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Section Monetary and budgetary spheres Fig. 10. The share of subsidies from FFSR in the overall volume of interbudgetary transfers to other levels of the budgetary system in 1999As evidenced by the data presented in Fig. 10, the share of subsidies from FFSR in interbudgetary transfers plunged from 73% in 1999 to 34% in 2007. Given that the methodology of formation of the Fund is among the most non transparent ones, this tendency is unlikely to be positive. Another associated with the Fund negative novelty of 2007 should become a modification of the methodology of its distribution. While the 2007 Methodology of distribution of subsidies from FFSR displays certain progress vis vis the current one, it should be remembered that the core feature of provision of interbudgetary transfers is predictability and stabil ity over time. If modified once in a year or two, the respective methodology does not contribute much to the stability of the budgetary system. In our view, it is ap propriate to revise the existing methodology in the medium term, but its modifica tion, even providing insignificant alterations, should take place, at least, once in 3 5 years. In the longer run it would be appropriate to raise the proportion of FFSR in the overall volume of interbudgetary transfers, mostly by concentrating in it subsi dies to the lower tier budgets, which are allocated to support measures on ensur ing their balances, as well as other transfers whose distribution is conducted with out following strict and formalized methodologies.

Since 2005 the Fund for Compensations (below referred to as FC) has been integrating resources allocated for financing all the federal expenditure mandates stipulated in the federal law. The 2007 federal budget law provides for a consider able increase in the volume of FC from RUR 73.9 bn in 2006 up to 153.1 bn (2.times). The Federations interests in regions begin gradually prevailing over the re gions ones, for, as noted above, the principal mission of FC is to finance federal mandates. The main explanation to this is the reform process of the system of so RUSSIAN ECONOMY IN trends and outlooks cial support and assignment to the regional level of significant expenditure obliga tions. In 2007, subventions from the Fund for Compensations will be spent mostly on the following:

a) subventions to regional budgets on payments for housing and public utilities services delivered to certain categories of citizens totaling RUR 81.7 bn, or 53% of the volume of the Fund (1.39 times more than in 2006);

b) subventions to regional budgets on exercising powers with regard to pursuance of the state population employment policy, including the costs of their adminis tering: RUR 33 bn, or 21% of the FCs pool;

c) subventions to regional budgets on increases of money allowances and wages rises to the personnel of subdivisions of the territorial police, as well that of fire brigades, whose operations are covered from budgets of the RF Subjects and local budgets: RUR 15 bn, or 9.8% of FC.

On the one hand, the federal centers eagerness to finance expenditure man dates is a positive factor for the budgetary system as a whole. On the other hand, given a significant vertical budgetary imbalances and differences in regions needs, it is equally imperative to boost at the same rate the non targeted funding provided to regional authorities. Besides, in addition to the aforementioned huge subven tions, which are significant to budgets of the RF Subjects, the last federal budget provides for a great number of small scale subventions, with the overall volume of financing by eight avenues accounting for less than RUR 1 bn. It should be noted that individual Subjects of the Federation often receive under one of these avenues less than RUR 1 m48. To cite a particular example, in 2007, the Altay Republic should receive RUR 176,000 to back up powers on compiling (modifying, amending) lists of candidates for juries under the federal courts of law of general jurisdiction dele gated to the executive and administrative bodies of municipal entities. The adminis trative costs associated with the subventions in question (planning and supervision of the respective spending) may exceed the volume of these subventions. We be lieve it is imperative to revise in the medium term principles of delegation of the 1) Subventions to budgets to ensure funding of delegated to the executive and administrative bod ies of municipal entities powers on compiling (modifying, amending) lists of candidates for juries under the federal courts of law of general jurisdiction in the Russian Federation (RUR 144 mln);

2) subventions to budgets on exercise of powers in the area of organization, regulation and protec tion of water biological resources (RUR 46 mln); 3) subventions to budgets on exercise of powers in the area of protection nd use of the objects of fauna related to the category of hunting (RUR 31 mln);

4) subventions to budgets on payment of public one time allowances under any form of placing chil dren deprived of parental care to a family (RUR 677 mln); 5) subventions to budgets on exercise of powers on payment public one time allowances and monthly compensations to citizens in the event of the rise of post vaccinal complications (RUR 5 mln); 6) subventions to budgets on exercise of powers on payment to disabled insurance premiums under contracts of compulsory insurance of civil liability of vehicles owners (RUR 34 mln); 7) subventions to budgets on exercise measures asso ciated with transportation between the RF Subjects and within territories of states that hold mem bership in CIS of minors that without permission have left families, orphanages, boarding schools, special education and rehabilitation centers and other institutions (RUR 34 mln); 8) subventions to the budget of the city of Saint Petersburg on exercise of the supreme executive body of state power in Saint Petersburg of the federal property management powers (RUR 19 mln).

Section Monetary and budgetary spheres powers, for the current procedures of their funding does not ensure a full coverage of regional expenditures on their exercise (for example, the costs incurred by re gions on their administration are not taken into account). As well, there is no strict economic justification for efficiency of the delegation of powers, hence, the effi ciency of standardization of the process of their delegation can be questioned, as in some regions it can be efficient, but fruitless in others. It is appropriate to exam ine the efficiency of the current division of powers and, if necessary:

a) to drop the practice of delegating to regions a series of federal powers and to switch to their funding directly from the federal budget;

b) to assign a number of federal mandates to the Federations Subjects in a full volume, along with the respective increase in the volume of non targeted trans fers and those implying flexible conditions of consumption of thus received funds and/or expansion of the regional budgets own receipts;

c) to consider a possibility for delegation/centralization of some powers on the contractual basis, with strict and legally stipulated conditions of such contracts.

It must be noted that Russia has accumulated a significant negative experience of the contract based division of powers, while foreign experiences often wit ness efficiency of this particular mechanism. That is why it would be appropriate to resume consideration of this problem in the long run, which requires an in depth legal and economic examination.

The 2007 volume of the Fund for Co Financing of Social Expenditures should grow at a more moderate (1.36 times) pace than that of FC, and it should ultimately account for RUR 35.4 bn This modification was mostly caused by an in crease in subsidies to budgets on childrens aliment in a trustees family, as well as on wages payable to adoptive parents.

Besides, it should be noted that in 2007 there should happen drastic cuts in costs of the federal targeted programs on development of the Republic of Tatar stan and the Republic of Bashkortostan. The costs in question have been fairly huge, as they had been approved to compensate for the termination of the effect of special tax and budgetary arrangements under agreements on division of powers between these regions and the federal center. Recently as much as RUR 20 bn.

plus has been allocated for this purpose, while in 20052006 the volume of the re spective funding was some RUR 11 bn. In 2007, there exists the only program, that is the federal targeted program Socio Economic Development of the Republic of Bashkortostan, which is worth a total of a. RUR 3 bn.

However, the 2007 budget law contains decisions that are aimed at a consid erable increase in discretionary interbudgetary transfers. The volume and proce dures of such transfers may vary substantially, due to the federal centers discre tion. In 2007, there should occur a drastic rise in sectoral subsidies, as well as in the federal targeted programs on support to individual regions:

- subsidies to regional budgets on support to the agricultural sector RUR 27.bn ( 1.6 times more than in 2006;

- subsidies to regional budgets on construction and modernization of territorial and municipal roads, including those in settlements, and road construction in RUSSIAN ECONOMY IN trends and outlooks new areas of mass low rise and apartments blocs construction, which will be worth a total of USD 35 bn (no such subsidies existed in 2006);

- subsidies on the monthly cash compensations for out of class activities at pub lic and municipal schools of general education, worth a total of RUR 11.7 bn (1.times more than the respective amount provided for the start of the 2006 finan cial year);

- the federal targeted program The social development of the rural areas through 2010, worth a total of RUR 5.5 bn;

- RUR 2 bn to fund establishment of technoparks operating in the high tech ar eas;

- the federal targeted program Restoration of the economy and social sphere in the Chechen Republic (in 2002 and subsequent years) RUR 11.9 bn (a fold increase vs. the respective volume of 2006);

- RUR 4.9 bn to fund the federal targeted program The South of Russia (a 2 fold increase vs. 2006);

- RUR 4.5 bn to fund the federal targeted program The economic and social de velopment of the Far East and Transbaikalia in 19962005 and through 2010 (1.6 times more than the 2006 level).

The subsidies allocated to the RF Subjects on support of measures on secur ing their budget balances should grow 1.24 times vs. 200649.

A drastic increase of discretionary transfers that displays no strict binding with the regions budget sufficiency or funding of federal mandates can introduce dis tortions to the subnational authorities fiscal behavior. For instance, a region that enjoys a greater level of budget sufficiency prior to the receipt of interbudgetary transfers may loose its advantages upon receiving financial resources from the federal center. That will diminish its appetite for an independent embarkation on measures aimed at boosting its fiscal capacity, i.e. economic growth rates.

2.4.4. Concept and Methodology of Advancement of Interbudgetary Relations in the Russian Federation and its Subjects in 2006 and in the Medium Run With its Resolution of April 3, 2006, No. 467 p, the RF Government approved the Concept of increasing efficiency of interbudgetary relations and quality of su pervision of public and municipal finance in RF in 200608 (below referred to as Concept) and an action plan on its implementation.

The Concept addresses the following challenges:

1. Solidification of financial independence of the RF Subjects;

2. Creation of incentives for boosting revenues to budgets of the RF Subjects and local budgets;

3. Creation of incentives for improvement of the quality of control over public and municipal finance;

4. Enhancement of transparency of regional and municipal finance;

On negative influence of this kind of interbudgetary transfers on the subnational authorities fiscal behavior see the IET 2004 and 2005 annual issues Russian Economy: Trends and Outlooks.

Section Monetary and budgetary spheres 5. Provision of methodological and consultancy assistance to the RF Subjects for the purpose of enhancement of efficiency and quality of control over public and municipal finance, as well as for the purpose of implementation of the local self governance reform.

Below, we will consider in a greater detail main measures suggested by the Concept and their possible impact on the state of interbudgetary relations in Russia.

Solidifying financial independence of the Subjects of Russian Federa tion To tackle this task, the Concept suggests provision of stability of the tax law and interbudgetary relations in Russia for the sake of trustworthy and objective budget planning in the medium term. It is suggested to exclude a possibility of in troduction of modifications on the federal level to the budget and tax legislation in the part of taxes and levies collected to budgets of the RF Subjects and local budg ets that may result in a contraction of the tax base, as well as modifications of ex penditure obligations of the regional budgets without adequate compensation from the federal budget. It should be noted that with all the indisputable accuracy of such a decision, the bulk of amendments to the budget and tax legislation in the part of taxes and levies collected to the noted budgets that result in the contraction of the tax base has been already passed (abolition of turnover taxes, sales tax, cen tralization of the mineral tax, and abolition of a number of minor regional taxes and charges, etc.). With that completed, the approach suggested by the Concept (that is, a full compensation payable from the federal budget to regions for their losses resulting from implementation of such measures) recently has not always pre vailed. But with account of the imperfection of the national tax system, the priority of the tax reform relative to the need for securing the stability of interbudgetary re lations has not been questioned.

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