceptional in terms of the coverage but could improve on the other definitional aspects. The second feature that the rule must have is transparency. There should be no room for creative accounting, and any data changes or revisions, as well as changes in coverage of the statistics, must be carefully explained and statistically In this respect, Brazil has

> 21  For detailed discussions on the measurement issues of public investment, and its relation with public borrowing, see Robinson (1998), Blanchard and Giavazzi (2003) and Buiter (2001). 22 These are IPEAs estimates.

26