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the previous years figures and accounted for Rb 7,679.3bn (14.2% of GDP).

The decline in the volume of the budget systems expenditures can be partly ascribed to low pace of spending throughout the year. For example, by results for the first 8 months of the year, expenditure-wise, cash execution of the federal budget was 58.4%, while that of consolidated budgets of RF Subjects 51.7%. The last month of the year saw spending of some 20% of all the federal budget outlays (in 2010 . 17.7%, in 2009 15.0%).

At year-end, the situation with cash execution of the federal budget and consolidated budgets of RF Subjects was as follows (see Table 6).

Table Cash Execution of the Federal Budget and the RF Subjects Consolidated Budget in 2010Federal budget RF Subjects consolidated budget 2011 2010 2011 Commitments, Cash Commitments, Cash execu- Commitments, Cash execu- Commitments, Cash execuas Rb. bn execution, % as Rb. bn tion, % as Rb. bn tion, % as Rb. bn tion, % 1 2 3 4 5 6 7 8 Expenditures, total 11 126.0 98.3 10 301.5 98.2 8400.7 91.4 7175.1 92.including Non-excludable costs 815.0 96.6 990.3 89.4 510.8 91.8 523.1 92.National defense 1524.4 99.5 1288.8 99.1 3.6 95.9 3.3 97.National security and law- 1258.1 100.0 1094.6 99.2 291.3 96.8 260.5 97.enforcement activities National economy 1861.7 96.2 1253.3 97.5 1485.5 88.6 1256.7 87.Public utilities sector 282.9 98.9 236.9 99.2 1335.8 72.5 974.4 85.Section The Monetary and Budget Spheres contd 1 2 3 4 5 6 7 8 Environmental protection 17.8 98.9 13.5 100.0 24.0 90.8 16.5 89.Education 556.0 99.5 444.8 99.5 1791.3 96.5 1497.5 96.Culture, motion picture 86.9 96.0 126.4 99.2 282.9 95.1 240.1 94.industry, mass media Health care, physical cul- 513.0 97.3 356.8 97.5 1502.0 89.1 853.5 93.ture, sports Social policy, pension 3185.9 98.2 346.9 99.4 1273.8 93.6 1237.5 94.system Source: the RF Ministry of Finance, the IEP calculations.

Despite the national leaderships regular calls to improve payment discipline, the situation with cash execution of the federal budget remained practically unchanged, while in the case of the RF Subjects consolidated budget it even exacerbated, with the budget having been executed, expenditure-wise, only by 91.4% (92.5% in 2010). In terms of functional sections the worst performance in executing consolidated budget expenditures over recent years was noted across the following sections Public utilities sector, National economy, Health care, physical culture and sports. Factors behind a low dynamic of spending of budget funds are: inclusion in the Budget Act of costs of construction of objects not backed with necessary documents and materials (approved in accordance with the established procedure design documentation on capital construction objects, decisions to make budget investments in the frame of the approved federal target program, etc.) and, according to the RF MinFin, the launch of the system of open e-auctions in the course of placement of public orders, which required setting up an e-document flow system.1.

At year-end 2011 the enlarged government budget was executed with a surplus of 1.6% of GDP thanks to a positive balance of execution of the federal budget (+0.8% of GDP) and budgets of extrabudgetary funds (+0.8% of GDP), including a surplus of the Pension Fun totaling 0.6% of GDP. To ensure the budget balance of the Pension Fund of Russias budget, during the year, the government injected therein Rb 924.4bn out of the federal budget (1.7% of GDP), while the gap between pension insurance premiums collected into the Pension Fund and payments of the labor and savings parts of pension, less other expenditure items of PFR, accounted for 2.7% of GDP2.

The consolidated budget of RF Subjects was executed with a negligible deficit (0.1% of GDP). According to data as of 1 January 2012, as many as 57 RF Subjects executed their regional budgets with deficit. Atop the list of such Subjects were the Republic of Tatarstan, Samara oblast and Krasnodar krai.

According to the RF MinFin, the volume of the public debt (with account of issued government guarantees) posted an insignificant increase from 9.2% of GDP as of late 2010 up to 9.6% of GDP as of 01.01.2012. The major driver behind the surging public debt was the soaring volume of domestic debt by 1.2p.p. of GDP, up to 7.7% of GDP. By contrast, the volume of foreign debt was down 0.8p.p. of GDP. It should be noted that the ballooning of public debt under a budget surplus (see Table 5) is explained by peculiarities of the national budget law. The fact of the matter is that according to Art. 184.2. of the Budget Code of Russian Federation, along with the bill on the budget the government should submit a draft program of borrowings for next financial year. Meanwhile, in accordance with the schedule approved in the beginning of the financial year, a public offer of government bonds is run http://bujet.ru/article/121904.php For details, see Section 2.3.

RUSSIAN ECONOMY IN trends and outlooks proceeding from the ongoing situation on financial markets, regardless of an actual securing of current expenditures and cash balances. Hence, focus on the current budget balance does not always seem justified in a situation of a continuous anticipation of the budget deficit by the end of the year.

Meanwhile, in anticipation of revenues above the budget projections and of a budget surplus, the MinFin has the right to make decisions to cut back on volumes of borrowings, which may be implemented in the form of an actual suspension or reduction of volumes of bond placements and redemption of earlier placed bonded loans. The Ministry used the right to implement all the planned bond issuances and, consequently, instead of the set in the budget act marginal debt volume of 13.7% of GDP, as of late-2011, the actual figure remained under 10% of GDP.

During the 11 months 2011, the volume of RF Subjects public debt shrank by Rb 34.1 bn and made up Rb 1,071.9bn (2.0% of GDP). The biggest contraction in the public debt was noted in Moscow oblast (Rb 50bn), the city of Moscow (Rb 36bn). Meanwhile, the figures were on the upsurge in 40 Subjects of RF, with the biggest one Rb 23bn reported by the Republic of Tatarstan.

So, while certain positive trends continued to unfold in the nations budget system in (e.g. rise in revenues along with a concurrent slashing of expenditure and the enlarged government budget once again in the black), symptoms of challenges to the budget systems stability exacerbating are there. We believe the most critical risk in this regard is the continuous high reliance of budget revenues on the state of affairs on the global markets for energy sources. As a consequence, the budget surplus becomes attainable only under extremely high oil prices. Our estimates show that in 2011 the structural component of revenues to the budget system of RF which takes place under an average long-standing oil price (USD 67/b.) accounted for 32.4% of GDP. This means that with regard to the amount of budget expenditures (36.8% of GDP) the 2011 structural deficit made up 4.4% of GDP.

A critical challenge facing the budget system is a broad employment of opaque and uncompetitive conduits, as far as channeling budget resources to contractors is concerned, which manifests itself in a high proportion of use of subsidies. By contrast, developed nations vigorously employ more transparent procurement procedures (across OECD nations, an average 18% of GDP is assigned through public procurement procedures vs. 10-11% in Russia).

Clearly, given a sizeable budget sector, the use of subsidies as an instrument of financing the public order for public institutions appears a justified move; however, their vigorous employment to support the real sector1 is, in our view, an unjustified measure and should be reduced just to individual cases of subsidizing interest rates on loans to agrarian producers and the framework of procedures of rehabilitation or an intense restructuring of backbone corporations.

Another example of employment of opaque budget instruments is contribution to corporate statutory capital (the 2011 spending on boosting stock and other forms of participation in equity capital on the federal level alone accounted for 0.8% of GDP, or 3.7% of the aggregate federal budget expenditures). Not only do investments in a corporations authorized capital fail to guarantee a target spending of budget allocations for investment purposes, as the state More specifically, the volume of federal budget spending on subsidizing commercial organizations under the Section National Economy remained on a fairly high level: in 2011 Rb 166.8bn (0.3% of GDP), in 2010 Rb 175.7bn (0.4% of GDP).

Section The Monetary and Budget Spheres may not directly determine directions of their use, but they engender a conflict between the governments mission to become an arbiter in economic relations and its interests as a stockholder of a given enterprise. Whereas the main advantage of the instrument in question is acquisition of the right to participate in managing the economic agents operations, we believe that it should be appropriate to limit the practice of contributing to corporations authorized capital (i.e. a de-facto irrevocable financing) to economic companies with the 100% government participation. That said, while investing in their authorized capital, the governments interest should lie in control over the economic agents long-term strategy, rather than in implementation of a concrete investment project.

Another recently noted distinctive feature of the state budget became implementation of huge construction projects (eg. the 2014 Olympics, the APEC Summit 2012, the World Cup2018). They have put a mounting pressure on the federal budget, while effectiveness of such costs does not appear evident.

Thus, reserves to bolster efficacy of budget spending should be sought in a change of the whole system of budget spending control mechanisms and approaches to selection of funding priorities.

2.2.2. Analysis of Revenues from Major Taxes into the Budget System of RF In 2011, the tax burden was up 12%, resulting both from a favorable foreign economic environment and, accordingly, increase in the oil-and-gas revenues, and improvement of business activity and rise of consumption in Russias economy, which entailed an increase in collection of corporate profit tax and VAT vs. the prior year.

Table Revenues from Major Taxes into the Budget of the Enlarged Government of Russian Federation in 20072011, as % of GDP Change in 2011 relative to 2007 2008 2009 2010 2011 As p.p. of in GDP prices, % Level of tax burden 36.1 35.7 30.8 31.9 35.8 3.9 16.Corporate profit tax 6.6 6.1 3.3 3.9 4.2 0.3 10.PIT 3.8 4,0 4.3 4,0 3.7 0.3 3.UIT/insurance premiums* 5.1 5.1 5.5 5.0 6.5 1,4 34.VAT 6.9 5.1 5.3 5.5 6.0 0.4 12.Excise taxes 1.0 0.8 0.9 1.0 1.2 0.2 24.Mineral tax 3.6 4.1 2.7 3.1 3.8 0.7 29.Customs duties and fees 7.3 8.6 6.8 7.0 8.5 1.5 27.* Since 2010 UIT was transformed into insurance premiums collected directly to extrabudgetary funds.

Source: the RF Ministry of Finance, Rosstat, the IEP calculations.

The data presented in Table 7 evidence that in 2011 the level of aggregate tax burden on the economy was practically back to the pre-crisis one. Meanwhile, as far as revenues from individual taxes are concerned, it can be noted that corporate profit-tax and VAT revenues remained at a level notably below the 2007 one, while those from PIT and the mineral tax were close to the 2007 level. In this context, due to the rise of their rates, insurance premiums (earlier known as UST) secured revenues equivalent to 6.5% of GDP vs. 5.1% of GDP in 2007, but posted an disproportionally lesser increase vis--vis the rise of the rates, nonetheless. Let us consider in every detail the situation with collection of main taxes.

RUSSIAN ECONOMY IN trends and outlooks The structure of tax revenues to the enlarged government budget is presented in Fig. 11. It was PIT which proved to be the only tax that posted a clearly negative dynamic in 2011.

80,70,60,50,40,30,20,10,0,Tax revenues Corporate profit tax PIT UIT/insurance VAT Excises Mineral tax premiums Source: FTS of RF.

Fig. 11. Proportion of Tax Revenues in Aggregate Revenues to the Enlarged Government Budget in 20072011, % The fall in question should be attributed to its shrinking tax base: the main indicator which characterizes the dynamic of the PIT tax base namely, the residents monetary incomes less social payments tumbled from 58.4% of GDP in 2010 to 53.2% of GDP in 2011 (see Fig. 12).

4,4 64,4,4,62,63,4,60,4,4,4,4,58,3,56,58,56,3,3,53,3,7 54,3,3,53,52,3,50,3,3,3 48,20 07 2008 2009 2010 PIT (left axis) Residents monetary incomes less social payments Source: FTS of RF, Rosstat.

Fig. 12. Dynamics of PIT Revenues to the Budget System of RF and Residents Monetary Incomes less Social Payments in 20072011, as % of GDP Section The Monetary and Budget Spheres The main factor driving the PIT tax base downwards in 2011 became the increase in social contributions rates, including the raising of the basic rate from 26% to 34% in particular.

According to surveys run by OPORA Rossii1, in 2011, small- and medium-sized businesses responded to the move by:

1) using various mechanisms to diminish amounts of insurance premiums (paying a part of salaries in envelopes, etc.) (83% of the surveyed);

2) abandoning earlier planned pay rises or cutting down salaries (90% of the surveyed);

3) dropping plans to expand operations (equipment modernization, other investment in development) (83% of the surveyed).

As a result, being a major component of the PIT tax base2, the labor compensation fund, less social contributions, plunged in 2011 by 2.1 p.p. of GDP (see Fig. 13), which in turn explains a 0.3 p.p. of GDP fall in PIT revenues in 2011 vs. the 2010 figures. By contrast, the volume of collection of social contributions surged by 1.44 p.p. of GDP, as the effect from the increase of their rates proved far in excess of consequences from the shrinkage of the tax base.

48,0 7,47,6,47,6,46,5,5,10 5,5,5,45,44,44,4,42,43,0 42,41,6 3,42,41,2,40,1,39,38,0 0,2007 2008 2009 2010 Labor compensation fund less social payments UST /social contributions (right axis) Source: FTS of RF, Rosstat.

Fig. 13. The Dynamic of Collection of UST/Social Contributions vs. the Dynamic of the Labor Compensation Fund less Social Contributions 20072011, % of GDP Preferential insurance premium rates were foreseen for a closed list of taxpayer categories, which decreased the effective taxation rate on the whole:

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