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However, as early as 2001 a noticeable growth in the volume of VAT refunds was seen, which had a negative impact on the level of revenues from this tax in 2001.

This phenomenon also to a certain extent accounted for a decline in the revenues from VAT in 2002 2004. At the same time, in 2004 the additional decline in the volume of revenues from VAT was produced by the lowering of the tax rate from 20 % to 18 %. At the same time, the decrease in the total share of revenues in GDP amounted to only 0.4 p. p. against the expected figure of approximately 0.6 % of GDP, which can be in part explained by a noticeable reduction in the volume of VAT refunds in respect of exports transactions.

In 2006 the share of revenues from the value added tax fell significantly to 5.7 % of GDP from 6.8 % of GDP in 2005. Among the main factors responsible for the declining revenues from VAT, we should point to the increased tax deductions and the shrinkage of the tax base, associated with the changes in legislation that entered into force in 2006.

Besides, an important item of revenue in the budgetary system of the Russian Federation are the payments for the use of natural resources, a considerable part of these being constituted by the revenues from the tax on the extraction of mineral resources (TEMR). While prior to 2001 such revenues remained relatively insignifi cant, from 2002 onward they began to display a stable growth due to the growth of the international prices of energy carriers. Since the rate of TEMR was directly linked to the level of international oil prices, the improved situation on the global market of energy carriers was automatically producing changes in the level of reve nues from this tax, and consequently in the amount of aggregate revenues gener ated by the payments for the use of natural resources.

Such a substantial increase in the rate of the excises on petrol was designed to compensate for the abolition of the tax on the sales of fuels and lubricants and for the lowered rate of the tax on us ers of motor roads.

RUSSIAN ECONOMY IN trends and outlooks Rather similar behaviors were demonstrated by the revenues from foreign economic activity, which during the greater part of the period under consideration were growing as a result of the growth of both the Russian economy and the for eign trade turnover, and of the changes in the export duties on oil, which from the year 2002 onward were calculated on the basis of the international oil price.

As for the tax revenues in 2006, the share of payments for the use of natural resources in GDP rose from 4.5 % of GDP (against 4.3 % of GDP in 2005), while the growth of revenues from foreign economic activity amounted to 0.9 p. p. of GDP (a rise from 7.8 % to 8.7 % of GDP). The main source of the growing revenues was the improving situation on the international oil market, as well as on the metals market (during that year, the prices of nickel and other metals reached their absolute his toric highs). As for foreign trade, by the results of 2006 its volume was approxi mately $ 470 billion (exports $ 304.5 billion, imports $ 163.9 billion), having in creased by 27 % (growth in exports by 25 %, in imports by 30.8 %).

The level of allotments to social off budget funds in 1998 2001 remained rather stable, but noticeable changes occurred from the year 2001 onward, which can be explained mainly by the amendments to legislations, which entered into force in 2001. When discussing the period of 2002 2006, it should be noted that in 2003 (less the amount of SST transferred to the federal budget) there occurred an increase in the amount of allotments in % of GDP, followed in 2004 and 2005 by a decline. In 2006 the revenues transferred to the off budget funds markedly grew also as a percentage of GDP and amounted to 4.3 %. At the same time, from 2002 an overall decline in the social allotments was observed.

If we look at the structure of allotments to off budget funds, it will be noticed that in 2001 2004 their share in GDP was remaining at a sufficiently stable level, whereas by the results of 2005 and 2006 a noticeable fall in the revenues trans ferred to the social insurance fund and the territorial compulsory medical insurance funds was observed. The main reason for this substantial decline was the changed proportional distribution of the revenues from SST. Thus, for example, if in 4.0 % of the rate of SST was transferred to the social insurance fund (the tax being under 100,000), in 2005 its size was revised and decreased to 3.2 %. The corre sponding indices of 2001 and 2005 for the allotments to the territorial compulsory medical insurance funds were 3.4 % and 2 %, respectively. On the contrary, the growth in the share of allotments to the Federal Compulsory Medical Insurance Fund in 2005 from 0.2 % to 0.8 % was conducive to the growth of revenues trans ferred to the Fund in 2005 and 2006. And finally, the revenues from the insurance contributions to mandatory pension insurance throughout the period of 2002 2005 remained at a rather stable level of approximately 2.7 % 2.9 % of GDP, and only by the results of 2006 increased to 3.51 % of GDP.

The structure of tax revenues in the budget of the general government is shown in Table. 10.

Section Monetary and budgetary spheres Table The share of tax revenues in the aggregate revenues of the general governments budget in 2000 2006, in % 1998 1999 2000 2001 2002 2003 2004 2005 Tax revenues 89.9 93.0 93.3 92.8 94.2 93.2 94.3 92.9 92.Profits tax 10.3 13.5 14.1 15.0 11.3 10.7 13.6 15.5 15.Personal income tax 7.6 7.2 6.2 7.4 8.8 9.3 9.0 8.2 8.VAT 16.8 17.6 16.2 18.6 18.4 17.9 16.7 17.2 14.Excises 7.3 6.7 5.9 7.1 6.5 7.0 3.8 3.0 2.Revenues from foreign 3.9 5.3 8.2 9.6 7.9 9.2 13.5 19.6 21.economic activity Payments for use of 2.4 2.7 2.8 3.8 8.1 8.0 9.1 10.8 11.mineral resources Sales tax 0.08 1.18 1.23 1.31 1.22 1.15 0.10 0.00 0.SST* 15.1 10.9 9.9 9.3 5.0 4.TOTAL REVENUE 100 100 100 100 100 100 100 100 * aggregate revenues from SST.

While discussing the structure of tax revenues in the general governments budget, it should be noted that in some of the years within the period under (1998 2006) the ratio between the main taxes as percentages of the aggregate revenue of the consolidated budget was changing. Thus, until 2004 the highest shares in the aggregate budget revenue were constituted by the profits tax, by VAT and from 2001 by the single social tax. Their aggregate share in 2002 2004 amounted to approximately 58 % of the aggregate revenue of the general governments budget.

Later on, rather noticeable growth was demonstrated by the share of revenue from foreign economic activity, which in 2005 and 2006 became the biggest component of the tax revenues in the general governments budget. On the contrary, the share of tax revenues from SST during the last two years showed a marked decline of the indices registered at the beginning of the period under consideration. In addition, some attention should be paid to the rather high volatility of the share in the aggre gate revenues of the general government's budget constituted by the tax on profit of organizations. Thus, throughout the whole period it fluctuated between 10.3 % of GDP 1998 and 15.7 % of GDP in 2006.

2.2.3. The expenditures of the budgetary system From 1 January 2005, the budgetary classification has been changed, and so it is impossible to adequately compare the main items of expenditure in the budg etary system for the years 2005 2006 and earlier. In this connection, below we are going to analyze separately the data prior to 2004 and the actual execution of the budgets of all levels in 2005 2006. The main characteristics of the expendi tures of the RF budgets of all levels in 2002 2004 are shown in Table. 11.

RUSSIAN ECONOMY IN trends and outlooks Table The expenditures of the federal, territorial and consolidated budgets in 2002 2004 (in % of GDP) 2002 2003 Consoli Consoli Territo Territo Consoli Territo Federal dated Federal Federal dated rial rial dated rial budget budget budget budget budget budgets budgets budget budgets 1 2 3 4 5 6 7 8 9 State administration and local self 0.5 0.8 1.4 0.5 0.9 1.4 0.5 0.8 1.government Judicial authority 0.2 0 0.2 0.2 0 0.2 0.2 0.0 0.International activity 0.3 0 0.3 0.2 0 0.2 0.3 0.0 0.National defense 2.7 2.7 2.7 0 2.7 2.6 0.0 2.Law enforcement activ 1.7 0.5 2.2 1.9 0.4 2.3 1.9 0.4 2.ity and state security Fundamental research and promotion of scien 0.3 0 0.3 0.3 0 0.3 0.3 0.0 0.tific and technological progress Industry, power engi neering and construc 1 1.3 2.3 0.5 2 2.5 0.5 1.9 2.tion Agriculture and fishery 0.3 0.3 0.5 0.2 0.3 0.5 0.2 0.3 0.Transport, motor road system, communica 0.1 0.4 0.5 0 0.3 0.3 0.0 0.2 0.* tions and informatics Housing and utilities 0 2.3 2.3 0 1.9 1.9 0.0 1.7 1.sector Public education 0.7 3 3.8 0.8 2.8 3.6 0.7 2.8 3.Culture, art and 0.1 0.4 0.5 0.1 0.3 0.5 0.1 0.3 0.cinematography, Mass media 0.1 0.1 0.2 0.1 0.1 0.2 0.1 0.1 0.Public health care and 0.3 2.1 2.4 0.3 1.9 2.2 0.3 1.9 2.physical culture ** ** Social policy 4.4 1.3 5.7 1 1.4 2.4 0.9 1.5 2.Government debt ser 2 0.1 2.2 1.7 0.1 1.8 1.2 0.2 1.vicing Financial support to *** *** 2.7 0 6.0 0 3.2 5.4 0.0 3.budgets of other levels Military reform 0.1 0 0.1 0.1 0 0.1 0.0 0.0 0.Motor road system 0.4 0.4 0.7 0.3 0.5 0.8 0.3 0.2 0.Target budget funds 0.1 1.4 1.6 0.1 1.1 1.2 0.1 1.0 1.Total expenditure 18.7 15.3 31.1 17.7 14.9 29.7 16.1 14.1 27.Source: the RF Ministry of Finance.

* In 2001 including the expenditures on the road system upkeep.

** Including transfers to the RF PF for the financing of the basic component of pension at the expense from the part of SST centralized in the federal budget.

*** From 2003 this section reflects the transfers to the state off budget funds.

Section Monetary and budgetary spheres Table Expenditure of the federal, consolidated and territorial budgets in 2005 and 2006 (in % of GDP) 2005 General state issues 3.5 2.3 1.2 3.1 2.0 1.of these, servicing of state and munici 1.1 1.0 0.1 0.7 0.6 0.pal debts National defense 2.7 2.7 0.0 2.6 2.6 0.National security and law enforcement 2.7 2.1 0.6 2.7 2.1 0.activity National economy 3.5 1.2 2.4 3.6 1.3 2.Housing and utilities system 2.2 0.0 2.1 2.4 0.2 2.Environment protection 0.1 0.02 0.08 0.1 0.02 0.Education 3.7 0.8 2.9 3.8 0.8 3.Culture, cinematography and mass 0.7 0.2 0.5 0.7 0.2 0.media Public health care and sports 2.6 0.4 2.1 2.8 0.6 2.Social policy 2.4 0.8 1.6 2.4 0.8 1.Interbudgetary transfers 3.5 5.8 0.1 3.4 5.6 0.Total expenditures 27.5 16.3 13.6 27.5 16.1 13.Source: the RF Ministry of Finance.

The main items of expenditure of the federal, consolidated and territorial budgets of the RF in 2005 and 2006 are shown in Table 12.

The structure of the RF budgetary systems expenditure in 2006 did not dem onstrate any significant changes by comparison with the previous year. Just as one year earlier, a substantial volume of financing was allocated to the items General state issues, National defense, National security and law enforcement activity, Education, Public health care and sports, and Social policy. At the same time, certain changes occurred in some of the sections of the functional classification of the consolidated budgets expenditures, which should be pointed out. Thus, the majority of sections demonstrated either a marked decline or the same figures as in the previous year. The most noticeable decline was seen in the item General state issues, where the amount of expenditures decreased from 3.5 % to 3.1 % of GDP.

This happened due to the diminished volume of costs relating to the servicing of government and municipal debt. The greatest upward shifts occurred in Housing and utilities system (growth from 2.2 % to 2.4 % of GDP), Education (from 3.7 % to 3.8 % of GDP), and Public health care and sports (from 2.6 % to 2.8 % of GDP), which can be explained by the onset of the implementation of national pro jects, that is, projects in the socially important spheres of the national economy.

No marked changes were observed on the expenditure side of the federal and the territorial budgets of RF subjects, either: the share of the corresponding items in GDP either somewhat decreased against the index of the previous year, or re mained unchanged. It is noteworthy that, despite the stability of expenditure in re spect to GDP, its further growth at the rate higher than that of economic growth in a situation of an excessive inflation pressure creates additional problems, which di budget budget budget budget Federal Federal budgets budgets Territorial Territorial Consolidated Consolidated RUSSIAN ECONOMY IN trends and outlooks minish the effect of the anti inflation measures being implemented by the govern ment. Despite the fact that, according to the results of 2006, the government has succeeded in keeping inflation at a predetermined level, any further growth in non interest expenditures may cast doubts as to the efficiency of the governments ac tions aimed at further reduction of the growth rate of consumer prices in the short and medium term.

2.2.4. The estimation of budget parameters cleared of the share of the oil and gas sector and the impact of international oil prices The rather strong dependence of the Russian budgetary system on the export of energy carriers, and consequently, on the situation on the international markets, is fraught with serious risks of a potential destabilization of the balance of the budgetary system. It was, to some extent, to neutralize the impact of this factor that in 2004 the RF Stabilization Fund was created, whose purpose is to accumulate the situational revenue in order to sterilize the excessive money supply and to cover the loss of revenues in the future, when the international prices of energy carriers will fall. Besides, the RF Ministry of Finance suggests that the concept of a budget not including the revenues (or expenditures) of the national economys oil and gas sector should be introduced in legislation. It is suggested that the resources gen erated by the export of raw materials and accumulated in the so called oil and gas fund should be used to cover fully or in part the budget deficit not associated with the oil and gas sector. The estimates of the RF federal budgets oil and gas bal ance made by the Ministry of Finance and by the International Monetary Fund (IMF), as well as the IETs estimations, are shown in Table 13.

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