1) the draft Concept compels the RF Ministry of Finance to assume a fairly ambitious mission in the area of development of a concept of legal acts and draft acts themselves. According to the noted action plan, by late 2006 the government would have to approve some 10 legal acts in various areas. However, so far the Ministry has failed to meet all the timelines. For instance, the system of monitoring of financial state and quality of finance management by the RF Subject and municipal entities has fallen short of duly maturing, while the monitoring outputs have not been employed in the current policy in the interbudgetary relations area. Thus, the efficient implementation of measures outlined in the Concept will require the Ministry to modify its modus operandi.
2) The Section of the Concept, which is entitled “Creating incentives to boost revenue collection to budgets of Subjects of the Russian Federation and municipal entities” comprises a series of suggestions in this particular area. They are mostly reduced to introduction of various restrictions on financial policies of the RF Subjects under which revenues received in the form of interbudgetary transfers from the federal budget exceed a certain proportion (the draft Concept suggests two special regimes:
one for regions in which the proportion of interbudgetary transfers accounts for over 60% - it is suggested to introduce additional restrictions on their control over budgetary funds; the other suggests the possibility for introduction of an external financial administration in the Subjects of the Federation wherein the respective index is over 80%).
At this point it should be noted that so far as solidification of the regional authorities’ financial independence is concerned, it appears inappropriate to favor measures that essentially can be reduced to imposition of various kinds of sanctions for regions that receive great volumes of financial assistance from the federal budget, and there are, at least, two reasons for reckoning this:
First, the possibility for introducing for regions restrictions due to causes that are not associated with abusing the budget law or an inefficient spending of budgetary funds can give a rise to incentives to distorting the respective statistical data and decreasing transparency of budgeting, rather than to growth in the tax base, which clearly contradicts other provisions of the Concept.
Secondly, it must be noted that it is appropriate to introduce budget policy restrictions and an external financial control in the event of identification of facts of an inefficient public finance management that has entailed the rise of excessive obligations of the public sector and outstanding debts. Such measures undertaken by higher-level authorities, as a rule, are coupled with extension of additional financial resources.
Meanwhile, given Russia’s federative structure, a high proportion of financial assistance in the conditions of existence of the interbudgetary equalization program (de-facto represented by the system of subsidies on equalization of budgetary sufficiency of its Subjects) does not apriori mean the inefficiency in the public finance management area, nor it indicates the existence of the situation of financial crisis in a given Subject of RF. Meanwhile, such an indicator as the proportion of funds received from the federal budget in the form of interbudgetary transfers in regional budgetary revenues can be determined by various factors, such as the structure of the methodology of allocation of interbudgetary transfers, the overall volume of funds the federal center appropriates for the purposes of interbudgetary equalization, and other factors that do not depend on the regional authorities’ decisions, among others. In other words, a great proportion of financial assistance in the region’s own budgetary revenues does not mean inefficiency of its public finance management – it can be noted even in the Subjects of the Federation that pursue a sound budgetary policy.
In parallel with that, it is also worthwhile noting that the bulk of financial assistance from the federal budget appears non-targeted, i.e. authorities of the RF Subjects do not find themselves bound to follow conditions in the area of directions of spending the funds they receive (accordingly, even a greater volume of financial resources they receive from the federal budget in the form of subsidies on equalization of a minimal budgetary sufficiency does not mean the need to exercise control over the targeted use of the received funds).
As a result, the suggested remedy to the problem of creation of incentives to boost budget revenues to regional budgets can result in punitive measures against Subjects of the Federation for which this particular measure does not appear actual.
Notwithstanding the above, such a conclusion does not mean the necessity to refuse application of the measures stipulated in the draft document. However, we believe that the criterion of their application should be modified towards a greater utilization of indicators that characterize an inefficient public finance management and outstanding budgetary debts.
3) The draft Concept suggests the notion of an imperative use of compensational measures by the federal authorities in the event inflation rates in the current year are in excess of the computation level employed in the course of drafting the federal budget law (automatic increase of the volume of the Fund at the value proportional to the inflation growth vis--vis its projected level).
Indeed, some nations (Canada, for instance) employ the principle under which the by results of the budgetary year the authorities carry out the second computations of volumes of interbudgetary transfers to regions on the basis of actual data used in formulas. However, in such cases the re-computation basing on the results of the year (which is run several times, upon receipt of the respective statistical data) covers all the indicators employed in the course of identification of the volume of interbudgetary transfers due to each region (which can influence both the decrease and increase in the volume of financial assistance) and not solely the aggregate volume of funds allocated for the sake of interbudgetary equalization.
In this respect, it is suggested not to abandon the design of proposals on indexing the volume of the Fund for Financial Support of Regions in the event the actual inflation rates are greater than projected ones that were used to allocate transfers, but to somewhat modify the principle of indexation stipulated in the draft Concept in favor of a greater balance between interests of the Federation and its Subjects - for example, to develop a more universal approach to the re-computation of both the volume of FFSR and transfers to individual Subjects of the Federation on the basis of actual statistical data collected by results of the year.
4) It is proposed in the draft Concept to merge the Fund for Regional Development with the Fund for Co-Financing of Regional Expenditures on the grounds that both Funds’ mission is to finance regional budgetary expenditures (in the first case – expenditures on capital investment in objects of regional property, and on purposes that fall under the regional authorities’ mandate – in the other case).
It should be noted that despite the fact that both Funds de-facto use the same form of allocation of interbudgetary transfers – that is, subsidies, their tasks and principles of allocation appear absolutely different. While subsidies from the Fund for Regional Development should be forwarded on financing investment expenditures of the RF Subjects, those allocated from the Fund for Co-Financing of Regional Expenditures are designated to support current expenditures of the regional budgets that form priority for the federal authorities. Accordingly, principles of allocation of interbudgetary transfers from the Funds in question should be different, which, in our view, does not allow for support of the proposal on their merging, as per the draft Concept.
In addition to the above comments, we believe it would be appropriate to complement the document in question with conceptual proposals that concern the following reform avenues:
1) Given the problem of allocation of subsidies on equalization of the RF Subjects’ budgetary sufficiency, the currently employed by the RF Ministry of Finance methodology of computation of the tax capacity index is based on reporting data supplied by statistical bodies in terms of items of the classification of sectors of the national economy. Meanwhile, publication of thus structured data should be discontinued in the nearest future and there should take place a final transition to a new classification – that is, kinds of economic activity. That will demand for a revision of approaches to assessment of the tax capacity index (for instance, employment of representative tax rates or other widespread approaches).
2) To prevent the rise of cash gaps in the RF Subjects’ budgets, it appears appropriate to adjudicate and publish a timetable of earmarking of all kinds of interbudgetary transfers from the federal budget. This will enhance the certainty for regional authorities who deal with the planning of budget revenues.
3) In addition to the measures on enhancement of the transparency of the budgetary process stipulated in the draft Concept, it is suggested to design formalized procedures of the RF Ministry of Finance’s decision making with regard to provision of additional financial assistance to the RF Subjects (for instance, budgetary loans) not allocated between regions by the law on the federal budget or the RF Government’s decisions, as well as to publish such decisions on the Ministry Homepage.
4) In addition to the proposals on extension of operations under the auspices of the Fund for Reforming Regional and Municipal Finance, it appears appropriate to ensure a transition to a stricter structure of the Fund, rather than to automatically extent the number of participants in the regional and municipal finance reform programs. For instance, we believe that it is imperative to single out the most priority avenues of the reform of public finance management in the RF Subjects and municipal entities and focus on the avenues (i.e. conduct tenders and compile reform programs by each avenue).
We believe that such a task-setting is justified by the fact that most regions now do not need a comprehensive public finance management reform. Rather, it would be appropriate to undertake measures along individual avenues (for instance, budget accounting and reporting, budget execution, budget planning, management of budget network and public enterprises, result-oriented budgeting, etc.) Such an approach would allow both maximum efficiency in using resources of the Fund for Reforming of Regional and Municipal Finance and work out, basing on the pilot-project principle, individual avenues of the budgetary reform, and consequently, an analysis and extension of the best practices in the budgetary reform area.
As well, in the framework of this particular avenue the RF Ministry of Finance should vigorously proceed with conducting workshops and working meetings, to teach regional and municipal authorities new methods of public finance management, spreading the best regional and municipal practices, and other issues. The methodological assistance to the regional authorities’ activity aimed at improvement of efficiency of the public finance management on the regional and municipal levels and enhancement of transparency of the system of public finance management should play a critical role in the reform implementation.
I. Trounin Issues discussed at the meetings held by the Government of the Russian Federation on March 2 and 23 of At the meetings of the RF Government held in March, G. O. Gref, the RF Minister of Economic Development and Trade presented his reports “On the results of the social and economic development of the Russian Federation in 2005 and the objectives of the economic policy pursued by the Government of the Russian Federation in year 2006” (on March 2) and “On scenario based forecasts of Russia’s social and economic development in year 2007 and in the period until 2009, and on the ceiling levels of prices (tariffs) on products (services) of natural monopolies for year 2007” (on March 23).
* * * In accordance with the report “On the results of the social and economic development of the Russian Federation in 2005 and the objectives of the economic policy pursued by the Government of the Russian Federation in year 2006,” the main conclusions derived from the analysis of the social and economic development in 2005 are as follows:
- in accordance with preliminary estimates the rates of growth in GDP made 6.4 per cent (above the original forecast of the Ministry of Economic Development and Trade (5.9 per cent), but below the results of 2004 (7.2 per cent).
- the rates of growth in external demand declined (from 11.9 per cent registered in 2004 to 5.6 per cent in 2005); however, the rates of growth in domestic demand were stable (9.3 per cent and 9.2 per cent respectively);
- the share of net exports increased from 12.6 per cent observed in 2004 to 13.9 per cent in 2005, the total volume of commodity exports increased by 4.7 per cent in 2005 as compared with 10.7 per cent registered in 2004, whereas export prices grew by 26.9 per cent and 22.7 per cent respectively.
Export of goods made US $ 245.3 billion (by 33.9 per cent above the level registered in 2004), including exports to countries outside the former Soviet Union, which made US $ 211.6 billion (a 38.3 per cent growth) and to the CIS member countries – US $ 33.6 billion (a 11.3 per cent increase). The share of the countries outside the former Soviet Union in the total amount of exports of goods increased from 83.5 per cent to 86.3 per cent, whereas the share of the CIS member countries declined respectively from 16.5 per cent to 13.7 per cent.
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