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The law on the federal budget envisages Rub. 6 billion worth of subsidies for compensation of losses relating to excises on tobacco products, vodka, and other alcohol products in the composition of federal aid to lower budget levels. It shall be pointed out that for the first time amounts of such compensations have been calculated for all regions in accordance to the single methodology. Regions where the share of excises on tobacco products in the tax revenues of consolidated budgets for 2001 made over 1 per cent were eligible to participate in the distribution of compensations for the losses related to excises on tobacco products. The compensations relating to tobacco excises were apportioned proceeding from the total amount of available funds (Rub. 6 billion) in proportion to the tobacco excise generated revenues of regional budgets in 2001 taking into account respective levels of estimated budgetary security (after the distribution of FFSR resources) minus the estimated amount compensation for losses at the expense of FFSR financing (estimated). In addition to the compensation for losses relating to excises on tobacco products, the law on the federal budget envisages compensation for losses relating to excises on vodka and other alcohol products. These compensatory subsidies were distributed among the subjects of the Russian Federation where the share of excises on alcohol products in the tax revenues of consolidated budgets for 8 months of 2002 made over 10 per cent, while the share of respective excise revenues in the total amount of such excises generated in the Russian Federation exceeded the share of population in the total population of the Russian federation more than twofold. In accordance with these limitations, the right for the compensation was granted only to two RF subjects the KabardianBalkarian Republic and the Republic of North Osetia. The total amount of such compensations made Rub. 251.7 million.

The law on the federal budget for 2003 envisages that since January 1, 2003, the RF Government shall ensure the transfer of ownership of budgetary loans for support of the seasonal deliveries to the North granted in 1994 and 1995 and earlier transferred under management of RF subjects. It shall be pointed out that until recently the federal authorities, which could not enforce the payment of debt on the part of regions have transferred the debt under management of regions. It seems that the transfer of the aforesaid subsidies in ownership of regions will result in formalization of the current situation where RF subjects can not repay the debt due to the lack of funds, and the write off of regional debts to the federal budget.

The provisions of the law on the federal budget for year 2003 also envisage assignment of Rub. 5 billion for repayment of federal indebtedness to RF subjects in the form of subsidies compensating for the losses relating to maintenance of housing, public utilities, and objects of the social and culture sphere transferred under jurisdiction of local governments. In previous years these expenditures were classified in the item Funds transferred in the course of RUSSIAN ECONOMY in trends and outlooks mutual payments; the total amount of the respective financing was not approved by the law on the federal budget and the Finance Ministry determined the concrete amount of subsidies to individual regions in the course of budget administration. Therefore, the law for year considerably curbs subjectivism in the distribution of funds pertaining to this item. At the same time, taking into attention the specifics of subsidized expenditures of regional budgets, it would be feasible to envisage in the law on the federal budget certain deadlines for transfer of housing owned by state agencies in municipal ownership thus facilitating the completion of the program of transfer of housing owned by state agencies in municipal ownership financed from the federal budget.

Analyzing the novations contained in the law on the federal budget for year 2003, it shall be pointed out that this document attempts to regulate tax privileges granted to the town of Baikonur (in preceding years such privileges were used for massive tax evasion as concerns excises and VAT). Similarly to the preceding year, provisions of the law envisage that all taxes and charges exacted in the territory of the town of Baikonur shall be due to the town budget, however, they at the same time limit the right of town authorities to grant tax privileges setting several eligibility criteria, including the necessity to have premises or property complexes for production and sale of goods (works, services) in the Baikonur territory. At the same time, the law prohibits to grant privileges relating to VAT, excises, profit tax on organizations, single social tax, and other federal taxes and charges. The law also prohibits to register in the town legal entities taxpayers not operating in the Baikonur territory. While admitting that these stipulations considerably limit the potential for unfair tax competition, it is necessary to point out that it would be more feasible to either to make respective amendments to the Tax and Budget Codes, or adopt a special legislative act regulating the tax and budgetary status of exterritorial administrative entities which, in contradistinction to the law on the federal budget, would be valid for more than one budget year.

The law on the federal budget for year 2003 instructs the RF Government to prolong the term of repayment of budgetary loans amounting to Rub. 20 billion granted before January 1, 2003, until September 30, 2003. The prolongation of budgetary loans is a form of financial aid governed by rather non-formalized procedure and therefore very subjective. On the one hand, it is necessary to allow regional budgets defer their obligations relating to federal budgetary loans in the situation where wages and salaries of employees of the budgetary sphere are rising in the framework of the single tariff schedule, while revenues decline due to incomplete compensation for the abolition of the tax on motor road users. On the other hand, it would be feasible to impose a number of conditions on such deferments, for instance setting forth requirements to undertake measures aimed to rehabilitate regional finances.

It is necessary to point out that the law on the federal budget for 2003 widely employs such type of penalties for infringements on the budgetary legislation and misuse of funds as transfer to the federal budget of the share of federal tax revenues due to the budgets of RF subjects and closed administrative territorial entities (CATEs). For instance, Article 77 of the law stipulates that in the case of failure to comply with the terms of repayment and misuse of funds to be repaid to the federal budget (i.e. budgetary loans and credits), respective amounts will be exacted by the federal treasury at the expense of revenues generated by federal taxes and charges due to respective budgets. This type of exaction is a most effective economic lever of influence on budgetary policies of RF subjects not being recipients of unconditional financial aid, or receiving insignificant amounts of subsidies from the federal budget.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru In the framework of financial resources assigned from the federal budget to the budgets of RF subjects for financing of road networks, there has been formed a reserve amounting to Rub.

35 million, which the RF Government uses to increase the amounts of subventions and subsidies to the budgets of RF subjects for financing works relating to commonly used motor roads destroyed in the result of natural calamities. RF subjects are eligible to receive funds from this reserve only in the case they have formed own reserves for same purposes and in the case these funds prove insufficient to finance respective works. The creation of this reserve is also conditioned by the necessity to provide federal financial aid to regions in the case they may have difficulties financing road networks due to the abolishment of the tax on users of motor roads and the tax on vehicle owners.

Similarly to the preceding law on the federal budget, the resources of the Fund of Regional Development (total amount is Rub. 25.0 billion) are primarily used to finance two federal targeted programs: the federal targeted program Social and economic development of the Republic of Tatarstan until 2006 amounting to Rub. 11.3 billion and the federal targeted program Social and economic development of the Republic of Bashkortostan until 2006 amounting to Rub. 7.billion. Similarly to 2002, these considerable amounts of financing of development programs in two regions are primarily conditioned by the arrangements between the authorities of the two Republics and the federal center concerning the compensation for abolishment of the special fiscal regime applied to these RF subjects prior to 2001. However, it is necessary to point out that in the situation where funds are lacking to compensate for the decline in revenues resulting from the abolishment of the tax on users of motor roads and the peak of repayment of the external debt, it seems very inefficient and unfeasible to assign these considerable financial resources to two RF subjects ranked among national leaders in terms of budgetary security.

This structure of federal budgetary expenditures as set forth in the sub-item Fund of Regional Development seems to be one of the most serious flaws of the law on the federal budget for year 2003 as concerns interbudgetary relations. On the one hand, previous arrangement should be complied with in order to maintain stability of relations between the Russian Federation and its subjects. However, on the other hand, such arrangements were not officially registered in respective regulatory or legislative acts. In this situation adherence to the arrangements with two subjects of the Russian Federation only increases the asymmetric character of fiscal federalism. It would seem feasible to considerably reduce, if not abolish, these federal targeted programs and use the funds made available for other purposes.

The law on the federal budget for year 2003 contains a provision according to which territorial offices of the Tax Ministry ensuring that regional and local budgets receive additional revenues may act on paid basis depending on their performance by concluding agreements with the executive authorities of RF subjects and municipal entities. The additional revenues should be accounted for as proceeds from entrepreneurial activities and fully utilized for maintenance of territorial tax offices, development of material and technical base of territorial tax offices, and security of premises. On the one hand, this provision might be feasible in the case the regional authorities and local governments bore full costs of administering of regional and local taxes respectively. In this case, introducing regional and local taxes regional and local administrations could conclude agreements with territorial tax offices according to which the latter were reimbursed for the costs of administering these taxes. On the other hand, according to the legislation currently in force, administering of all taxes and charges in the Russian Federation is vested with federal tax agencies and carried out at the expense of the federal budget. In this situation no criteria exist to evaluate the performance of tax agencies as concerns mobilization of additional reve RUSSIAN ECONOMY in trends and outlooks nues and, respectively, determine the amount of remuneration of tax authorities, what, in turn, may result in abuse of taxpayers on the part of tax agencies.

Similarly to preceding years, the law on the federal budget for 2003 approved the list of heavily subsidized regions whose budgets, according to Article 49, should be administered by the federal treasury offices. The list contains 29 regions, in comparison with the list for 2002, the Republic of Sakha, Primorski krai, and Taimyr Autonomous Okrug were excluded, while the Republic of Mari El was included.

The Law on Federal Budget: Quantitative Characteristics As concerns financial aid to regions, for respective major characteristics of the federal budget for 2003 see Table 17.

Table The law on the federal budget for year 2003: Financial aid to budgets of other levels Rub. mil. % of GDP Subsidies and subventions 31905 0,Including:

Subsidies and subventions to CATEs and the town of Baikonur 14538 0, Subsidies to CATEs 7955 0, Subsidies to the town of Baikonur 564 0, Capital investment subventions to CATEs 4195 0, Resettlement subventions to CATEs 824 0, Subventions to CATEs for financing of CATE development programs 1000 0, Other subsidies and subventions 17368 0, Subsidy to the town of Sochi 1046 0, Subsidies to budgets of RF subjects to compensate for losses relating to excises on tobacco and alcohol products 6000 0, Subsidies compensating losses relating to maintenance of HPU objects transferred under jurisdiction of local governments 5000 0, Other subsidies to budgets of RF subjects 4069 0, Other subventions to budgets of RF subjects and local governments 1253 0,Transfers from FFSR 173168 1, Including:

Transfers 173168 1, Of which: state support of seasonal deliveries to the North 8809 0,Subsidies and subventions from the Compensatory Fund 47011 0, Including:

Subsides for implementation of the law on social security of disabled persons 6630 0, Subventions for implementation of the law on state family allowances 22213 0, Subventions for compensation of privileges related to payment for HPU services in accordance with the federal legislation 13820 0, Other subventions and subsidies from Compensatory Fund 4349 0,Resources of the Fund of Co-Financing of Social Expenditures 5000 0,Resources of the Fund of Regional Development 25072 0,State support of road networks 39000 0,Resources of the Fund of Reformation of regional finances 1300 0,Other types of financial aid 14240 0, Including:

Measures of regional development 14240 0,Total: funds transferred to budgets of other levels 336697 2,Source: the law on the federal budget for year 2003.

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