Secondly, it is appropriate to introduce restrictions to the budgetary policy, as well as the external financial management, in the event of exposure of facts of an inefficient public finance management, which entailed the rise of excessive obliga tions of the public sector and outstanding debts. But such measures exercised by superior authorities, as a rule, are coupled with a provision of additional financial resources.
RUSSIAN ECONOMY IN trends and outlooks Meanwhile, given Russia’s federative structure, a great proportion of financial aid in the conditions of existence of an interbudgetary equalization program (which in Russia is de facto represented by subsidies on equalization of the RF Subjects’ budget sufficiency) does not a priori mean inefficiency in the public finance man agement area, as well as the situation of financial crisis in a given Subject of the Federation. Given that, such an indicator as the proportion of funds received from the federal budget in the form of interbudgetary transfers in the regional budget revenues can be determined by various factors, of which worth noting are the structure of the methodology of distribution of interbudgetary transfers, an overall amount of funds the federal authorities allocate for the sake of interbudgetary equalization, as well as other factors that do not depend on the regional authorities’ decisions. In other words, a great proportion of financial aid in the regions’ own budgetary revenues does not mean inefficiency in the public finance management area, but this phenomenon can be spotted even in those Subjects of the Federation that pursue a sound budgetary policy.
At the same time it should be noted that the bulk of financial aid from the fed eral budget is formed by non targeted transfers, i.e. administrations of the RF Sub jects are not bound with any conditions that would otherwise dictate areas, on which the federal resources should be spent (accordingly, even a greater volume of financial resources granted to them from the federal budget in the form of subsi dies on equalization of their minimum budget sufficiency does not mean the neces sity to control the targeted consumption of the funds in question).
As a result, the suggested remedy to the problem of creation of incentives to regional budgets to boost up their revenues may lead to punitive measures against the RF Subjects to whom such penalties do not pose a real threat. Meanwhile, it is equally undesirable to create a situation in which in the short run all the federal and regional authorities’ attention and efforts would be centered on introduction of the aforementioned capping into highly subsidized regions and municipal entities, as problems of rehabilitation of regional and municipal budgets, creation of incentives for development of their tax bases, increase in the efficiency of financial manage ment and, in particular, introduction to the national practice of the institution of ex ternal financial management, will per se be left beyond the framework of the dis cussion.
Thus, it is appropriate to introduce caps and restrictions into the budgetary policy, as well as the external financial management, upon exposing facts of an in efficient public finance management that has entailed a rise in excessive obliga tions of the public sector and outstanding indebtedness.
To ensure rehabilitation of regional finance, it is appropriate to apply certain measures to regions in a crisis situation, which differ form measures applied to re gions that meet insolvency criteria. While contributing to the World Bank project en titled “Improvement of legislation on interbudgetary relations and subnational fi nance”, the IET experts have already suggested a series of measures to prevent financial crises in Russian regions and create incentives for a sound public finance management on the regional level. In the most general form, they are as follows:
1. Regions in the situation of the financial crisis.
Section Monetary and budgetary spheres We propose to formulate the concept of a region (municipality) in the state of financial crisis as follows:
“A Subject of RF (municipal entity) in the state of financial crisis is the Subject of the Federation (municipal entity) whose volume of payments on servicing and repayment of its public (municipal) debt due in the current or regular financial year is in excess of 20% (or, optional, 30%) of the total volume of its revenues projected for the respective year, with account of non targeted financial aid from the higher tier budgets”.
Once given this status, the region has a chance to receive an additional finan cial aid in the form of a long term budgetary loan from the federal budget, provid ing it fulfills a regional finance rehabilitation program approved by the federal Ministry of Finance and legitimized by an agreement with the RF Government.
The main characteristics of the region in the state of financial crisis are:
- voluntary (by application) nature of granting the status;
- position of the region that has applied for such a status matches certain criteria;
- possibility to receive additional financial aid from the federal budget upon re ceiving the status in question;
- entering in the respective agreement with the RF Government, which should contain, as its inseparable part, a regional finance rehabilitation program and obligations assumed by the RF Subject with respect to observance with the program.
It is also necessary to consider a possibility for adjusting the respective provi sions of the Budget Code of RF associated with the introduction of the new status, as follows:
1) to consider the possibility for provision to the RF Subjects, which have been granted the status of the region in the state of financial crisis, of long term budget ary loans for the purpose of implementation of a regional finance rehabilitation pro gram. That said, it appears appropriate to split the amount of the loan into several parts and introduce conditions of transferring each of them against completion by the region of the respective part of the program or its demonstration of some pro gress in implementation of individual measures. This should form a key precondi tion that would help enforce implementation of such an agreement;
2) to modify requirements of the Budget Code with regard to caps on the vol ume of the public debt of an RF Subject, costs of its servicing and an ultimate size of the budget deficit, so that the federal center could be able to disburse a budget ary loan to the region in the state of crisis.
2. Regions that meet the insolvency criteria.
By contrast to the “crisis” regions, where the failure to fulfill public obligations appears possible, the regions that meet the insolvency criteria are those wherein the failure has already occurred. The federal center, therefore, has to impose di rect enforcement measures on such regions to ensure improvement of their fi nance.
The main instrument with which the federal center can exercise influence on regional authorities’ budgetary policies is interbudgetary transfers. Should the re gional legislature refuse to include in the local budget law measures provided for by RUSSIAN ECONOMY IN trends and outlooks a given rehabilitation program, the upright effect of such a move shall be depriva tion of the region of some kinds of interbudgetary transfers. This is where the dif ference between the status of the region (municipality) that meets insolvency crite ria from the status of the region in crisis lies.
But, whereas a discontinuation of provision of the federal financial aid and col lection to regional budgets of revenues from the federal taxes form very strong en forcement instruments, which practically excludes the possibility to oppose to the Federation’s requirements, their application should imply certain legal constraints.
A bill on measures on regulation of debts accumulated by the RF Subjects and municipalities that meet the insolvency criteria should enumerate a closed list of measures that can be included in a budget rehabilitation program. The set of the measures should vary, depending on a concrete volume of the debt due to the re structuring, the extent to which a given region is subsidized, the structure and vol ume of its minimum budget expenditures, and other significant factors. Such a bill should specify bounds for differentiation of measures on rehabilitation of an insol vent regional (municipal) budget.
The Concept also offers stimulatory measures to regions that have increased their tax base on their own: it is envisaged to introduce amendments to the meth odology of allocations of subsidies from FFSR, which will ensure creation of a mechanism of encouragement of government bodies of the RF Subjects to develop their own tax bases. The stimulatory effect will be ensured by specifying proce dures of calculation of the said subsidies, which should not provide for their con traction, once an RF Subject displays socio economic development indices greater than the average nationwide ones.
From the economic perspective, this measure raises questions, but it appears justified from the political perspective. Theoretically, in the frame of the methodology of allocation of subsidies from FFSR there existed an inverse relation between the volume of subsidies from FFSR and GDP growth rates, i.e. from the perspective of the formal cause and effect relation, there was no direct stimulation to GDP growth with the use of the FFSR subsidies. Regional authorities often criti cized this particular aspect of allocation of subsidies from FFSR, but it is worthwhile noting that to a significant extent their criticism was steered by political reasons.
First, it will be only a few years later when an accelerated growth in GDP could have a negative effect on the volume of the FFSR subsidies. Secondly, the regional au thorities practically could not foretell a decline in GRP and growth in subsidies from FFSR, nor they could benefit from the phenomena, i.e. the 2006 methodology did not create negative fiscal incentives for them. Thirdly, there is no country in the world where subsidies on equalization of the level of budget sufficiency are aimed at stimulation of economic growth. Rather, they are aimed at ensuring a country’s balanced budgetary system. Despite lax economic arguments against the methodology of distribution of FFSR and particularly its negative effect on the re gions’ fondness of economic growth, the RF Ministry of Finance has preferred to opt for an insignificant modification of the subsidies distribution formula, so that to ensure a positive political effect. The modification appeared absolutely justified from the perspective of the real economic policy, for upon an insignificant modifi Section Monetary and budgetary spheres cation of the methodology of distribution of the FFSR subsidies, which is one of the most transparent and economically rational methodologies of allocation of inter budgetary transfers in Russia, the ranks of its critics should thin out. Time will show whether, from the perspective of a real stimulation of economic growth and budg etary and tax discipline in the regions, such a modification of the FFSR methodol ogy is efficient. Meanwhile, the modification in question appears fairly disputable from the methodological perspective. Every single government regulation instru ment must first of all address a certain challenge, without affecting remedies to other problems. Thus, subsidies on equalization of the level of budget sufficiency must first of all secure the possibility of provision of an equal level under equal tax efforts in all the regions, but without disincentives to regions keen to boost their budget sufficiency on their own. But an efficient encouragement of regions to do so is most likely to happen once other government regulation instruments are applied.
Creating incentives to improvement of the quality of public and munici pal finance management The reform of division of powers has legitimized a considerable part of powers with regard to subjects of joint jurisdiction of the Federation and its Subjects by as signing such powers to the latter. Accordingly, the level of efficiency of the use of regional finance will have quite a strong cumulative impact on efficiency of the pub lic sector on the whole.
To intensify incentives for improvement of the quality of public and municipal finance management, the Concept provides for the following:
- increase in the number of the RF Subjects and municipal entities selected to grant them subsidies according to results of the evaluation of regional and mu nicipal finance reform programs;
- improvement of the current selection mechanisms by assigning a greater part to indices that determine the quality of the regional and municipal finance man agement;
- introduction of a system of the annual rating based evaluation of performance by government bodies of the RF Subjects with regard to finance management, primarily their use of new fundamentals of result oriented budgeting and me dium term budget planning. Creation of a system of financial rewards available to Subjects of the Federation that have been earned greater scores;
- revision of principles of provision of financial aid granted on terms of co financing, to secure implementation of powers of government bodies of the RF Subjects that form priority powers for the Russian Federation. It is suggested to concentrate funds for provision of the said aid in a specially created Federal Fund for Co financing of Expenditures. While identifying the level of co financing from the federal budget of certain powers funded from budgets of the RF Subjects and/or local budgets, it is suggested to employ a mechanism of differentiated identification of volumes of the provision of subsidies, with account of the finance management quality indices. For example, should an RF Subject fail to fulfill set by its law obligations by accumulating a growing volume of the respective accounts payable, it is envisaged to reduce the amount of federal subsidies due to the re gion. Quite logically, should there be no debt or its amount is on the decline, the RUSSIAN ECONOMY IN trends and outlooks region should be awarded with a greater volume of financial aid. That should allow development of incentives for the RF Subjects to enhance the quality of imple mentation of their own powers and avoid the rise of debts.
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