In 2010, the budget revenues from VAT grew by 0.3% vs 2009 at the expense of the tax imposed on the imported goods only. The VAT revenues from the goods sold inside the Russian Federation in real prices increased by 2.4% only while in the case of imports taxation – by 21.4%. Therefore in 2010, in the VAT revenue structure a continuation of the trend (since 2006) to reduce the share of the internal VAT has been observed in favor of the VAT revenues from the imported goods (if in 2004 the ratio between the revenues from the taxation of the internal sales and the taxation of the imported goods was 70:30, in 2010 such ratio was 53:47). It is explained by two factors mainly: the internal demand has shifted towards consumption of the imported goods (the share of imports in GDP increased from 12.8% in to 16.9% in 2010) and the legislation regulating internal VAT administration has changed recently; according to our conservative estimates1, both factors resulted in annual under-receipt of budget revenues in the amount of at least 1.5% of GDP.
Quality of VAT administration in OECD countries and in Russia/A. Knobel. S. Sinelnikov_murylev, I. Sokolov – M. Journal “Applied Econometrics” No 4 (20), 2010.
RUSSIAN ECONOMY IN trends and outlooks In 2010, a considerable growth of excise revenues to the budget of the enlarged government by 0.2% of GDP vs the respective value of 2009 was recorded. The reason behind such growth was a sizable increase of the rates on alcohol products, on beer specifically (by times), and indexing for inflation of other groups of excisable goods. If in the 2000’es, the growth rates of the tax base were behind the real GDP growth for all the excisable goods besides the alcohol products, since 2010 this trend has become pronounced for the alcohol products as well, which production volume reduced by 2.9% vs 2009 in physical terms.
The revenues from the Personal Income Tax (PIT) to the budget of the enlarged government reduced to 4.0% of GDP; this is by 0.3% of GDP lower than the 2009 value. In absolute terms the revenues grew by 7.5% only vs the previous year making RUR1,790.5 billion. In real prices the PIT revenues reduced by 2.6% vs the respective values of 2009. Such reduction of the PIT revenues occurred following the reduction of the taxable base (in GDP shares): in 2010 the growth rates of monetary revenues of the population (less social payouts) were lower than the rates of rehabilitation of the national economy; as a result, their share in GDP decreased by 4.6% of GDP for nine months of 2010 vs the respective period of 2009.
Since 2010, UST has been converted to insurance contributions administered by state offbudget funds1. Before 2010, insurance contributions were paid on the insured and cumulative portion of the state pension and administered by the Federal Tax Service of Russia. These contributions were not a portion of UST, however the UST obligations were reduced by the amount of the paid insurance contributions (the UST portion subject to payment to the federal budget). In 2010, the summary rate of the insurance contributions was maintained at the level of the UST base rate of 26% of the payroll budget, however it was the taxable base that changed. Thus, if before 2010, the UTS was imposed at the regressive scale, and the base rate applied to the annual wage not exceeding RUR280,000, in 2010 the rate of 26% applied to the wage of RUR415,000, and any wage above that level was exempt from insurance contributions (actually two rates were applied: 26% and 0%).
It is important to note that Federal Law No 212-FZ of 24.07.2009 stipulated annual indexing of the marginal base for insurance contributions in line with the growth of the average wage in the Russian Federation2. The changes described above should be taken into consideration by comparing the UST dynamics (including the insurance contributions) with the revenues from the insurance contributions in 2010. As Table 9 suggests, the collection of the insurance contributions made about 0.3% of GDP vs the previous year. It is partially related to the reduction of the payroll fund in GDP by 2.5% of GDP.
Note that more important changes associated with insurance contributions have been effected since January 1, 2011, namely, the increase of the overall rate from 26% to 34%. According to our estimates, this action does not ensure the balance of the pension system of Russia in a long-term period, and there is a considerable negative influence on the pace of economic growth; this may enlarge a scale of tax evasion by the business (the share of the “shade wages” would increase).
With an insignificant growth of revenues to the budget of the enlarged government in GDP shares, in 2010 the budget expenditures reduced vs GDP (by 2.5 pp of GDP) but actually did Federal Law of July 24, 2009 No212-FZ On insurance contributions to the Pension Fund of the Russian Federation, Social Insurance Fund of the Russian Federation, Federal Fund of Compulsory Medical Insurance and Territorial Funds of Compulsory Medical Insurance”.
By Resolution of the RF Government of November 27, 2010, No 933, the taxable base limit was set at RUR463,000 for 2011.
Monetary-Credit and Budgetary Spheres not change in real terms; this conforms to the earlier accepted concept of their growth restraint (Table. 10).
Table Implementation of the expenditure obligations of the budget of the enlarged government in 2009 – 2010, in % of GDP 2010 2009 Change RUR, % of RUR, % of in pp. of %, real asbillion. GDP billion. GDP GDP sessment Expenditures, total 17301,0 38,9 16048,3 41,4 –2,5 –2,including General government issues 1438,9 3,2 1313,8 3,4 –0,2 –0,incl. servicing federal and municipal debts 261,0 0,6 236,3 0,6 0,0 0,National defense 1279,7 2,9 1191,2 3,1 –0,2 –2,National security and law enforcement 1339,4 3,0 1245,9 3,2 –0,2 –2,National economy 2323,9 5,2 2782,1 7,2 –1,9 –24,Housing and utilities 1071,5 2,4 1006,1 2,6 –0,2 –3,Protection of natural environment 28,3 0,1 29,6 0,1 0,0 –13,Education 1893,9 4,3 1783,5 4,6 –0,3 –3,Culture, cinematography, mass media 353,4 0,8 324,4 0,8 0,0 –1,Healthcare and sports 1708,7 3,8 1653,0 4,3 –0,4 –6,Social policy 5863,2 13,2 4718,8 12,2 1,0 12,Source: RF Treasury, IEP calculations The reduction of the government expenditures was mostly related to such budget items as “National economy” (by 1.9 pp. of GDP), “Healthcare and sports” (by 0.4 pp. of GDP) and “Education” (by 0.3 pp. of GDP). The only item of the budget of the enlarged government which enjoyed increase of funding was “Social policy”; this is mostly connected with pension indexation, three times during the reviewed year. Thus, from January 1, 2010, social supplementary pays to the pension were established to raise the pension up to the cost of living.
Therefore, in 66 subjects of the Russian Federation payouts in the form of federal extra pays to the pension (for 2,403. 7 thousand people) and in 17 subjects of the RF in the form of regional extra pays to the pension (2,441.1 thousand people) were made.
From April 1, 2010, work pensions were additionally indexed by 6.3% and social pensions by 8.8%. Besides, from July 1, 2010, social pensions have been increased by 3.41%. With account of all 2010 actions (valorization, indexation) the work pension (old age pension) has grown by 23% amounting to RUR8,177.
At the same time one should mind that such increase of the social obligations requires a well-thought approach since in the context of a sustained shortage of the RF Pension Fund it becomes an extra load on the national budget. Expenditures for funding the additional pension increase in January 2010 were estimated at RUR502 billion (about 1.2% of GDP) while for the April indexation the Federal government had to find another RUR 150 billion. The aggregate pension expenditures grew by RUR1.3 trillion (2.4% of GDP) vs 2009, and a result, the pension system shortage increased to 5.2% of GDP in 2010.
In such context, to revise the current national pension policy is absolutely required. Otherwise, to maintain the replacement ratio at the current level (36%) a choice between the two options will have to be made:
• Step up additional financing (0.5% of GDP for 2011 1% of GDP in 2016, 2% of GDP in 2022, etc) to compensate the pension system shortage; or • Increase the rates of the insurance contributions by 0.5% on the average every year.
RUSSIAN ECONOMY IN trends and outlooks Thus we believe it reasonable to come back to the social tax scale that had been in effect before 2010, to carry our moderate indexation that would not increase the tax burden on the labor market in 2011 – 2012. In a mid-term, to secure the pension system, extra funds should be engaged in addition to standard insurance contributions for compulsory pension insurance.
Alongside with the reserve funds, privatization of state property may help, also by way of passing the property over to the RF Pension Fund and non-state (private) pension funds in consideration of current contributions under the cumulative component of the pension insurance.
2.2.3. Main events in the budget area in 2010.
In the last year, in spite of the crisis and the need to cut down budget expenditures, the RF Government continued making transformations that started in the second half of the 2000’es to improve the quality of the budget governance and to implement the social obligations that had been assumed before. In 2010, the following events in the budget area can be considered as significant:
1. Development and approval of the RF Government Program to improve efficiency of the budget expenditures1. The need to ensure a long-term balance and stability of the budget system in the form of an absolute fair limitation of the “irresponsible” annual increase of the budget expenditures is a fundamental condition for the Program implementation success.
An innovation in the Program is introduction of another program targeted tool - “a government program” designed to set aims, objectives and instruments of the government policy aimed at the implementation of the priorities of the Concept of a long-term social and economic development or large-scale actions of national or international significance. Last August the RF Government approved the procedure for development, implementation and assessment of efficiency of such government programs2, while in November the RF Government passed a resolution where a list of the government programs was approved3. All the programs are structured by the following areas:
- New quality of life (13 programs);
- Innovative development and upgrade of the economy (17 programs);
- National security assurance (2 programs);
- Well-balanced regional development (4 programs);
- Effective government (5 programs).
The funds for the programs will be determined during national budgeting for 2012-2014.
Other significant areas of budget governance quality improvement in the Program are:
- Considerable increase of the target programs share (currently the budget expenditures under a targeted program method are covered by about 15%) in the budget;
- Reforming the mechanism of state order implementation;
- Improvement of the budget network;
- Reforming institutions of the federal (municipal) government control;
- Delineation of authorities between various levels of power, etc.
In spite of the fact that the Program is oriented at the improvement of the budget process at the federal level, the success of its implementation depends on the alignment and effective Order of the RF Government of June 30, 2010 No 1101-r Resolution of the RF Government No 588 of August 2, Order of the RF Government of November 11, 2010 No 1950-r Section 2.
Monetary-Credit and Budgetary Spheres ness of the efforts at all the levels. Therefore the RF Government recommended the executive authorities of the RF subjects and the local government bodies to develop and implement similar regional and municipal programs for improving efficiency of expenditures of the respective budgets according to the key provisions of the Federal Program. Also a decision was taken to grant federal subsidies to the regional budgets for the implementation of the regional programs1.
2. In 2010, amendments 2 in the RF Budget Code were adopted to be effective since 2011.
These amendments primarily changed the structure of functional classification of the budget expenditures and increased the number of budget items from 11 to 14. The following expenditures now have become separate items:
- servicing of the federal government and municipal debts. Before this expenditure item was included in the section “General Government issues”. This innovation aims at the improvement of control effectiveness over government debts specifically in view of its future increase in the mid-term;
- physical culture and sports expenditures. Earlier this budget item was included in the section “Healthcare”;
- expenditures on mass media including TV and radio broadcasting; periodical press and publishing houses, applied research in the area of mass media and other mass media issues. Earlier the mass media expenditures were included in section “Culture and cinematography”.
“Inter-budget transfers” section was also modified. Now it is called “Inter-budget transfers of general nature to the budgets of the RF subjects and municipal establishments”. In this section the targeted transfers such as subventions and subsidies are united in item “subsidies for alignment of the budget provision of the subjects of the Russian Federation and municipal establishments”. All other transfers are grouped into– “other subsidies” and “other inter-budget transfers of general nature”. Transfers to off-budget funds are included in other sections.
Thus, since 2011 transfers to the national Pension Fund will be included in section “Social policy”; as a result, the expenditures under “Inter-budget transfers” will be considerably reduced in 2011 – 2013 while the expenditures under “Social policy” will grow (see Table 13).
“National security and law enforcement” section was supplemented with an item called “modernization of the inferior troops, rescue military crews of a federal executive body authorized to resolve problems of the civil defense and of the law-enforcement and other bodies”. The desire to localize expenditures in the expenditure structure is explained by the coming (since 2012) transition to the program-based budget where each expenditure area will be shaped as a government program.