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A review of the applicable international experience shows that the government needs in goods, works and services are satisfied more efficiently and adequately if all procedures of a process cycle of a government order (planning, formation and placement) are built into unified institutional environment, aligned with common for all the procedures milestones and streamlined in terms of structure and element composition. At present, however, the Russian legislation does not provide for a unified approach to regulation of the entire cycle of the government order placement. Thus, at the planning stage, the budget legislation is called to ensure targeted and effective spending of the budget funds. Regulation of the implementation of government contracts is limited to the application of general provisions of the Civil Code, and no specific regulation tools are actually applied. Though the stage of placing a government order is most effectively regulated as a result of on-going refinement of FZ-94, the following issues are not settled yet: carry-over of the budget funds allocated to payment for government contracts from the current to a future budget period, broader independence in spending of the saved budget funds generated by effective procurements, application of price monitoring data to justify the start-up procurement prices, prospects of centralization of state procurements, RUSSIAN ECONOMY IN trends and outlooks improvement of the procedure for setting prices in construction sector, possibility to engage specialized companies to perform control over contract compliance, in terms of targeted spending of funds, effective work organization, implementation of technologies (banks and engineering companies), methods of procurement of highly specialized services (R&D and pilot), etc.

Implementation of national projects of priority (NPP) as an alternative way of programmed governance of budget expenditures. A new approach to resolve the task of improvement of the Russian community life quality was demonstrated in development of four national projects of priority in the areas of education, healthcare, housing and agribusiness industry.

Within each such project problems, objectives and actions were formulated. A specific focus was made on development trends of education and healthcare as these sectors have provided traditionally a wide range access to their services for the citizens and have always been extremely significant in terms of investments into human capital.

A review of the implementation results of NPP shows that the project target indicators have been delivered and over-delivered. However, these deliverables have not been supported by any institutional reform and therefore limited to additional budget allocations to alleviate acute problems in the key social sectors.

As there were no system approach to project shaping, the list of areas and actions of government support had to be extended every year thus leading to additional budget expenditures (to finance new bottlenecks, e.g. schools were connected to Internet, later the Internet traffic was paid for, since municipal budgets had no such expenditure items). Besides, the implementation of the national projects created additional expenditure obligations for the regional authorities. It is the regional authorities that are accountable mainly for the areas identified as national priorities. Therefore the national projects being included in the regional scope of competences created for the regions the so called hidden non-financed expenditure mandates:

in the projects Education and Healthcare additional benefits and increase of salaries of certain categories of budget employees took place while labor remuneration in the education and healthcare sectors in general have been maintained at the levels planned by the government. Thus a gap in individual revenues was created, and some of the human resources moved to jobs that were highly paid for. The regional authorities had to respond by unplanned increase of salaries of other employees in the education and healthcare sectors.

as the national projects of priority were implemented, it was found that they did not provide funds for maintenance of high-tech medical equipment, retraining of employees so that they could work with such high-tech equipment, etc.

The process of establishment of development institutions in order to create a unified national innovation system for development began in 2005. For several years, several dozens of organizations were established in Russia with the aim to incentivize investments and transfer to an innovative-performance model of the Russian economy, among them: Bank of Development and External Economic Activity, Investment Foundation of the Russian Federation, OJSC Special Economic Zones, Russian Venture Company, Russian Corporation of NanoTechnologies and other institutions. Each of them enjoyed a sizable support from the federal budget. Budget allocations were granted to organizations called development institutions, mainly in the form of contributions to their charter capital. Development institutions are granted such forms of private business support as loans, insurance of export risks, acquisition Section 2.

Monetary-Credit and Budgetary Spheres of securities of legal entities, participation in their capital and in concession agreements, and direct subsidizing.

The development institutions in spite of the considerable government support have not become catalysts of investment growth of the Russian economy, partially because there were no effective interface system for the institutions, their competences were vague, the applied tools were not aligned with those of established budget support, and the institutions did not have access to main sector strategic documents, etc.

Transition to a mid-term budget planning. In 2007, the 2008 2010 federal budget for 2008 2010 was formed (for a three-year period) for the first time in the contemporary Russia history. This development indeed was designed to improve predictability of the mid-term budget and fiscal policy of the RF Government, to enhance financial assurance of the adopted expenditure obligations for a three-year term and also to improve requirements to the budget quality and accountability for mistakes made in planning. According to the Budget Law, budget allocations were approved separately for each year of the three-year period, and chief executives of the budget were granted the right of re-allocation of funds in the course of the federal budget implementation between the current and future years. However, early 2009, as a result of rather high mid-term uncertainties caused by further recession in the world and in the Russian economy, the Federal Government elected not to follow the new practice of 3Y budgeting in 2010-2012. This decision was justified in the then economic environment, and the return to budgeting on a one-year basis was considered a temporary measure, therefore in 2010 the RF Government returned to federal budgeting on a three- year basis.

Thus the review of most important measures to improve the budget policy performed in the 2000es shows that most of them remained on paper. The results-oriented budgeting was not developed up to a level of becoming a tool of effective management of expenditures; the system of the development institutions can hardly be described as completely developed, the reform of the budget network was slow, etc. A lot of issues remain unattended and unsettled;

they can form an urgent agenda to be dealt with in the near future.

We can assume that these insignificant results have been a consequence of mistakes made in selection of priorities of the budget reform. Since early 2000es, complicated management tools (the results-oriented budgeting, targeted programming) have been implemented to improve the budget process; they proved to be quite effective in such countries as Great Britain, the USA, New Zealand, Australia; however they were hardly used in the countries with weak institutional environment. In a country where such fundamental issues of the budget sphere as restructuring of the budget network, creation of incentives for more efficient use of the budget funds at the bottom level, and improvement of a government order remain unresolved, it is difficult to expect a fast breakthrough in the quality of budget management.

2.2.2. Budget policy at the stage of recovery In the context of improving macro-economic situation, with a stable growth of oil world prices in 2010, common trends for all budget levels have been: revenue growth, reduction of expenditures vs the previous year and consequently reduction of the budget deficit (see. Table. 8). In particular, the budget expenditures of the enlarged government fell down by 2.5 p.p. of GDP, of the federal budget by 2.p.p. of GDP, of the consolidated budget of the RF subjects by 1.2 p.p. of GDP. At the same time, with re-calculation into real prices, the saving of the budget funds looks quite modest vs 2009 figures and fluctuates within 2-5% range RUSSIAN ECONOMY IN trends and outlooks thus we can hardly speak of the efficiency of the announced intentions to implement the responsible budget policy.

In 2010, the revenues of the budget system changed insignificantly vs the similar parameters of the previous year. Thus the budget revenues of the enlarged government grew by 0.p.p. of GDP (equivalent to a 4.8% surplus). This is mainly a result of the change of the procedure of remitting revenues from insurance contributions1 the federal budget revenues made 18.7% of GDP in 2010 this is by 0.2 pp. of GDP lower than in 2009.

Table Implementation of revenues and expenditures of the budgets of all power levels in 2010 Change vs in bln in % of nominal value real value pp of GDP RUR GDP bln of RUR. % bln of RUR % Federal budget Revenues 8303,8 18,7 966,1 13,2 208,9 2,6 0, Incl. from oil & gas sector 3830,7 8,6 846,7 28,4 538,8 16,4 0,Expenditures 10115,6 22,7 455,6 4,7 541,2 5,1 2,Deficit () /Surplus (+) 1811,8 4,1 510,5 750,1 2,Consolidated budgets of the RF subjects Revenues 6537,0 14,7 610,3 10,3 1,2 0,0 0,Expenditures 6636,9 14,9 381,2 6,1 264,3 3,8 1,Deficit () /Surplus (+) 100,0 0,2 229,1 263,1 0,Budget of the enlarged government Revenues 15715,9 35,3 2116,2 15,6 712,9 4,8 0,Expenditures 17301,0 38,9 1252,7 7,8 403,3 2,3 2,Deficit () /Surplus (+) 1585,1 3,6 863,5 1116,2 2,For reference: 44491,GDP, in bln RUR.

Source: Ministry of Finance of the Russian Federation, IEP calculations It should be noted that the tax burden in 2010 exceeded that of 2009 by 1.6 pp of GDP reaching 32.4% of GDP. Such increase was substantiated mainly by the positive trend of the tax revenues (see Table 9). Thus in 2010, Profits Tax, MET and indirect taxes dominated in their effect on the budget revenues of the enlarged government.

The revenues from the oil & gas sector that secure about one fourth of all the national budget revenues, have fluctuated depending on the world prices trends and demands for the goods of the fuel and energy complex. The main reason of the oil & gas sector revenues growth was the increase of the world prices on oil vs the similar period of 2009 ($75.9 against $56.7 $/bbl), accompanied with monthly indexation of the export duties from $253,6 per a ton in March up to $303.8 per a ton in December. As a result of the growth of physical volumes of production and export of hydrocarbons and the growth of world prices on energy carriers, the surplus of oil & gas revenues was 0.9 pp. of GDP vs 2009. A non-zero beneficial export duty on the supplies of oil from the East Siberia fields2, implemented in July 2010, positively affected the situation; the duty rate is re-calculated monthly depending on the world market prices and the demands for oil on the world markets.

If in 2009 UST revenues were partially remitted to the federal budget and then to the RF Pension Fund, since 2010 insurance contributions have been directed to off-budget funds.

The beneficial rate applies to 22 fields of the East Siberia.

Section 2.

Monetary-Credit and Budgetary Spheres Table Main taxes revenues to the budget of the enlarged government of the Russian Federation in 2007 2010 in % of GDP 2010 change vs 2009 Tax elasticity for GDP in in % in 2006 2007 2008 2009 2010, by of prices, in times GDP % Tax load 35,9 36,1 35,7 30,8 32,4 1,6 9,3 2,Profits Tax 6,2 6,6 6,1 3,3 4,0 0,7 27,2 6,Personal Income Tax 3,5 3,8 4,0 4,3 4,0 0,3 2,6 0,Uniform Social Tax/ /insurance con- 4,8 5,1 5,1 5,5 5,1 0,3 2,6 0,tributions* VAT 5,6 6,9 5,1 5,3 5,6 0,3 10,5 2,Excises 1 1 0,8 0,9 1,1 0,2 23,1 5,MET 4,1 3,6 4,1 2,7 3,2 0,4 21,0 5,Customs duties and fees 8,6 7,3 8,6 6,8 7,1 0,3 9,2 2,* since 2010, UST has been converted to insurance contributions remitted to off-budget funds directly.

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

The following factors were suppressive for the oil and gas revenues trend in 2010: firstly, the slowdown of oil production growth rates in 2H 2010 vs 2009 and secondly, strengthening of the ruble currency which reduced revenues from external trade in the ruble equivalent.

The Profits Tax and indirect taxes, among other main oil and gas revenue sources, demonstrated a more pronounced trend to increase revenues both in % of GDP and in real prices; the Personal Income Tax revenues and revenues from insurance contributions, however, reduced by 0.3% of GDP.

In particular, the Profits Tax revenues by the year end reached 0.4% of GDP which is by 0.7% higher vs 2009. In real prices, the growth was 27.2% - this is the highest value among the considered taxes. Such positive growth of the Profits Tax revenues was mainly prompted by a better financial situation in the real sector. Thus, for 11 months of 2010, the consolidated financial effect of organizations (without small businesses, banks, insurance companies and budget-funded agencies) reached RUR 5.54 trillion (in current prices); this by 49.6% exceeds the value of this indicator for the respective period in 2009; the share of lossmaking enterprises reduced to 29.7% against 32.0% in 2009.

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