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The most important source of the federal financial aid to the regions is currently based upon subsidies for equalization of the minimum budget level of the RF subjects, provided from the Federal Fund of Financial Support to the Regions (FFFSR) established in 1994. Around 70 to 80 out of the 89 RF subjects annually gain a right to receive transfers allocated from FFFSR. Traditionally, for the recent years FFFSR accounted for 14% of total for tax revenue amount received by the federal budget excluding customs fees revenues. In 2001, the fund value was reduced to 9 % of total tax revenues (due to the increase in tax revenues collected by the federal budget, which resulted from the re-distribution of value-added tax revenues to the federal budget formerly raised by the regions, which accounted for 15% of total for regional VAT revenues). According to the legislative project designed for the federal budget in 2001, the amount of the FFFSR accounts for 100353722 thousand of rubles (8,4 % of total for federal budget expenditures, or 53,77% of the federal budget expenditures under Financial Aid to the budgets of other levels).

Up to date, FFFSR has been the only comparatively formalized source of federal financial aid (since 2000, besides FFFSR, there have appeared other funds aimed at financial support to the regions within the federal budget). The formalized character of this model for financial aid distribution was revealed in common methods of financial aid amount calculations done on the basis of specific formulas. The methods were designed by the RF Ministry of Finance and then were modified. In the project of the federal budget for 2001 the model goes as follows:

1 stage: the calculation of gross tax resources for each RF subject.

Unlike models formerly applied, the current model is not based upon actual revenue collected by the regional budget during the last years. It proves to be a considerable positive change. While estimating the regional tax base by means of direct calculations done on the what is achieved basis, the Subjects of the Russian Federation were interested in concealing their actual tax base (in particular, due to the transition of tax revenues into out-budget funds, as well as the negligence of tax dodging) rather than in the increasing of tax revenues collected, in order to justify their need for the federal financial aid.

Currently, a relative rate, the so called gross tax resources (GTR), takes affect in order to calculate regional budget revenues, which allows to consider tax efforts of regional authorities.

Specific gross tax resources of a region are equal to average revenue level of RF subjects per capita, as expected in 2001, multiplied by fiscal capacity rate of the RF subject.

Fiscal Capacity Ratio (FCR) performs a quantitative estimate of regional economy capacity to generate tax revenues considering its structure and level of development. FCR is calculated on the basis of the gross regional product rate.

2nd stage: the correlation of specific gross tax resources of the regions.

In order to correlate specific gross tax resources of different regions, it is necessary that GRP of each region be divided by budget expenditure index (BEI), which reflects the correlation of expected expenditure needs for the provision of budget services base amount in the region with average level in Russia (regarding the regional payroll coefficient, the price level, the duration of the heating season, the population structure, and other objective factors).

In this respect, it should be noted that during the last two years, transport availability as well as the level of the electricity tariff were included in the list of factors extending expenditure needs of the RF subjects, which resulted in a more objective fund resources distribution, formerly allocated on the target principle to provide financial support for the purchase and transportation of oil, oil products, fuel, and food to the regions of the Far North and other regions of the same status (so called north supply) as well as to offset higher electricity tariff for the territories of the Far East and Archangelsk region.

Stage 3: the distribution of 80% of total for the FFFSR amount among the RF subjects, the correlated specific GRP of which do not exceed the average federal rate, pro rata to the deviation of specific STR from the average level.

After the distribution of the first part of FFFSR, the correlation of regional budget revenue for different regions to each other remains the same: the regions with higher GRP will be better provided after the equalization if compared to regions with low-revenue rate. Thus, the strategy of distribution of the first (and the main) part of FFFSR provides incentives for own-source tax base development.

Stage 4: The distribution of the rest 20 % from FFFSR among worse provided regions (after the distribution of the first part of the transfer) by means of equalization of their revenues to one and the same level guaranteed by the FFFSR amount.

Thus, the distribution of this transfer part is aimed at the support of common for whole Russia level of budget revenues in order to secure a scope of some budget services to the population.

In the conclusion, the final share of RF subject in the federal fund of financial support to the regions is defined by adding the second part of the transfer to the first.

Although the model of financial support through equalization of minimum budget level has been perfected for the last years, it still demonstrates some serious disadvantages. The most significant of them is the fact, that the model of financial aid provided from FFFSR described above hasn’t been adopted by the law and has gained the status of a functional document in addition to the federal budget project. Although the share of each region in the FFFSR is fixed in the law of the federal budget for the current year and is usually calculated on the basis of the model, it might be changed while passing the law through the Parliament. It makes the model financial aid provided from FFFSR untransparent for the public and deprives regional authorities from the possibility to forecast their expected revenue amount both for an average and the shortest period of time. Besides, it contradicts the federal law adopted on July 9,1999, 159-FL, which assigns the federal law of the federal budget for the current year to determine financial aid provided for equalization of minimum budget level and its amount calculations unless a special federal law is adopted.

With reference to the future adoption of the law concerning the order and amount of financial aid provided for equalization of minimum budget level, it must be admitted that legal regulations of i. 135 of Budget Code, which make the adoption the law dependant upon preliminary law of minimum social standards as well as upon the resolutions of the Government on expenditure standards necessary to provide public (state) services and minimum budget revenues, complicate the matter. According to the item of the BC mentioned, federal budget financial support provided for the budget of RF subject for the purpose of equalization of minimum budget level is calculated on the basis of expenditure standards necessary to provide state services in order to cover the expenditure needs for minimum social standards adopted by the state.

In our opinion, the idea of relying upon minimum social standards as the basic point for federal financial aid calculations fails to be successful. According to the i. 6 of the BC minimum social standards comprise those state services, the delivery of which to the citizens on the irretrievable and gratuitous basis by means of financing from budgets of all levels as well as from state out-budget funds is secured by the state at a possible minimum level on the whole territory of the Russian Federation. The list, kinds and quantitative amount of minimum state social standards are determined by the federal legislation. Unlike social standards, expenditure standards necessary to provide state services (per one service unit) are adopted by the Government and used in order to calculate financial aid amount provided either for some certain major executor, or budget executor, or budget institution in reference with its certain service objectives (i. 173). In other words, while following the minimum social standards within the territory of all RF subjects proves to be the goal of budget regulations, observing expenditure standards necessary to provide state services is just a means of it.

In our opinion, the calculations of the federal transfers received by the budgets of RF subjects shouldn’t be based upon minimum social standards adopted by the state but upon expenditure standards necessary to provide state services. The difference between these two approaches can be illustrated by the following example. Let’s assume that the population of regions A and B is the same and accounts for 1000 people, but health care services of A provide 100 openings for the sick per hospital and, as for B, here they have 50 openings. The expenditure standard for one opening accounts for 100 rubles. Minimal social standard for health care services can be calculated both in money value and real terms. While it is in money terms, e.g. in health care it accounts for 1 ruble per capita, then regions A and B require the same amount of federal financial aid. But in this case, expenditure standard per one service unit for region B will be doubled. Then it can be concluded that while social standards are calculated in money terms, they will inevitably contradict expenditure standards per one service unit. Considering that the former are determined by the legislation and the latter by a legislative act, social standards will gain the priority, which might exert a negative influence upon the validity of federal financial support distribution.

In case the social standard is calculated in real terms, e.g. hospotal opening per 100 residents, region B, besides financial aid calculated on the basis of expenditure standard (i.e. 5000 rubles), will receive financial aid for building additional hospitals for the purpose of equalization of the level of public welfare if compared to social standard. But federal transfers aimed at equalization of budget level for RF subjects are not provided for capital but for current expenditure needs. According to this example, in order to equalize the level of opening provision at hospitals in region B up to social standard, expenditure needs will many times exceed financial aid amount provided for A region. Thus, financial aid allocation based upon minimum social standards might cause outstanding growth of the federal fund of financial support to the RF subjects, which might exceed federal budget capacity. The negative influence exerted by social standards upon the budget system can be avoided provided that the Government is qualified to establish social standards on the basis of actual but not desirable capacity. But in this case social standards lose their meaning and turn to be expenditure standards calculated in real terms. Thus, the concept adopted in the Budget Code, which regards both minimum social standards and expenditure standards per one service unit as criteria for financial support to the RF subjects provided from FFFSR for the purpose of equalization their levels of fiscal capacity, might result in practice in disability to outline any model for the allocation of such aid and complete chaos in the interbudgetary relations. In this respect it is necessary that minimum social standards be excluded from the scope of criteria for the distribution of financial aid received from FFFSR. But on the other hand, minimum social standards adopted by the legislation might be useful in the following situations: they can be regarded as a pivot, while providing capital investments, target transfers from federal budget for the regions.

The main feature of financial aid received from FFFDR is the fact, that it has a general character. The economic essence of the transfers received from FFFSR consists in the fact, that these transfers being subsidies, transfers were used by regional authorities without any accountability. During the first years of the Fund it proved to be a disadvantage, for the RF subjects being absolutely unlimited in choosing financial aid expenditure perspectives, there were no any minimum expenditure requirements imposed upon recipient –subjects of the Russian Federation. Moreover, target transfers, which were necessary to provide functioning of federal social legislation in the regions, were also allocated through FFFSR. It often resulted in addressing the transfers to the economically and socially unreasonable expenditure needs (e.g. housing subsidies) alongside with the increase in regional budget debt for funding social benefits.

During the last two years some measures were taken in order to avoid the drawbacks mentioned above. Firstly, the federal government has become qualified to control target transfers received by the regional budgets in order to provide for federal social mandates, which resulted from extracting these transfers from the FFFSR and organizing another fund aimed at such kind of offsets. (for more detail see below).

Secondly, the Budget Code fixed general conditions for financial aid allocation in order to equalize the minimum fiscal capacity level. Thus, according to i.134 of the BC financial aid received by RF subject’s budget from the federal budget for the purpose of equalization of the minimum fiscal capacity level is provided under the condition of entering into an agreement on the performance of the RF subject’s budget through Federal Treasury of the Russian Federation. Besides, the recipient-region does not have a right:

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