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2.3.2. Financial support from the federal budget The total amount of federal budget transfers to subnational budgets increased in nominal terms by 4.8% in 2011, but decreased in real terms like in the preceding year (by 1.2% in 2011; 14.4% in 2010 vs. the percentage reported in 2009). The balance of extended and reSection The Monetary and Budget Spheres paid budget loans decreased by 51.5%, from Rb 164,4bn to Rb 79,8bn. It should be noted that in 2011 the amount of extended federal budget loans to the regions decreased by Rb 41,7bn to Rb 128,4bn. The balance decreased visibly as a result of a substantial growth in repayments for budget loans by the regions, from Rb 5,4bn in 2010 to Rb 48,6bn in 2011, which was basically conditioned by repayment of 3-year budget loans extended in 2009.

Let us examine in detail the dynamics of certain types of federal budget transfers (refer to Fig. 18).

Source: Federal Treasury, Gaidar Institutes estimates.

Fig. 18. Federal budget transfers to Russias regions in the period between 2008 and 2011 (at 2008 values) Subventions and other interbudget transfers (hereinafter other IBTs) decreased in real terms in 2011 vs. 2010. Subventions decreased most, by 16.0%, other IBTs by 8.9%. However, comparing the amounts of these transfers in 2011 with 2008, it should be noted that subventions increased in real terms by 75.4% whereas other IBTs decreased by 56.2%. Subsidies in 2011 increased by 10.2% vs. the percentage reported in 2010 (however, it was 12.1% less than in 2008). The amount of grants decreased markedly and stabilized at Rb 563,5bn in 2011 over the recent two years (a growth of 1.6% in real terms vs. 2010) after a substantial growth in 2009.

The foregoing dynamics resulted in certain changes in the structure of transfers in the period between 2008 and 2011 (refer to Table 23).

As evident from Table 23, the amount of grants increased in 2011 against 2010 mostly through an increase to Rb 154,3bn from Rb 105,9bn in the amount of grants allocated for the provision of support to budget balancing measures. As a result, a share of grants for fiscal equalization increased from 7.7% to 10.7% of total amount of transfers. However, a share of grants for budget balancing decreased to 27.5% from 28.8%. Grants accounted for 39.0% total interbudget transfers in 2011, a growth of 1.1 p.p. vs. 2010. In general, the data on changes cant be single-valued, because grants for budget balancing are allocated through a more transparent method based on objective factors against grants for fiscal equalization. In spite of the fact that a certain part of grants for budget balancing are allocated on the basis of publicly available methods and rules, many applicable criteria and indicators are less grounded and intrinsic vs. allocation of grants for fiscal equalization. A new type of financial support to the RUSSIAN ECONOMY IN trends and outlooks regions appeared in 2011, namely grants to the constituent territories of the Russian Federation which achieved best results in increasing the regional taxable capacity, which are also allocated as grants for budget equalization (refer to Section 2.3.3 for details).

Table Federal budget transfers to Russias regions in the period between 2008 and 2011, in nominal terms 2008 2009 2010 m Rb % of total m Rb % of total m Rb % of total m Rb % of total Transfers to the 1,094,680 100.0 1,480,385 100.0 1,378,337 100.0 1,445,581 100.regions, total Grants 390,398 35.7 578,277 39.1 522,685 37.9 563,500 39.including:

grants for fiscal 328,648 30.0 375,485 25.4 396,996 28.8 396,996 27.capacity equalization grants for the 46,035 4.2 191,886 13.0 105,955 7.7 154,270 10.provision of support to budget balancing measures Subsidies 435,867 39.8 530,073 35.8 411,439 29.9 481,252 33.including:

subsidies for road 101,799 9.3 104,304 7.0 61,437 4.5 57,643 4.facilities agricultural subsidies 73,593 6.7 90,641 6.1 87,930 6.4 98,509 6.Subventions 153,170 14.0 284,440 19.2 378,650 27.5 337,467 23.including:

subventions for 37,413 3.4 77,414 5.2 87,090 6.3 74,193 5.exercising the powers in employment promotion subventions for GPW 0 0.0 45,825 3.1 116,851 8.5 46,054 3.veteran housing Other interbudget 115,245 10.5 87,595 5.9 65,562 4.8 63,362 4.transfers Source: Federal Treasury, Gaidar Institutes estimates.

A share of subventions decreased from to 23.3% in 2011, 27.5% in 2010 in total amount of transfers. The decrease in the amount of subventions was conditioned basically by a decrease in subventions for exercising the authority in promotion of employment and subventions for the Great Patriotic War veterans housing due to the 65th Anniversary of the Victory in the Great Patriotic War (1941-1945)1 which appeared in 2009. It is the latter type of subventions that resulted in a substantial decrease in 2011, when a share of this subvention became twice as little, i.e. they decreased from 8.5% to 3.2% of total amount of transfers.

A share of subsidies in total amount of transfers decreased continuously in 2009from 39.8% in 2008 to 35.8% in 2009, and stood at mere 29.9% in 2010. On the contrary, a share of subsidies increased by 3.4 p.p. to 33.3% in 2011.

Following are the principal lines of co-financing of subnational budget expenditures in 2011:

- the state program on agricultural development and regulation of the markets of agricultural products, raw materials and food products for the period of 20082012 (20.5% of total amount of subsidies, 21.4% in 2010);

Pursuant to Edict of the President of the Russian Federation No. 714, dd. 07.05.2008 On the Great Patriotic War (19411945) Veterans Housing.

Section The Monetary and Budget Spheres - construction and modernization of motor roads (12.0%; 14.9% in 2010)1;

- financing additional medical assistance provided by district general practitioners and pediatric physicians, general practitioners (family doctors) (4.5%; 5.1% in 2010).

- implementing additional measures aimed at easing the tension in the labor market of the constituent territories of the Russian Federation (3.7%, in 2010 9.4%).

In general, speaking of the principal parameters of federal budget transfers to the regions in 2011, the following should be noted. A share of grants and subsidies increased a bit and a share of other IBTs and subventions decreased in total amount of federal budget transfers vs.

2010. Comparing the transfers made in 2011 with those in 2008 (the pre-recession period), it should be noted that a share of subventions increased substantially and a share of other IBTs decreased in the total amount allocated to subnational budgets transfers. In general, the federal center made efforts concerning intergovernmental fiscal relations in 2011 which were intended to keep gradually curtailing principal counter-recession channels of aid to subnational budgets and simultaneously create additional stimuli for increasing the tax base (this refers, above all, to stimulus grants whose allocation method is described in detail in the next section).

2.3.3. Stimulating the constituent territories of the Russian Federation which achieved best results in enhancing regional taxable capacity There has been a visible trend over the last few years towards wider use of the practice of federal budget allocations to the regions on the basis of their economic and financial performance results. Since 2007, the Ministry of Regional Development of Russia has been measuring effectiveness of executive branches of the government of the constituent territories of the Russian Federation2, and grants are allocated to regions which are found to be most efficient based on such measurement. In addition, at the end of 2011, the federal government bodies made a decision on creating a stimulus arrangement for those constituent territories of the Russian Federation which managed to achieve best results in their economic development and fundraising. A total of Rb 10bn was allocated from the federal budget for this purpose in 2011. Ten billion rubles is planned to be allocated in 2012, however the amount may increase in the future based on the development process of the stimulus arrangement. However, a wider use of such tools of intergovernmental fiscal relations is exposed to serious risks which will be examined below.

Russian Government Ordinance No. 798, dd. February 18, 2011, On the Allocation of Grants in 2011 to the Budget of the Constituent Territories of the Russian Federation to Support Measures of Balancing of the Budget of the Constituent Territories of the Russian Federation Which Achieved Best Results in Enhancing regional taxable capacity formalized the method of resulting figure calculation and the mechanism of allocation of such stimulus grants. According to this document, a final comprehensive measurement which takes account of economic performance results over the last three year, is to be made to measure the performance of each region. In addition, this comprehensive measurement includes the performance results of the constituent territories of the Russian Federation on the basis of six eco The amount of these subsidies includes relevant expenditures as part of all federal special purpose programs.

Edict of the President of the Russian Federation No. 825, dd. 28.06.2007 On the Measurement of Effectiveness of Executive Government Bodies of the Constituent Territories of the Russian Federation (as revised on 28.04.2008 No. 606).

RUSSIAN ECONOMY IN trends and outlooks nomic performance indicators which are grouped into three segments: investments, taxation, industrial output. Two economic performance indicators are to be calculated for each segment so that each segment be measured both in terms of dynamics and value. As a result, both regions with a low value but high growth rates and those with a high value but without pronounced dynamics may equally be qualified for federal support.

It should be emphasized that according to the Ordinance, all economic performance indicators which are considered for allocation of stimulus grants, are to be calculated without regard to the regions financial and economic performance results in the industries relating to mineral production. This condition was imposed by the federal government bodies even before February 2011, when the idea of allocation of such grants was advanced, however the focus was originally placed on the oil and gas sector rather than the entire extractive industry1.

A total of three Draft Ordinances of the Russian Government were considered over six months, which differed mostly in the expression of specific economic performance indicators while the list itself remained unchanged. The only thing that should be emphasized is the Ministry of Economic Development and Trades initiative to widen the scope of assessment, which suggested that the innovation production segment should be assessed as well (in addition to the aforesaid three segments). The following parameters were selected as indicators:

level and growth rate of innovative goods, works, services for all types of economic activity.

However, this idea failed to receive the required support. A potential reason is that the notion of Innovative goods, works and services is not well-defined in the federal legislation2, which might result in incorrect statistics from both organizations and enterprises and government bodies of the constituent territories of the Russian Federation.

A total of 20 Russian regions received stimulus grants in 2011. Financial support varied within a range of Rb 206,8m to Rb 2bn on the basis of the results obtained through the final comprehensive measurement. The Kaluga Region was ranked first, which managed to be qualified for 20% of total stimulus grants. The Tyumen Region was ranked second and received a significant amount of budget funds (Rb 1,9bn or 19.1% of total), which is a historical recipient of grants for fiscal capacity equalization, as against the Kaluga Region. For example, the Tyumen Regions fiscal capacity stood at 2,347 after Moscow and St. Petersburg in 20113. The Tyumen Regions consolidated budget tax and non-tax revenues totaled Rb 147,9bn, aggregate income Rb 184,7bn at year-end. Comparing these figures with the amount of allocated grants, proves that this amount is unlikely to have any effect whatsoever on the regional government bodies goal-setting. Other 18 winners received less than Rb 1bn.

In addition, it should be emphasized that a total of 13 constituent territories of the Russian Federation received no grants for equalization in 2011, eight of which received the foregoing stimulus grants at the end of the year. Therefore, such grants can hardly be regarded as a serious stimulus instrument. Allocation of stimulus grants within the framework of the applicable arrangement results more likely in dispersion of a part of the federal budget funds.

As noted above, such stimulus tools of intergovernmental fiscal relations are not regarded as novelty for the practice in Russia. Since 2007, the Ministry of Regional Development of http://www.minfin.ru/ru/press/speech/index.phppg4=13&id4=12089 based on A. G. Siluanovs interviews to in agencies at the 8th Krasnoyarsk Economic Forum.

http://www.gks.ru/free_doc/new_site/business/nauka/minnov3.htm Rosstat defines this notion as products manufactured by applying various types of technological innovations in the accounting year.

According to the Method for allocation of grants for fiscal capacity equalization of the constituent territories of the Russian Federation for 2011.

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