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Tax revenues 3 167 825.9 13.0 3 579 923.0 13.2 3 928 669.4 13.Non-tax revenues 1 878 311.6 7.7 2 579 143.6 9.5 2 520 698.3 8.Deductions to Stabili857 477.4 3.5 1 703 532.9 6.3 1 565 456.1 5.zation Fund GDP 24 380 000 27 220 000 28 907 * Prices of 2006.

Reviewing the basic factors which led to the RF macroeconomic indicators growth, an emphasis should be made on GDP growth, changes in import and export volumes, raise of profits of large enterprises, growth of output and sales of products subject to excise duties, enlarged extraction of mineral resources, growth of other volumetric indicators, raise of prices for Urals oil, change of prices for natural gas. Major tax innovations which decreased revenues as compared to 2006 budget execution were the transfer from administrative procedure of VAT refund to the exporters, paid by them on material resources, to the procedure of refund upon an application, reduction of the total profits tax base of enterprises by the amount of losses incurred in previous years, shorter time lines for writing-off the expenses on R&D with regard to enterprise profit tax and lower rate of tax on natural resources production, which is an incentive to continue exploration of mature oil fields and establishment of zero rate for mineral resources production tax on new oil fields. Reduction of revenues caused by amendments in tax legislation was partially recovered by the new excise rates introduced by the RF Tax Code. As to amendments to the budgetary legislation, there should be noted a transfer from the federal budget to the budgets of the RF Subjects of a part of the tax on mineral resources production, applied to diamonds, single payments for the usage of subsurface resources in certain cases, specified in the license for the usage of subsurface mineral resources on the RF territory, applied to the diamond deposits.

Reviewing the aggregate structure of revenues in the draft federal budget for 2007, one can notice a significant growth of the budget tax revenues in absolute terms in comparison with the budget law and its execution forecast for 2006. Alongside with that, some reduction of budget non-tax revenues in nominal terms is forecasted for 2007 as compared with the indicators of 2006. In terms of the shares in GDP the dynamics is somewhat different. Thus, if the share of tax revenues of the 2007 budget should make 13.6 per cent of GDP (as compared with 13.0 and 13.2 per cent of GDP specified in the budget Complete text of the Review of the federal budget draft for 2007 is available at the official IET site: www.iet.ru law and its execution forecast for 2006 accordingly), the share of non-tax revenues in the budget of 2007 considerably exceeds the level specified in the budget law for 2006 (7.7 per cent of GDP); however, this level is somewhat lower that the forecasted indicators of the current year (9.5 per cent of GDP).

The structure of federal law revenuers from basic taxes in 2007 is presented in Table 5.

Table Structure of Federal Budget Revenuers from Basic Taxes in 2006 and Tax Budget law 2006 Forecast for 2006 . Forecast for (RUR, mln) (RUR, mln) (RUR, mln) * Enterprise profit tax 344 838.10 451 364.80 537 415.Unified social tax, transferred to the federal budget 302 090.20 310 412.10 341 457.VAT 1 634 342.60 1 534 485.30 1 918 326.Excise duties 110 187.50 107 507.50 117 299.Export-import taxes 1 607 843.30 2 261 555.00 2 216 836.Tax on mineral resources production 731 570.30 1 127 660.30 960 870.* Prices for 2006.

Basing on the data presented in Table 5, a conclusion can be made, that increase of revenues is forecasted in 2007 for practically all basic taxes, excluding tax on mineral resources production and export-import taxes. The most significant gain is expected from value-added tax (growth by 25 per cent as compared with 2006 indicator) and enterprise profit tax (growth by 19.1 per cent), whereas revenues from excise duties and unified social tax might grow by 9.1 and 10.0 per cent accordingly.

Therefore, regardless of a series of tax innovations, expected in 2007, total revenue from the basic taxes of the RF fiscal system will be increased. A comparison of expenses should be made between the RF budgets of 2006 and 2007, which is presented in Table 6.

Table Key Indicators of the RF Federal Budget Expenses for 2006 and 2006 . 2006 . - 2007 . RUR, mln % of RUR, mln % of RUR, mln % of GDP GDP GDP Expenses 4 270 114,7 17,5 4 388 603,0 16,1 5 058 777,7 17,including:

Interest expenditures 198 482,2 0,8 192 380,0 0,7 145 227,1 0,Non-interest expendi4 071 632,5 16,7 4 196 223,0 15,4 4 913 550,6 17,tures * Prices of 2006.

Upon comparison of the presented indicators a conclusion can be made that according to the budget draft for 2007, a significant growth of expenses of the federal budget is expected in absolute terms in both, the budget law of 2006 and in the estimated budget execution for the current year. In regard to the share in GDP, the level of budget expenses for 2007 remained at the level approved by the budget law for 2006 (17.5 per cent of GDP) and happened to be much higher than relevant execution estimates (16.1 per cent of GDP). Alongside with the above, the Table shows that the total growth of budget expenses resulted from increase of non-interest revenues, where they have raised to 17.0 from 16.7 per cent of GDP specified in the budget law of 2006 and from 15.4 per cent of GDP according to execution forecast of the year results. One of the major reasons of such a noticeable growth of noninterest revenues of the federal budget for 2007 was the Letter of the RF President to the Federal Assembly, where a number of priority trends of the national policy for 2007 where outlined. In particular, a number of targets in social policy and welfare, national economy and interbudgetary relations were pointed out as priority trends. Provisions of the President Letter concerning the improvement of demographic situation in Russia are also taken into regard in the estimates of the budget expenditures for 2007.

Now the structure of the draft federal budget expenditures will be considered and compared with the structure of expenditures in the current year according to the budget law of 2006 and with regard to the introduced amendments (Table 7).

Table Structure of Federal Budget Expenses in 2006 and 2006 Budget law % of Amended % of Draft % of (RUR, mln) GDP indicator GDP (RUR, mln) GDP (RUR, mln) Federal issues 638 885.6 2.62 642 055.4 2.36 2. 760 508.Including expenditures associated with the servicing of he public and munici198 482.2 0.81 197 786.3 0.73 0.pal debt 145 227,National defense 666 026.6 2.73 659 258.1 2.42 2. 760 344.National security and law enforcement 541 634.6 2,22 539 496.5 1.98 615 566.7 2.National Economy 339 334.0 1.39 346 839.0 1.27 459 145.6 1.Housing and public utilities 38 883.2 0.16 53 470.7 0.20 46 158.4 0.Environmental protection 6 334.3 0.03 6 435.0 0.02 7 265.3 0.Education 201 588.7 0.83 208 137.3 0.76 257 841.1 0.Culture, cinematography and mass 51 248.1 0.21 51 242.7 0.19 0.media 60 286.Health care and sports 149 098.7 0.61 156 159.2 0.57 190 881.2 0.Social policy 205 253.3 0.84 217 288.9 0.80 195 320.0 0.Interbudgetary transfers 1 431 827. 1 443 703. 1 705 459.

5.87 5.30 5.8 5 Total expenditures 4 270 114.7 17.51 4 324 086.3 15.5 058 777.7 17.* Prices of 2006.

An analysis of expenditures by sectors of functional classification shows that in general the structure of budget expenditures for 2007 is similar to the structure presented in the budget law for 2006, as well as to the estimated budget execution based on the current year results. The most noticeable changes are observed in such budget sectors and sub-sectors as Servicing of national and municipal debt (decrease from 0.81 to 0.50 per cent of GDP), National economy (growth from 1.39 to 1.59 of GDP), Social policy (decline from 0.84 to 0/68 per cent of GDP). In other sections and subsections the difference of indicators in terms of share in GDP are not so expressed. The major expenditure lines in the budget of 2007 remain, as before, interbudgetary transfers, national security, federal issues, national security and law enforcement, national economy. Total share of those expenses in GDP makes 14.88 per cent as compared with 14.83 per cent in the current year. Therefore, the share in GDP of total amount of expenditures broken down by major budget sections and subsections for practically remains at the level of the current year; changes mentioned above are explained by relocation of assets.

Some decrease of revenues of the federal budget for 2007 alongside with a significant growth of expenditures causes an explicit reduction of the federal budget surplus (see Table 8). The major sources of financing of government debt obligations in 2007 will be the assets received from government securities, emitted to the internal market.

An analysis of the structure of external financial sources shows that it is not planned in 2007 to issue government securities nominated in foreign currency. Among external financial sources for untied loans of foreign governments and international financial institutions are not mentioned.

Tied loans were planned for the current and preceding years in line with the major trends of the RF debt policy and prospective financial plan for 2007 through 2009, where provisions are made for refusal from foreign loans. This policy will make it possible to abandon totally the usage of tied loans in 2007, two years earlier of the planned term.

Table Federal Budget Surplus and Sources of Federal Budget Deficit Recovery in 2006 and 2006 - approved 2006 forecast for execution 2007 - draft RUR, mln % of RUR, mln % of RUR, mln % of GDP GDP GDP Deficit ()/Surplus (+) of 776 022.8 3.2 1 770 463.6 6.5 1 390 590.1 4.federal budget Sources of federal budget 40 549.3 - -501 611.4 - 174 866.0 deficit recovery, including:

internal 253 19.9 - 284 836.7 - 324 328.1 - external 212 641.6 - 786 448.1 - 149 462.0 - * Prices of 2006.

Therefore, basing on the above, the following conclusions can be made.

Firstly, the level of revenues in the draft budget for 2007 is explicitly higher in absolute terms than the level of revenues, approved by the budget law for 2006 and according to the budget execution forecast based on the results of the year. Alongside with that some decrease of revenues in terms of the share in GDP is expected in comparison with the execution forecast for 2006. Amendments to tax legislation are regarded as the major factors that led to revenue decrease in terms of the share in GDP.

However, amendment of the forecast of the RF macroeconomic indicators allowed partial recovery of revenue reduction. Taking into consideration that a significant share of the budget revenues depends on market fluctuations and in view of the fact that the price for Urals oil will apparently remain close to the current level, the year 2007 should not bring any remarkable differences between approved by law and actually performed budget indicators. This is implicitly confirmed by some decrease of deductions to the RF Stabilization Fund, which are immediately dependant on the world oil prices.

Secondly, there are no major changes in the structure of the budget revenues. The greater share of revenues is derived from tax proceeds to the federal budget. In 2007 some growth of those proceeds is expected in terms of their share in GDP in comparison with the level of estimated revenues to be raised by the end of 2006. The structure of proceeds from basic taxes has also not been greatly changed. The growth is foreseen in the proceeds from basic taxes and the highest increase is expected in regard to value-added tax and tax on profit of enterprises. As to non-tax revenues, they may be lower as compared to the current year indicators both, in absolute terms and in terms of the share in GDP.

Thirdly, expenses of the federal budget for 2007 in absolute terms are much higher than the indicators of the current year budget law and the forecast of performance as well. However, in terms of the share in GDP the level of revenues indicated in the draft budget for 2007 is corresponding to the indicators of the current year budget law. Nevertheless, the level of expenses of the RF federal budget is expected to be noticeably higher versus the estimated performance of 2006. It should be also noted that in the draft federal budget for 2007 the indicators of non-interest expenses will be significantly higher than in this year. The growth is caused by addressing the budget funds for realization of a series of measures to be taken in priority areas of social policy, outlined by the RF President in his Letter to the RF Federal Assembly.

An analysis of expenditures for individual sections of functional classification shows that in general the structure of budget expenses in 2007 is comparable with both, the structure of the budget law for 2006, and with the forecasted results of budget execution of the current year. The most noticeable differences in the amount of expenses are related to such sections and subsections of the budget as servicing of the public and municipal debt (decrease from 0.81 to 0.50 per cent of GDP), social policy (decrease from 0.84 to 0.68 per cent of GDP). Alongside with that, the total share in GDP of the largest sections and subsections of budget structure of 2007 remains practically the same as compared with 2006 (14.88% versus14.83% of GDP).

Therefore, regardless of the total growth of non-interest expenses in the budget for 2007, the share of assets from the largest sections and subsections of the budget structure, related to priority areas outlined by the President, shows only insignificant increase. Nevertheless, in our opinion, in the situation of welfare stabilization as compared with the level of 2006, there are certain risks in the growth of non-interest expenses section in view of the inflation, which apparently might overcome earlier esti mated value. Taking into regard that reduction of the inflation rate is one of priority measures for the government in 2006 and 2007, the government should pursue the policy of curbing the level of expenses in view of favorable situation in the world market of raw products, where additional revenues can be derived.

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