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Statement of the problem

Introduction. In the article we dwell upon the problems connected with the impact of interbudgetary relations on the fiscal behavior of regional authorities. Alongside with that we will also regard such parts of interbudgetary relations structure as expenditure and revenue assignment between the Federal Center and the regions (inclusive of setting proportions of tax revenue sharing) as well as its effect with the regional authorities’ fiscal behavior, its influence upon the interbudgetary relations stability, and the mechanism of intergovernmental financial aid to the regions in need.

The economic policy pursued by the regional authorities comes to be largely determined by the features of the existing system of intergovernmental fiscal relations (IGFR). The mechanism of interbudgetary relations as well as distribution of tax authorities together with tax revenues between the Federal Center and the regions prove to intensify fiscal incentives within the regions, the latter attained both by means of local or regional tax revenue increase and fiscal administration improvement alongside with the tax base growth facilitated by the economic activity within the region. It does quite in the same manner that the peculiar features of IGFR focused on exert an influence upon the structure and the efficiency of regional budget expenditures.

Further on, the model being shaped, it will be assumed that the rules of revenue base formation are common to all the regions as well as the methods of financial aid amount calculation be established by the federal authorities. The decisions concerning both the regional budget revenue formation and the procedures of financing the corresponding expenditures are made by the regional authorities, with reliance on the above-mentioned rules. It is assumed that the decisions made by the regional authorities be based on the purposes of securing maximum public support, which results from the status and structure of public goods allocation within the region and the tax incidence level (level of regional tax rates, scope of tax incentives levied by the regional authorities) as from the basic criteria for the regional authorities’ evaluation. Consequently, it can be assumed that there occur a certain correlation between preferences of regional authority and of the regional population, which is natural for the election-based political system. Such correlation must be sustained after local elections for it provides political public support for the regional authorities and tells on the possibility of being re-elected for the next term.

Interests of the regional leader and other economic agents in the region. In the regional authority structure the regional leader, whose formal status is largely determined by the Constitution adopted in the corresponding Federation Subject (the Governor, the Head of the Republic, etc) is of primary importance. The regional leader’s behavior and interests mostly shape regional fiscal policy. Therefore it is provided that the most important economic agents’ groups, which might exert an influence upon the regional leader’s behavior, be defined.

Firstly, one of these groups comprises the regional electorate. The electorate interests may take effect with securing the regional leader position at the next elections. Besides, the leader supported by the electorate may be less dependent on the other economic agents’ groups inclusive of the federal authorities. The latter considers the local public support to be a deciding factor for the regional leader’s success and consequently – for the attitude of the Federal Center towards the leader.

Secondly, it is essential that local big business influence as well as special interest groups effect with the regional leader be mentioned. Such special interest groups may determine the regional economic policy both by lobbying some decisions through the legislative (representative) and executive authorities and by shaping the voters’ electoral behavior through electioneering technologies. The regional elections result may largely be influenced by sponsoring the election campaign as well as by initiating or discouraging the electorate from the demonstration of either support or protest against the authorities’ behavior, etc.

Thirdly, the political position of the regional leader depends upon the attitude (to the leader) assumed by the Federal authorities. In most cases it is possible that the Federal Center support be a deciding factor in making a success of the elections. It can result from the encouraging the electorate by the financial aid promise and future federal support in solving local problems as well as from the leader’s growing independence from big business and local municipal officials, which enables the leader to exert a more effective influence upon these groups.

Another group determining the behavior of the regional leader comprises both local officials and bureaucrats subordinate to the regional leader and government officials formally subordinate to the Federal Center but informally dependant on the regional authorities. Such local officials take an active part in making decisions, which shape the regional fiscal policy. Therefore they can wield a profound influence on taxation level and tax policy, tax administration quality, regional budget expenditure structure and efficiency, price formation, as well as they can provide for or against the development of free enterprise and etrepreneurship in the region. At the same time by taking part in the election campaign they can determine the results both of local and federal elections. It’s local officials who are provided with detailed information about the region, who keep the Federal Center informed and might arrange the information to be offered.

Shaping economic policy, the regional leader must take into consideration diverse local officials’ interests so that the latter would pledge solid support. These interests might be sustained by salary growth, non-cash privileges, accommodation supply, project support received by an affiliated with the officials persons and entities, extra-budgetary funds set up for the purpose of financing regional administration, etc. To crown it all, a scheme of interrelations between the groups mentioned above and the regional leader can be concocted (see scheme 1):

The Correlation between Fiscal Policy and the Level of Public Support for the Regional Leader. Now, taking into consideration the correlation between the regional authorities’ interest and economic agents’ groups mentioned above, we could thoroughly examine fiscal policy influence upon the level of public support for the regional authorities.

As it was mentioned above, we can proceed from the assumption that the electorate interest as well as the support level for this or that regional leader is determined by economic agents’ welfare level. The wlefare level (actual or desired) largely depends upon the fiscal policy (declared or implemented). Producing public welfare and keeping control over disposable public income through taxation and income transfers (university grants and scholarships, pensions, social subsidies etc.) attains the fiscal policy influence upon the electorate welfare level. Therefore, regional budget expenditures and its efficiency/effectiveness, which determines both the amount of public and private goods promoted by chosen taxation level under the fixed income condition, come to be a deciding factor in electorate behavior and support for the regional authorities. It can be assumed that the level of public support for the regional authorities be increased alongside with the public welfare growth as well as adaptation of public and private goods structure for the population priorities.

a) Regional public revenue and expenditure level. On the one hand, regional income level is determined by economic activity level, which depends upon both regional output potential and economic policy of the authorities essential for economic conditions defined by business institution system development (legislation and its stability, instruments for legislative norms and contract liabilities enforcement, the degree of bureaucrats’ corruption, social system and production infrastructure development, etc.). On the other hand, given taxing power of both the Federal Center and the regions fixed the regional revenue level depends upon tax policy pursued by regional authorities. Own revenues of regional budgets (regional and local taxes, federal taxes or their shares accrued to regional and local budgets) are determined by the rate level attained through tax privileges and tax administration level. The latter is defined by tax arrears level as well as by usage of non-cash forms of tax payments (various offsets). Alongside with that regional budgetary revenues are determined not only by own tax revenues but by the amount of federal financial aid (transfers from federal fund for financial support to regions, subventions, budget loans, resources allocated through mutual settlements1, etc.)

Regional authorities’ aspiration for tax revenue increase exerts a negative influence upon the level of public support for regional budget revenue increase imposes a growing tax burden on the population. On the contrary tax burden relief attained by rate reduction and tax privileges as well as delay in tax payment allowed secures positive attitude revealed by the economic agents. Alongside with that it must be assumed that revenue decrease contradicts the authorities’ aspiration for the high level of public goods production level. Such aspiration is determined by the fact that public goods provision growth and adaptation of its structure for social needs gain growing public support.

Therefore, the choice of tax rates in the region is based on a compromise between aspiration for budget revenue increase on the one hand, which fosters public goods provision growth and consequently secures a high level of public support for the authorities, and tax burden growth imposed on enterprises and the population of the region on the other hand, which provides against the public support and in the long run exerts a negative influence upon economic activity and consequently the level of budget revenue.

Besides own tax revenues regional expenditures are covered by federal financial aid provided from the federal budget (almost all the Russian regions receive federal financial aid in this or that form) and regional debt amount increase2. Providing the regions in need with federal financial aid appeared to be a complicated and shaky system of settlements and agreements based on hierarchy bargaining between different levels of executive and legislative authorities. Under the conditions of Russian economy the whole procedure resulted from the necessity for covering at least partly (to the extent federal budget could allow) the gap between regional budget expenditures and revenues agreed with the Federal Center.

But for the formal methodology of federal financial aid amount calculations, which in the first years of its existence were based on the equimarginal principle applied to RF subjects forecasted revenues and expenditures3 2 (according to the funds assigned for the purpose of interbudgetary equalization), up to 1998-1999 there were no objective methodology for such calculations. Under such conditions federal financial aid amount depended both upon regional forecasted revenues and expenditures agreed with (and approved by) the Federal Ministry of Finance and upon lobbying activity on behalf of regional interests during the Parliamentary discussion of federal budget law for the next fiscal year. Besides regular financial aid, the allocation of which is fixed by federal budget law, there are many kinds of irregular financial aid (funds distributed through mutual settlements, budget loans and others), which are distributed between the regions during budget execution on the basis of federal executive authorities’ decisions. It is obvious that the possibility of receiving irregular financial aid as well as its amount largely depend upon the regional authorities’ ability to convince the Federal Center of the necessity for gaining additional financial support regardless of having any objective background for such demands.

Therefore, the level of regional budgetary revenues is determined by diverse parts of tax system and IGFR structure, which shape both the degree of possible regional influence upon income earned and the degree of the regional authorities’ interest in local budget revenues growth. If either financial aid or federal tax sharing rates could change so that it would compensate for interregionalown revenue fluctuation, regional authorities would have no incentives to increase the latter.

Further on it will be assumed that the amount of financial aid to the region be defined by the gap size between regional own revenues and its expenditure needs. Besides, regional revenue calculation can be based upon either actual budget revenues or revenue capacity, i.e. revenues, which might be earned in the region through setting average tax rate and applying average tax efforts concerning the existing tax base. The same way regional expenditure needs can be defined on the basis of both actual (reported) expenditures and some standard regional expenditure needs estimation derived from national average regional expenditure level as well as existing price-rate and some specific factors determining needs in public goods provision (the climate and other geographical factors, sex-age structure, scale effect, population allocation between rural and urban areas, etc.)

b) The impact of tools and institutions used for budget execution upon the level of public support for the regional authorities. Besides public and private goods provision level and structure, the level of electorate support for the regional authorities can be determined by the factors characteristic of budget execution tools system. These factors appear to be of vital importance for special interests groups.

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