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Overall deficit of the consolidated budget of the constituent territories of the Russian Federation remained unchanged in 2010, but its scope decreased to 1.5% of the total expenditures, which was much less than in 2009 (5.3%). Examining the value of budget deficit by constituent territory, it should be noted that only 20 of 82 regions had a surplus of the consolidated regional budget at 2010 year-end. As a result, the need for borrowings remained at the subnational level. In addition, it should be noted that the need for borrowings could arise from the need for refinancing of the existing debt. Data on volumes of the public debt owed by the constituent territories of the Russian Federation in the period between 2007 and and municipal debt in 2010 is shown in Table 20.

Table Volumes of public debt owed by the constituent territories of the Russian Federation in 2007 2010 and municipal debt in 2010 (bln RUB) Debt size, bln RUB as of January 1, as of January 1, as of January 1, as of January 1, as of July 1, 2008 2009 2010 All constituent territories of 456,9 599,6 889,6 934,5 1096,the Russian Federation incl.:

Moscow 89,3 121,5 243,1 264 299,Moscow Region 92,1 156,1 163,7 151,2 146,Constituent territories of 275,4 322 482,8 519,3 649,the Russian Federation (net of Moscow and the Moscow Region) Municipalities n/a n/a 134,9 143,6 169,Data Source : Ministry of Finance of Russia, the estimates were made by the Gaidar Institute.

The data on changes in volumes of the public debt owed by the constituent territories of the Russian Federation in 2009 (an increase by RUB 290,0 bln) and in 2010 (an increase by RUB 206,4 bln) shows a slight decreased in borrowings in 2010. It is, however, the substantial decrease in growth rates of borrowings and loans in Moscow as well as of public debt in the Moscow Region in 2010, that was most responsible for the said decrease. The two above mentioned regions accounted for more than 45% of the total amount of public debt owed by RUSSIAN ECONOMY IN trends and outlooks the constituent territories of the Russian Federation as of January 1, 2010. The picture would be different if we examine dynamics of volumes of the regional debt, net of Moscow and the Moscow Region. Volumes of public debt of the other constituent territories of the Russian Federation increased by RUB 167,1 bln by the end of 2010 against the level of the beginning of the year, and were a bit less (RUB 160,8 bln) in 2009. More than 78% of growth in volumes of the public debt were reported in H2 2010. It is noteworthy that balances of repaid federal loans totaled RUB 127,2 bln in 2010 for the regions (net of Moscow and the Moscow Region). By comparing the data, we can see that most of the borrowings were obtained as federal budget loans (see the next paragraph for details on federal financial assistance). In 2010, debts grew both at the regional and municipal levels. Municipal debts increased from RUB 134,9 bln as of January 1, 2010 to RUB 169,8 bln as of January 1, 2011.

To summarize, the following can be highlighted. The situation with execution of subnational budgets improved visibly in 2010. Tax revenues in the consolidated budget of the constituent territories of the Russian Federation increased in volume. However, many parameters, which describe the situation with subnational finances, were found to be much lower than the prerecession values. Most of the Russian regions still had a deficit-ridden budget, which gave rise to the need for extra borrowings. Federal financial aid, including budget loans, kept playing an important role, like in 2009, in the provision of financial stability at the subnational level.

2.3.2. Financial Support from the Federal Budget In general, the volume of funds (budget loan balances) allocated from the federal budget to the budget of the constituent territories of the Russian Federation decreased by 4.1% in nominal terms in 2010. A total volume of federal transfers decreased by 6.9% from RUB 1,480.4 bln to RUB 1,378.3 bln, whereas balances of obtained and repaid budget loans increased by 28.9% from RUB 127,5 bln to RUB 164,4 bln. It should be noted that the volume of federal budget loans allocated in 2010 to the regions remained at the level of (RUB 169,8 bln and RUB 170,0 bln, respectively). The balances increased considerably as a result of considerable decrease from RUB 43,2 bln in 2009 to RUB 5,4 bln in volumes of repaid budget loans by the regions in 2010, which may be connected with increase in the number of federal budget loans issued for a period of more than one year.

Lets examine dynamics of certain types of federal transfers (see Fig. 15).

All types of transfers, save for subventions, which increased in nominal terms by 33.1%, decreased in 2010 against 2009. Other intergovernmental fiscal transfers decreased by 25.2% and subsidies by 22.4% decreased most against the level of 2009. Grants also decreased in volumes by 9.6%. However, if we compare the amounts of transfers to the regions with the amounts transferred in 2008, the picture would be slightly different. In general, total volume of transfers (at 2008 values) increased by 6.4% in 2010 against 2008. On the other hand, other intergovernmental fiscal transfers substantially decreased in real terms by 51.9% and subsidies by 20.3% against the level of 2008. At the same time, subventions in 2010 (at 2008 values ) more than doubled subventions in 2008 (a 108.8% growth in real terms). In addition, in 2010 grants increased in real terms by 13.1% against the level of 2008.

The foregoing dynamics resulted in specific changes in the structure of transfers in the period between 2009 and 2010 (see Table 21).

Section 2.

Monetary-Credit and Budgetary Spheres Data Source : The Federal Treasury, the estimates were made by the Gaidar Institute.

Fig. 15. Transfers to the regions from the federal budget in 2008 2010 (at 2008 values ).

Table Transfers to the Russian regions from the federal budget in 2008 2010, in nominal terms 2008 2009 as % of as % of as % of mln RUB mln RUB mln RUB total total total Transfer by region, total 1,094,680 100.0 1,480,385 100.0 1,378,337 100.Grants 390,398 35.7 578,277 39.1 522,685 37.including:

fiscal capacity equalization transfers 328,648 30.0 375,485 25.4 396,996 28.grants on the provision of support to fiscal 46,035 4.2 191,886 13.0 105,955 7.equalization Subsidies 435,867 39.8 530,073 35.8 411,439 29.including:

subsidies on road facilities 101,799 9.3 104,304 7.0 61,437 4.subsidies on agriculture 73,593 6.7 90,641 6.1 87,930 6.Subventions 153,170 14.0 284,440 19.2 378,650 27.including:

subventions on exercise of powers for pro- 37,413 3.4 77,414 5.2 87,090 6.motion of employment subventions on the provision of housing to 0 0.0 45,825 3.1 116,851 8.veterans of WWII Other intergovernmental fiscal transfers 115,245 10.5 87,595 5.9 65,562 4.Data Source: The Federal Treasury, the estimates were made by the Gaidar Institute.

As shown in the Table, grants decreased in volumes in 2010 in nominal terms against the level of 2009 mostly due to a reduction from RUB 191,9 bln to RUB 105,9 bln in the amount of grants on the provision of support to fiscal equalization. As a result, a share of grants on fiscal equalization decreased in the total amounts of transfers from 13.0 to 7.7%, whereas a share of fiscal capacity equalization transfers increased from 25.4 to 28.8%. In general, these RUSSIAN ECONOMY IN trends and outlooks changes should be regarded as positive ones, because fiscal capacity equalization transfers are allocated by using the most transparent method based on impartial factors. It is important to emphasize that decrease in volumes of grants on fiscal equalization was accompanied by a substantial growth in balances of budget loans. In general, however, the amount of grants fiscal equalization and balances of budget loans decreased by 15.4% in nominal terms from RUB 319,4 bln in 2009 to RUB 270,3 bln in 2010. The decrease reflects the above mentioned ease of tensions in subnational finances in 2010 against 2009.

A share of subventions increased considerably in the total amount of transfers in the period between 2009 and 2010, from 14.0% in 2008 to 27.5% in 2010. Growth in volumes of subventions was conditioned mostly by a consistent increase in subventions on exercise of powers for promotion of employment due to escalating tensions in the labor market, and a subvention on the provision of housing to veterans of WWII on the occasion of the V-Day 65th Anniversary1 which was introduced in 2009. It is the latter type of subventions that was responsible for most of the growth in subventions in 2010: the subvention on the provision of housing to veterans of WWII increased from RUB 45,8 bln to RUB 116,9 bln, accounting for more than 30% of the total subventions in 2010. Furthermore, it should be noted that in housing utility subventions for specific categories of individuals increased by 17.8% from 84.8 to RUB 99,9 bln.

A share of subsidies in the total amount of transfers gradually decreased in the period between 2009 and 2010, from 39.8% in 2008 to 35.8% in 2009, to 29.9% in 2010. A visible reduction in cofinancing from the federal budget as part of federal special-purpose programs and budget investments which were not included into federal special-purpose programs, was most responsible for substantial reduction in the amounts of subsidies in 2010. In general, the reduction accounted for about 35% against the level of 2009. Furthermore, subsidies to the Federal Road Agency were reduced from RUB 104,3 bln in 2009 to RUB 61,4 bln in 2010.

As a result, a share of these subsidies decreased from 7.0 to 4.5% in the total amount of transfers. Subsidies on agriculture decreased too, but not that much, by 3% against the level of 2009. Nevertheless, a share of these subsidies increased from 6.1 to 6.4% against a much bigger decline in the total amount of transfers. In addition, it should be noted that a series of federal budget subsidies were discontinued in 2010, of which most relevant were :

1) subsidies on the provision of individuals with rent and utility subsidies (RUB 11,7 bln in 2009) ;

2) subsidies on compensation for a part of payment which parents pay for maintenance of their kids at public and municipal educational institutions operating under the basic preschool general education curriculum (RUB 8,2 bln in 2009 ) ;

3) subsidies on public support to introduction of integrated modernization of education (RUB 5,3 bln in 2009 ) ;

4) subsidies on training of labor force and specialists for high-tech enterprises, which includes purchase of modern training-laboratory and training-production equipment (RUB 1,9 bln in 2009 ).

In addition, it is noteworthy that subsidies on purchase of motor and municipal vehicles decreased by nearly 50%, from RUB 19,7 bln in 2009 to RUB 9,96 bln in 2010. It should be noted, however, that a subsidy of RUB 1,02 bln on purchase of school buses manufactured on Pursuant to the Order of the President of the Russian Federation dd. May 7, 2008, No. 714 On the Provision of Housing to Veterans of WWII, 19411945.

Section 2.

Monetary-Credit and Budgetary Spheres the territory of the Russian Federation for general educational institutions was introduced at the same time in 2010.

In spite of decline in the total amount of subsidies in 2010, cofinancing was increased for specific subsidies, including the following major subsidies :

1) subsidies on additional measures aimed at easing tensions in the labor market of the constituent territories of the Russian Federation (by RUB 2,9 bln or 8.2%) ;

2) a subsidy to the budget of the Krasnodar Territory on measures aimed at developing the infrastructure at the city of Sochi (by RUB 9,3 bln or more than 4 times) ;

3) subsidies on medical rehabilitation of children (by RUB 2,8 bln or more than 3 times against the level of 2009 ).

In general, referring to the basic parameters of transfers from the federal budget in 2010, the following can be highlighted. The trends of 2009 continued in 2010, namely increase in a share of subventions and decrease in a share of subsidies and other intergovernmental fiscal transfers in the total amount of transfers from the federal budget. Though the total volume of grants on fiscal equalization and budget loans increased in 2010, it exceeded considerably the level of 2008, which was to a large extent due to certain sustained tensions regarding the execution of the consolidated budget of the constituent territories of the Russian Federation. Increase in a share of fiscal capacity equalization transfers in the total amount of transfers from the federal budget became a positive trend in 2010.

2.3.3. Federal Law On the Federal Budget for 2011 and Planning Period of 2012 and 2013 as Related to Allocation of Intergovernmental Fiscal Transfers to Other Budget System Levels A total of about RUB 1,252.4 bln was scheduled for allocation to regional and local budgets in 2011, which is 9.1% less in nominal terms than in 2010. Overall federal budget expenditures are expected to increase by 5.4%. A share of intergovernmental fiscal transfers to other levels of the budget system will eventually decrease from 13.6 to 11.7% in the federal budget expenditures against 2010.

The grants scheduled for allocation from the federal budget in 2011 will total RUB 523,bln, which is almost equal to the level of 2010 (RUB 522,7 bln). In 2011, the main channel of financial aid to regional government authorities fiscal capacity equalization transfers from the Fund for Financial Support of the Regions (FFSR) is expected to be maintained at the level of 2010 (RUB 397 bln). It should be noted that the 2010 upward trend in a share of the FFSR in total amount of transfers from the federal budget is expected to continue in 2011.

Under the Federal Law On the Federal Budget for 20112013, a share of fiscal capacity equalization transfers must increase from 28.8% in 2010 to 31.7% in 2011. It should be emphasized, however, that the scheduled increase in a share of the FFSR is to be reached by reducing the total amount of transfers and maintaining the volume of fiscal capacity equalization transfers at the level of 2010. Given that the Fund accounted for 73% of the intergovernmental fiscal transfers in 1999, and fiscal capacity of the Russian regions became more unbalanced since 1999, the scheduled volumes of grants from the FFSR in 2011 seem to be insufficient if maintained at the level of 2010 (i.e. without any indexation whatsoever within three years).

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