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1.100 Overall, following the proposed fiscal rules would allow the government to maintain the fiscal stability and yet adequately address the emerging structural and cyclical challenges through the embedded flexibility. This fiscal framework would make the budget policy more predictable and sustainable, thereby facilitating the development of the private sector.

At oil prices in the range of 20-24 US$/bbl the overall budget outcome is ambiguous. It would depend on the extent to which the government would finance structural reforms and/or conduct countercyclical policy.

1.101 The World Bank as well as other international financial institutions may help the government to overcome its institutional weaknesses in managing the implementation of reform and public investment programs. This appears to be the way to increase the efficiency of public spending, so that it fully complies with the proposed fiscal rules.

Chapter 2. FISCAL COSTS OF CIVIL SERVICE REFORM IN THE RUSSIAN FEDERATION 2.1 This Chapter provides recommendations on the planning and sequencing of civil service reform in Russia based on (i) estimates for direct fiscal effects of various reforms in the area of public administration, and (ii) analysis of feasibility of different reform options.

The Chapter suggests that broad reforms in the core government administration and in the civilian public sector at large may be implemented within five to seven years but should be differentiated by the scope of pay adjustment in various sub-sectors of civilian employment, closely monitored for non-wage expenditure growth, and complemented by significant staffing adjustments in the civilian public sector as well as by at least some staff reductions in the core government administration. Implementation of such reforms would require additional budget financing as compared to 2003 expenditure levels, but fiscal costs could be sustained within a reasonable range.

A. EMPLOYMENT AND FINANCING OF CORE GOVERNMENT ADMINISTRATION AND THE CIVILIAN PUBLIC SECTOR 2.2 Overall core government administration and civilian public sector employment accounts for a significant part of the Russian population: in 2002, employment in these sectors was about 11 million people or about 7.7 percent of the countrys total population. The structure of civil employment in Russia is presented in Table 2.1.

Table 2.1: Structure of Core Government Administration and Civilian Public Sector Employment in Sector Employment Employment (000 persons) (% of total) Total: Core government administration and civilian 11,062.2 100.public sector (A+B) A. Core government administration employment 1,252.3 11.Civil service and local self-government 919.5 8. Federal civil service 463.7 4. Subnational civil service (incl. local self- 455.8 4.government) Other core government administration employment 332.8 3.B. Civilian public sector employment 9,809.9 88.Health, physical culture and sports, social services 3,356.1 30.Education 5,282.3 47.Culture and Arts 915.4 8.Research and Development* 256.1 2.*Data are for 2001.

Source: Roskomstat.

2.3 In 2002, core government administration employment accounted for 1.25 million people (or roughly 0.9 percent of the total population) with about 47 percent employed by the federal authorities and 53 percent employed at the regional and municipal levels of the government. Employment in executive authorities (including local self-government with executive functions) accounts for more than 86 percent of core government administration employment.

2.4 Over the past eight years, the core government administration employment has increased by almost a quarter with the most drastic increases in legislative, judiciary and other government bodies. Employment growth in the executive branch of core government administration was slower, but still since 1994 there have been significant increases in absolute staffing levels (Table 2.2).

Table 2.2: Core Government Administration Employment in Russia in 1994(in thousands) 1994 1995 1996 1997 1998 1999 2000 2001 Total core government 1004.3 1061.8 1093.0 1108.9 1102.8 1133.7 1163.3 1140.6 1252.administration employment as % of the 1994 employment 100 105.7 108.8 110.4 109.8 112.9 115.8 113.6 124.A. Legislative authorities 7.1 8.8 10.5 11.1 11.0 14.5 15.5 19.1 20. as % in 1994 100 123.9 147.9 156.3 154.9 204.2 218.3 269.0 287.B. Executive authorities 894.4 945.1 971.3 984.4 983.9 1006.5 1029.5 983.7 1072. as % in 1994 100 105.7 108.6 110.1 110.0 112.5 115.1 110.0 119.B1. Federal executive 379.9 416.2 433.0 442.5 409.9 412.8 404.7 377.1 446. as % in 1994 100 109.6 114.0 116.5 107.9 108.7 106.5 99.3 117. HQ-based 33.8 33.8 31.2 30.4 28.9 30.9 30.3 28.8 28. as % in 1994 100 100 92.3 89.9 85.5 91.4 89.6 85.2 85. Deconcentrated 346.1 382.4 401.8 412.1 381.0 381.9 374.4 348.3 418. as % in 1994 100 110.5 116.1 119.1 110.1 110.3 108.2 100.6 120.B2. Subnational executive 514.5 529.0 538.3 542.0 574.0 593.4 624.8 606.6 625.(incl. Local self-government) as % in 1994 100 102.8 104.6 105.3 111.6 115.3 121.4 117.9 121.C. Judiciary authorities 102.7 107.3 110.1 111.5 105.6 110.1 115.2 134.3 153. as % in 1994 100 104.5 107.2 108.6 102.8 107.2 112.2 130.8 149.D. Other authorities 0.1 0.6 1.2 1.8 2.3 2.6 3.1 3.5 5. as % in 1994 100 600 1200 1800 2300 2600 3100 3500 Source: Gimpelson (2002) and Roskomstat (2002).

2.5 It is notable, that the only category of core government administration employment that has been declining over this period was employment in HQ-based federal executive authorities, while the employment in deconcentrated federal executive bodies and particularly in the subnational executive branch has been steadily growing. This disproportional growth in part may be explained by the changes in government functions from central planning to regulation of economic activities during the period of transition. These functional changes led to growing numbers of core government administration employees working for federal deconcentrated units (treasury, tax administration, customs, employment service, anti-trust agencies and property management units). Decentralization and transfer of some of the government functions from the federal to sub-federal levels may also explain part of the employment growth at the subnational level (see Gimpelson, 2002), while some of the increases may have resulted from a lack of control of staffing levels in the regional administrations and local self-government. Moreover, the recent World Bank report points to excessive employment generation in the public sector at the regional level due to insufficient job creation in the private sector. As a result, budget employment started to function as a quasi social safety net (see World Bank, 2004b).

2.6 Federal and subnational civil service in 2001 accounted for about 75 percent of total core government administration employment. The structure of the federal and subnational civil service is presented in Table 2.3.

Table 2.3: Structure of Civil Service Employment in Federal civil servants Subnational civil servants Category Legislative Executive Judiciary Others Total Subjects Munici- Total Total of RF pal Total core 4.5 377.1 122.0 1.3 504.9 N/A N/A 635.8 1140.government administration employment, (000 persons) O/w total civil 3.8 322.5 95.2 1.3 422.8 153.3 283.6 436.9 859.service employment, (000 persons) As % of total civil service employment Total civil 100 100 100 100 100 100 100 100 service Category A 11.7 0 20.4 2.2 4.7 3.6 4.3 4 4.Category B 26 0 1.7 3.2 0.6 3.7 4 3.9 2.Category C 62.3 99.9 46.6 94.6 87.5 92.7 91.7 92.1 89.Top 1.9 0.4 0.1 8.4 0.4 2.2 3.3 3 1.Chief 16.3 1.4 0.2 28.4 1.3 9.7 12.4 11.4 6.Lead 27.6 24.9 2.1 45.1 19.9 23.2 14.9 17.8 18.Senior 11.7 53.6 10.5 10.7 43.4 35.9 30.9 32.6 37.Junior 4.8 19.7 33.8 2 22.7 21.7 30.2 27.2 25.Prosecutors 31.3 7 3.Source: Roskomstat (2002).

2.7 The remaining 25 percent of the core government administration personnel do not have a status of civil servants and their employment contracts are regulated by the Labor Code. Most of these employees perform supporting or logistical functions (secretaries, drivers, etc.).

2.8 Comparison of cross-country data on public sector employment (see Figure 2.1. below and Annex 2.4 to this Chapter for more information) confirms: first, that the total employment in core government administration and the civilian public sector in Russia is quite large as compared to other countries; but, second, the composition of this employment is rather distorted. It is characterized by fairly tiny federal HQ-based government authorities, as opposed to much better staffed federal deconcentrated units, to even more numerous regional and municipal administrations, and to a clearly overstaffed civilian public sector. Some of these imbalances were inherited from the central planning era, while others (especially an expansion in subnational administrative employment) have emerged over the years of transition.

2.9 The core government administration in Russia is rather small as compared to highincome OECD economies as well as many transition economies. In fact, only Poland and Kazakhstan have smaller core government administrations, while all federative countries presented in the sample, especially those with comparable population numbers, have significantly higher core government administration employment, particularly at the subnational level, as illustrated by the Figure 2.1 below. At the same time, the number of education and health employees in Russia is significantly higher than in all other countries in the sample, including transition economies that historically also had high employment in the health and education sectors.

Figure 2.1: Public Sector Employment in Selected OECD Countries and Transition Economies (as a percentage of population) Note: For some countries not all types of employment data are available, hence there are some gaps in the figure above.

Source: WB Database.

2.10 Overall, public sector employment is rather high, and its financing is not adequate vis-vis the employment level. This coexistence of high employment and low funding represents at the moment a major disproportion in the Russian public sector.

2.11 Based on the 2002 baseline data, the current status of financing core government administration and civilian public sector employment could be summarized as the following.

As Table 2.4 shows, in 2002 the total budget expenditures on cash compensation in core government administration and the civilian public sector accounted for about 6.6 percent of GDP. Cash compensation in core government administration was only 1.7 percent of GDP out of which only about 0.7 percent of GDP was spent on the federal governments wage bill (or 1.4 percent of GDP including cash compensation of the armed forces). This is quite a low ratio by international standards. In the 1990s, the central government wage bill (including armed forces) in large developed economies with a federal structure varied from 1 percent to GDP in Germany to 2.1 percent in Australia. Some sources quote OECD averages for the early 1990s as being equal to 4.5 percent of GDP, while Latin America and the Caribbean (LAC) as 4.9 percent (see Annex 2.4). In addition, there is a view that while the expenditures on core government administration (specifically, on federal executive civil service) in Russia are lower than in other countries, the functions of the federal executive authorities in Russia are broader than in comparable countries with the federal structure of the government (see Higher School of Economics (HSE), 2004, for more information).

Table 2.4: Cash Compensation and Non-Wage Expenditures on Core Government Administration and Civilian Public Employment in 2002 (% of GDP) Cash Compensation, % of 2002 GDP Non-Wage Expenditures, % of 2002 GDP* Federal Sub-federal Federal Sub-federal Total Total Budget Budgets Budget Budgets Core Government 1.7 0.7 1.0 1.0 0.4 0.Administration Civilian Public 4.9 1.1 3.8 3.2 0.2** 3.0** Employment Total 6.6 1.8 4.8 4.2 0.6 3.* Estimated.

** Non-wage expenditures in civilian public sector employment do not include budget transfers to extra-budgetary funds and government transfers to population.

Source: Roskomstat, Ministry of Finance, and staff calculations.

2.12 The 2002 ratio of the average cash compensation in the federal core government administration to per capita GDP accounted for 1.21, which was lower than in other middleincome countries as well as in Europe and Central Asia (ECA) and OECD economies. For example, the ECA average is 1.3, OECD average is 1.6 while in LAC countries the indicator accounts for 2.5.

2.13 Hence, although core government administration pay and employment figures vary from country to country and are highly dependent on the structure and functions of the government as well as on the methodology used for national public sector statistics, the crosscountry comparison shows that in terms of spending Russias core government administration is quite small. Both wage bill in the core government administration (as a percentage of GDP) and the average cash compensation (as a ratio to GDP per capita) are considerably lower than is common internationally.

B. CIVIL SERVICE REFORM PRIORITIES AND PROGRESS TO DATE 2.14 The need to increase productivity and transparency of the public administration and improve quality of public services has been widely recognized in Russia both inside and outside the Government as a necessary condition for ensuring implementation of other reforms and sustainable development of the country. Hence, implementation of the civil service reform (including administrative reform) is one of the Governments key priorities in the mid-term reform agenda.

2.15 The priorities for civil service reform were defined in the Presidential Decree No.

1336, dated November 19, 2002: On Federal Program, Reform of the Civil Service of the Russian Federation (2003-2005), containing a set of measures aimed at improving legal, organizational, financial, and methodological framework of the public service15 in the Russian Federation. The main areas of reform include the following:

creating a comprehensive normative and legal framework governing the public service of the Russian Federation;

developing efficient mechanisms for implementing a personnel policy for the purpose of optimizing the structure of public service personnel;

The term public service is used in this section to denote civil service, police service and armed forces.

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