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Dividing expenditure powers between the Russian Federation, its Subjects, and municipal entities Numerous regions and municipal entities have found themselves in a situation when a sizeable proportion of their budget revenues are formed by subventions on exercise of their respective mandates. The subsequent jeopardy to efforts to increase the quality of control over the state and municipal finance is two-fold. First, regional and municipal authorities may not be keen to ensure a maximal efficiency of exercising a de facto someone elses mandate, while the respective monitoring mechanisms are far from being perfect. Second, funding the delegated mandates inevitably gives rise to certain challenges: there primarily exists a certain information asymmetry, i.e. data that directly affect the volume of subventions is supplied to the federal agencies by the RF Subjects. In addition, in the process of execution of the budget it may well happen that a given RF Subject (municipal entity) has received from the federal RUSSIAN ECONOMY IN trends and outlooks budget (the RF Subjects budget) an excessive amount of financing to exercise some delegated powers, while other powers have remained underfinanced. Given rigorous conditions of using subventions strictly to fund a certain delegated power, this results in an inefficient consumption of budget funds and the need in an urgent introduction of amendments to the RF Subjects law in the end of a fiscal year.

The division of powers between the tiers of the budget system has recently been revised literally every year. This lowers predictability of the fundamental parameters of the budget system in the eyes of regional governments and local authorities and has an adverse effect on the quality of management of the public and municipal finance.

At this juncture it seems inappropriate to introduce amendments to the division of expenditure powers in 2010. Meanwhile, it is appropriate to use this period to monitor and evaluate efficiency of the effective system of division of powers.

It is imperative to provide for a possibility for revision of the effective system of division of powers for the sake of reducing the number of delegated powers and to fix with each tier of government those powers it is able to exercise in the most efficient way. This move should be completed as early as in 2011-2012. As the decision has been made to finance the Interior Ministrys bodies exclusively out of the federal budget, there arise ample opportunities and room for a trading of powers between different tiers of government.

Optimizing mechanisms of management of financial support to the RF Subjects According to the draft 2010-2012 budget, there are 87 more transfers in the Russian Federation (4 ones in the subsection on budget transfers per se, 43- in the subsection on subsidies, including federal programs and sub-programs, 21- in the subsection on subventions, and 19 ones- in the subsection on other interbudgetary transfers). Notably, the volume of funding of as many as 35 transfers has been under Rb. 1bn, which means that an array of programs run by given RF Subject are eligible for just a meager financing. Given a strictly targeted nature of most of them (funded by means of subsidies and subventions), the costs of evaluation of the targeted spending of the respective funds, let alone evaluation of efficiency of such a spending, may overweigh their prospective benefits.

Hence the growing appreciation of the need for systematization of interbudgetary transfers, including a rigorous observance with the fundamental principle, which implies that financial aid should be allocated with account of the RF Subjects budget sufficiency rate.

This problem can be partly resolved by improving the expenditure powers division procedures. At the same time, the need for integration of a big number of small-volume target interbudgetary transfers into blocs has become evident.

The bottom line is that the concept of bloc transfers implies that financial resources in the frame of a given interbudgetary transfer can be spent by several directions, with the level of government from whose budget they are allocated enjoying the right for setting both the formula of their allocation and conditions of their spending by each direction of financing. The said level of government should have the right to opt for certain proportions of spending of the received bloc transfer by each direction included therein.

This should increase the quality of management of public and municipal finance in the course of implementation of the national priorities, particularly by taking into account, to a maximum degree, the local populations preferences. It seems appropriate to gradually replace after 2010 a considerable fraction of funding in the frame of the national projects, as well as the bulk of versatile subsidies to regions, with bloc interbudgetary transfers. Because of a high degree of differentiation of the fiscal capacity and costs of delivery of budget serSection Monetary and Budgetary Spheres vices in the RF Subjects, it appears appropriate for the federal level to allocate bloc subsidies with account of the regions budget sufficiency rate. But the equalizing progressiveness rate should be substantially lower than the one of transfers earmarked from the Fund for Financial Support of Regions. It is proposed to grant bloc transfers in proportion to the size of the gap between the regions budget sufficiency rate and the one of the most prosperous Subject of RF.

As concerns possible directions that may be integrated into bloc transfers at the regional level, those may be: capital refurbishment of public schools; capital refurbishment of blocs of apartments whose owners have established condominium; upgrading the quality of municipal motorways; population relocation from hardly accessible settlements; the health care reform, to name a few.

2.3. Interbudgetary Relations and Subnational Finance in 2.3.1. Subnational budgets in the grip of economic crisis Main trends in relations between different tiers of government are mirrored in the revenue and expenditure structure of the consolidated budget of RF. Table 1 presents data that highlight on the proportion of tax revenues and expenditures of the Subjects of the Federation in the respective indicators of Russias consolidated budget.

Table Proportion of Some Indicators of Budgets of the RF Subjects in Russias Consolidated Budget in 19922009 ( as %) Tax revenues 44.2 53.1 53.4 47.6 49.5 53.1 56.6 49.2 43.5 37.4 35.1 39.6 36.1 30.9 31.8 33.9 33.2 36.Tax revenues 47.7 61.7 61.4 56.0 55.8 59.5 59.9 53.0 49.0 42.6 40.1 41.9 47.5 49.1 52.0 50.5 53.7 54.less mineral payments and customs duties Expenditures 34.0 40.3 37.7 43.4 45.4 48.1 54.1 51.9 54.4 54.2 49.3 50.0 50.8 49.5 43.4 48.3 49.2 43.Source: the Federal Treasury, the IET calculations.

Analysis of the data of Table 1 allows the following notes: between 1998 and 2005 the proportion of tax revenues to the RF Subjects budgets in the consolidated budget has tumbled from 56.6% to 30.9%. The tendency has been fueled chiefly by the economic factors (specifically, the price rise for energy sources has entailed a greater influx of customs duties and mineral payments to the federal budget), rather than by reallocation of revenue sources between different tiers of the budget system. This is evidenced by the fact that the plunge in the proportion of subnational budgets in tax revenues to the consolidated budget has not been equally drastic from 53% in 1999 to 49.1% in 2005. Between 2006 and 2007 the proportion of subnational budgets in tax revenues was on the rise due to a faster growth in revenues from taxes fixed with regional budgets vis--vis those fixed with the federal budget. In 2008, the proportion slid slightly, but remained on a level substantially in excess of the 2005 one, nonetheless. Meanwhile, the 2008 proportion of regional budgets in tax revenues to the consolidated budget posted a notable growth vs. the respective figure of 2007. The economic crisis has altered the relations in question. The proportion of the RF Subjects tax revenues in the respective revenues to Russias consolidated budget posted a dramatic growth from 33.2 to RUSSIAN ECONOMY IN trends and outlooks 36.6%, which can be ascribed primarily to a drastic fall in revenues to the federal budget from the mineral tax and custom duties. The proportion of regional budgets without regard to mineral payments and customs duties also was slightly up at 1.1 p.p., from 53.7% to 54.8%. This is largely determined by the steadiness of revenues from the PIT to regional budgets during the crisis period (Rb 1, 666.2bn in 2008 and 1,665.8bn in 2009).

Let us examine the situation with regard to the revenue part of the subnational budgets in a greater detail. Starting from November 2008, the economic crisis has begun intensively affecting revenues to the regional budgets. As noted in the previous review, initially, the crisis most heavily battered those subjects of RF that were more better off economically (Tyumen oblast, Orenburg Oblast, Khanty-Mansy AO, Chelyabinsk oblast, etc.), as their revenues are dependent chiefly on the financial standing of large taxpayers concentrated in the metallurgical, oil, petrochemical and some other sectors. Between November and December 2008 tax revenues to the RF Subjects consolidated budgets shrank in nominal terms in 34 regions compared with the same period of 2007, with 15 regions suffering a sizeable (over 10%) fall in the revenues (see Table 2).

In the 1st quarter 2009, the economic crisis hit budget revenues of most Russias regions:

when compared with the same period of 2008, the tax revenues to the RF Subjects consolidated budgets tumbled in nominal terms in 54 regions, with already 31 regions suffering the noted drastic 10%-plus fall in their revenues. Meanwhile, it should be noted that the situation with execution of the revenue part of the RF Subjects budgets was particularly stretching in January and February and improved notably in March.

Between April and May 2009 the situation with execution of the revenue part of the budget remained relatively stable (compared with the 1st quarter of the year). But when compared with the same period of 2008, most Russian regions saw their tax revenues plunge. By results of the first 9 months of the year the magnitude of the fall diminished slightly; however, the number of the RF Subjects that reported a rise in their tax revenues in 2009 dropped vis--vis the same period of 2008 (their number proved to be smaller than the one reported by results of the 3 and 5 months of 2009). In the 4th quarter, the situation with tax revenues to the RF Subjects consolidated budgets somewhat improved. By results of the year only 6 Subjects saw their tax revenues fall by more than 25%, while another 31 Subjects registered their rise. So, it can be argued that it was in the beginning of the year that regional budgets experienced the most serious problems with their revenue part. The situation had slightly improved by the end of the year; however, as many as 52 out of 83 RF regions saw their tax revenues fall vs. the 2008 level.

The main cause behind the rise of problems with execution of the revenue part of the RF Subjects budgets became a fall in revenues from the corporate profit tax, which kicked off in the late 2008. Between November and December 2008 the said revenues to the consolidated budget of the RF Subjects plunged by 30.5% in nominal terms compared with the same period of 2007. The fall encompassed most Subjects of the Federation (65 out of 83 ones), and the negative tendency continued in the first quarter 2009, with the revenues in question slid by 35% in nominal terms vs. the same period of 2007 already in 72 regions. It should be noted that the situation with revenues from the corporate profit tax began to improve in March, but it was extremely daunting in January and February 2009. More specifically, in three regions (Republic of Sakha-Yakutiya, Astrakhan oblast and Yamal-Nenetsky AO) the amount of refunds of the corporate profit tax even exceeded the volume of the respective revenues. In April and May 2009, revenues from the corporate profit tax were substantially (roughly twoSection Monetary and Budgetary Spheres fold) lower than the respective figures of 2008, i.e. the situation continued to aggravate.

While it somewhat improved in the second half of the year, the problem remained very pressing, nonetheless. By results of the year revenues from the corporate profit tax to the RF Subjects consolidated budget shrank by 39% compared with the 2008 figures, with the fall registered in 67 regions.

Table Classification of Russias Regions by Change in Tax Revenues to Their Consolidated Budgets November- January- January- JanuaryThe number of regions January- January-May December February September December wherein the change in March 2009 to 2009 to the 2008 to the 2009 to the 2009 to the 2009 to the tax revenues accounted the same pe- same period same period same period same period same period for: riod of 2008 of of 2007 of 2008 of 2008 of Fall over 25% 3 15 7 11 10 Fall between 10 and 25% 12 24 24 24 19 Fall less than 10% 19 29 23 21 31 Growth 48 14 29 27 23 Source: the Federal Treasury, the IET calculations.

By contrast, revenues from the personal income tax across the country on the whole proved to be far more stable. In the first quarter 2009 they posted a 5% growth in nominal terms vis--vis the first quarter of 2008. But some Subjects of the Federation (Chelyabinsk, Yaroslavl, Kemerovo, Orel, Sverdlovsk oblast) saw their considerable (by more than 5%) plunge. The increase in revenues from the PIT can be partly ascribed to pay rises to budget employees. But the situation aggravated shortly afterwards. As already noted, overall, the 2009 PIT-based revenues remained at the 2008 level, but region-wise the situation appears far less unambiguous. In 36 regions revenues from PIT were down, with 7 regions reporting their 10%-plus fall1.

Overall, the 2009 revenues to the RF Subjects consolidated budget fell by 4.4% in nominal terms vs. their 2008 level. That said, different components of the revenues demonstrated a multidirectional dynamic, and, consequently, the revenue structure underwent notable transformations (see Fig. 1).

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