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Monetary and budgetary spheres above resulted from the necessity to redistribute tax revenues among the budgets in con nection to the shifts in expenditure obligations of budgets of different levels.

2.3.7. The law on the federal budget for year 2005 and interbudgetary relations The law on the federal budget for year 2005 contains a number of innovations con cerning the relations among the budgets of different levels.

First of all, it should be noted that the decisions taken in the sphere of division of powers between the tiers of state authority, as well as decisions relating to the ongoing tax reform have resulted in the necessity to redistribute tax revenues among the budgets of different levels. The most significant shift in this sphere was the next stage of redistribution of the revenues generated by the profit tax on organizations in favor of the federal budget:

while in 2004 the federal budget received the revenues from the tax on the profits of enter prises and organizations calculated at the rate of 5 per cent, in 2005 the federal budget will receive the revenues from the profit tax calculated at the 6.5 per cent rate. In 2005, the revenues of regional budgets will be also affected by such decisions as the indexation of specific rates of excises, changes in the revenues generated by the tax on profits and the income tax on individuals resulting from the reduction of the effective rate of the single so cial tax.

As a result, the proportions of distribution of tax revenues between the federal budget and consolidated budgets of RF subjects will remain practically the same as com pared with the data for years 2003 and 2004; it is planned that in 2005 the share of tax revenues of subnational budgets in the framework of the comparable budgetary classifica tion (i.e. including in the composition of tax revenues the proceeds from external economic activities) will made about 40 per cent. However, taking into account the scale of planned transformations in different spheres; at this stage it seems problematic to arrive to conclu sions abut the inter territorial distribution of tax revenues as concerns regions.

As concerns the distribution of tax revenues among the budgets of different levels, it should be also noted that since 2005 there will be enacted the new rule of entering of reve nues generated by federal taxes to the budgets of autonomous okrugs in the composition of oblasts and krais introduced by the new version of the law On the general principles of organization of legislative (representative) and executive authorities of RF subjects (article 26.17) and the new version of the RF Budget Code. In accordance with this rule, the reve nues generated by federal taxes and fees should be due to the budget of the oblast (krai) in the case the agreement about the division of powers between the okrug and oblast (krai) does not stipulate otherwise.

However, article 27 of the law on the federal budget for year 2005 contains an excep tion from this rule as concerns the tax on the profits of enterprises and organizations and the mineral extraction tax as concerns hydrocarbon mineral resources (with the exception of natural gas): the respective revenues should be distributed between the budgets of Khanty Mansi and Yamal Nenets autonomous okrugs in the Tyumen oblast. The same arti cle stipulates that these two autonomous okrugs should retain the rights to receive inter budgetary transfers similar to the rights of other RF subjects, which are not autonomous okrugs being in the composition of an oblast (krai). In other words, the draft law on the federal budget for year 2005 makes for two autonomous okrugs in the territory of the Tyumen oblast an exception from the general rule set for the RF subjects of the same status. It should be reminded that in 2004 the authorities of these okrugs agreed to trans fer to the federal budget a considerable portion of additional tax revenues generated by the repayment of the tax arrears on the part of NK YUKOS; therefore, it may be surmised RUSSIAN ECONOMY in trends and outlooks that such a concession in the sphere of interbudgetary relations was made with respect to these two regions in exchange for transfer of additional revenues to the federal budget.

These practices do not seem productive, since any other forms of asymmetry and exceptions from the general arrangements set in the sphere of interbudgetary relations in a federative state undermine the efficiency of the incentives of behavior of regional au thorities, soften budgetary constraints on regional and local authorities, and create incen tives making the regional authorities to take decisions aimed at the satisfaction of prefer ences of the federal center, and not regional voters as it should be in a federative state.

In the course of an analysis of such an aspect of the law on the federal budget for year 2005 as interbudgetary relations, it is necessary to dwell on the problem of allocation of interbudgetary transfers as concerns the transfers from the federal budget to the budg ets of territories. In 2005, it is planned to introduce certain changes, which seem to be radical in comparison with the trends observed in the laws on the federal budget for years 2001 through 2004.

In connection to the reform of the budgetary classification all gratis transfers be tween budgets and extra budgetary funds are grouped in the section of the functional classification of budgetary expenditures Interbudgetary transfers. At the same time, fed eral financial resources are transferred to regional and local budgets across several sub sections: Financial aid to budgets of other levels, Compensatory Fund, and Fund of Regional Development. Therefore, there was indicated the distinction between the finan cial aid, i.e. the support of relatively poor regions, and compensations for the expenditures associated with the exercise of delegated powers provided by the federal authorities, and assistance to investment in the region. As a result, the budgetary classification differenti ates between the financial resources provision of which may result in various restrictions on the part of federal authorities (for instance, organization of the execution of regional budgets via the Federal Treasury) and other types of transfers to the budgets of lower lev els, which are not related to their financial needs and are determined only by the necessity to comply with the federal legislation or priorities of upper levels of authorities and various forms of joint activities.

The total amount of financial resources planned to be transferred to the regional and local budgets in 2005 makes about Rub. 379 billion and in real terms (taking into account that the estimated growth in the consumer price index will make 8 per cent in 2005) is at about the same level as that targeted in the law on the federal budget for year 2004. How ever, taking into account the prognosticated growth in the gross domestic product inter budgetary transfers to territorial budgets will somewhat decline from 2.2 per cent of GDP envisaged by the federal budget in 2004 to 1.9 per cent of GDP in 2005). As it will be dem onstrated below, the structure of the planned transfers from the federal budget to regional budgets has also changed.

The major channel through which regional authorities receive financial aid is subven tions for equalization of the budgetary security provided by the Fund of Financial Support of Regions; while in real terms the respective amount remained at the same level, it de clined in terms of GDP: from 1.15 per cent of GDP registered in 2004 to almost 1 per cent in 2005.

In comparison with the figures registered in 2004, according to the law on the federal budget in 2005 in real terms the amounts of transfers from FFSR will decline in 33 RF sub jects, increase in 36 RF subjects, and 2 regions will not receive FFSR transfers.

The regions, which are the winners because of the changes introduced in the Methods of distribution of FFSR financial resources include: Belgorod, Bryansk, Voronezh, Section 2.

Monetary and budgetary spheres Ivanovo, Kursk, Tambov, Tula, Arkhangelsk, and Murmansk oblasts, Republic of Adygeya, Republic of Dagestan, Ingush Republic, Kabarda Balkar Republic, Karach Cherkess Re public, Stavropol krai, Volgograd and Rostov oblasts, Republic of Mari El, Chuvash Repub lic, Kirov, Nizhni Novgorod, and Penza oblasts, Komi Permyak autonomous okrug, Kurgan oblast, Republic of Altai, Altai krai, Irkutsk and Omsk oblasts, Taimyr (Dolgan Nenets) autonomous okrug, Republic of Sakha (Yakutiya), Primorski krai, Kamchatka and Magadan oblasts.

The regions, which are the losers because of the changes introduced in the Meth ods of distribution of FFSR financial resources include: Vladimir, Kaluga, Kostroma, Mos cow, Orel, Ryazan, Smolensk, and Tver oblasts, Republic of Kareliya, Kaliningrad, Nov gorod, and Pskov oblasts, Republic of Kalmykiya, Republic North Osetiya Alaniya, Chechen Republic, Krasnodar krai, Republic of Mordoviya, Saratov, Ulyanovsk, and Chelyabinsk oblasts, Republic of Buryatiya, Republic of Tyva, Republic of Khakasiya, Ke merovo, Novosibirsk, Tomsk, and Chita oblasts, Aginsk Buryat, Ust Orda Buryat, and Evenk autonomous okrugs, Khabarovsk krai, Amur and Sakhalin oblasts, Evreiskaya autonomous oblast, Koryak and Chukotka autonomous okrugs.

The transfers of FFSR financial resources to Astrakhan and Sverdlovsk oblast were ceased.

The relationship between the changes in the amount of FFSR grants and the level of budgetary security of the region is presented in Table 12.

The data presented in Table 12 demonstrate that there is no clear relationship be tween the level of budgetary security and the changes observed in the amounts of grants provided by FFSR in accordance with the new methodology of distribution. This result is caused by a large number of differently directed changes in the Methods of distribution of FFSR financial resources. Thus, all 14 regions31 receiving less FFSR financial resources in real terms in 2005, in 2004 were in the group of regions receiving grants from the second part of FFSR aimed to raise the respective levels of budgetary security to the guaranteed minimum level. Due to the changes in the methodology these regions received less finan cial resources.

Table The relationship between the changes in the amount of FFSR grants in 2005 in comparison with the data for 2004 in real terms and the level of budgetary security of the region Number of regions receiving FFSR grants in real terms in Level of budgetary security Less than in 2004 More than in Below 50 % 14 5070 % 11 Over 70 % 13 It should be noted that the law on the federal budget for year 2005 envisages a de cline in the amount of the Compensatory Fund from Rub. 50 billion in 2004 to Rub. 33 bil lion in 2005 (from 0.33 per cent to 0.18 per cent of GDP). This development may be ex plained primarily by the reform of the system of social support. The transfer of powers The Pskov oblast, the Republic of Kalmykiya, the Republic of North Osetiya Alaniya, the Chechen Republic, the Republic of Mordoviya, the Republic of Buryatiya, the Republic of Tyva, the Aginsk Buryat, Ust Orda Buryat, Evenk autonomous ok rugs, the Amur oblast, the Evreiskaya autonomous oblast, the Koryak and Chukotka autonomous okrugs.

RUSSIAN ECONOMY in trends and outlooks concerning the introduction of the majority of social benefits (including the payment of child benefits, what represents the bulk of expenditures of the Compensatory Fund) to the regional level resulted in the following changes in the targets of subventions and subsidies provided from the Compensatory Fund in 2005:

subventions and subsidies to certain categories eligible for federal social benefits in 2005 as concerns HPU payments (the HPU related social benefits should be abolished later), which are envisaged in federal laws on support of disabled persons, veterans, persons who participated in the liquidation of the consequences of the Chernobyl dis aster, victims of other radiation accidents;

subventions for financing of powers concerning the state registration of births, daths, and marriages;

subventions for implementation of the stipulations of the federal legislation as con cerns payments to donors of blood.

Therefore, starting since 2005, the Compensatory Fund will consolidate the financial resources for financing of all federal expenditure mandates defined as such in the legisla tion. It is one of the positive features of the law on the budget.

Unfortunately, the measures aimed at the reform of the system of interbudgetary transfers to regional and local authorities in 2005 practically did not concern the Fund of Regional Development (FRD). The only significant decision with respect to FRD was re lated to the inclusion in the composition of the Fund of transfers to RF subjects aimed at support of motor road network. From the authors point of view, this decision can hardly be defined as justified and efficient.

The necessity of the reform of the mechanism of state support of road networks in regions and municipal entitles can not be denied. Both the methods of distribution of re spective financial resources and the forms of provision thereof need to be reformed; how ever the inclusion of these resources in the composition of FRD does not answer the re quirements of such a reform.

First, no transparent uniform methods of distribution of the funds aimed at support of the motor road network have been elaborated by 2005, and this problem has not been solved by the transfer of the respective financial resources to FRD.

Second, this transfer does not answer the objectives of the Fund set by the present concept of the further reform of interbudgetary relations co financing of investment pro jects of regional and local authorities in the sphere of social infrastructure carried out on tender basis. At present this objective can not be achieved, since FRD is a combination of federal targeted programs of regional development, where the financial resources of fed eral program Equalization of differences in the social and economic development of RF subjects (the major source of co financing of investment projects in the sphere of social infrastructure) makes only an insignificant part.

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