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- financing of expenditures for upkeep ofhousing and social utilities transferred under jurisdiction of localgovernments;

- subsidies to stabilize budget revenuebases of territories of the Russian Federation in connection with adoption ofthe second part of the Tax Code of the Russian Federation and wage rise for thefirst >

As before the main part of financial aid tobudgets of other levels is comprised of subsidies from the Fund of FinancialSupport of Regions and targeted financial aid from the Compensation Fund. Totalamount of means planned to be distributed through these channels in 2002 equalsto 68% of the total volume of federal financial aid, which is somewhat higherthan the analogous figures of 2001 (the law on the federal budget for 2001envisaged that in connection with distribution of extra revenues shares offinancial aid types in question in the total amount of federal financial aid tosub-national budgets will amount to 66%). This tendency is a positive fact,because means of the mentioned funds in contrast to the majority of other typesof financial aid are calculated with the help of methods common to allterritories of the Federation in accordance with factors that determineobjective requirements of regional budgets for funds.

Considering the law on the federal budgetfor 2002 and the financial aid allotted as subsidies from the Fund of FinancialSupport of Regions and means from the Compensation Fund one should point outthat in 2001 methods of distribution from these funds were improved. Forexample the method of assessment of budget tax potential of territories of theFederation was adjusted to take a complete account of composition of industrialbranches of territories. Starting in 2002 two extra federal expense commissionsare financed from the means of the Compensation Fund: in addition tosubventions to implement the law On state grants to citizens that havechildren and subsidies to implement the law On social protection of thedisabled in the Russian Federation the Compensation fund allots subsidies tobudgets of territories of the Russian Federation to compensate for paymentallowances in housing and communal services, telecommunication services, use ofpublic transport by citizens who had been exposed to the radioactivity ofChernobyl, the accident on the Mayak factory and nuclear tests on the provingground near Semipalatinsk, also subsidies to compensate for payment allowancesin housing and communal services and telecommunication services for themilitary, militia officers, employed by the internal affairs’ authorities, the tax police,customs functionaries. Amounts of the new types of subsidies are calculated onthe basis of the number of receivers of the named allowances living on theterritories of the Federation, the minimal subsidy per one receiver and federalstandards for housing and communal services costs on the given territory of theFederation.

When making an analysis of the 2002 federalbudget law item that allots amounts of financial aid to sub-national budgetsone should note that in spite of the fact that a number of financial aidallotments to sub-national budgets is viewed as well-grounded in their amounts,aims and distribution criteria (transfers from the Fund of Financial Support ofRegions, means form the Compensation fund), other forms of financial aidtransfers to budgets of lower levels are a subject of certain controversy.

In this way allotment of subsidies tocompensate for electrical power tariffs to the regions of the Far East andArkhangelsk oblast in the form of targeted subsidies as a separate item cannotbe viewed as obviously grounded. In all probability these means should bedistributed as parts of transfers from the Fund of Financial Support of Regionsin the form of non-targeted subsidies, because objectives of the federalgovernment do not include levelling of electrical power tariffs on the whole ofthe country’sterritory, but rather building up of regional authorities’ potential to provide stateservices of unified quality. Including the electrical power tariff factor intothe formula of calculation of subsidies from the Fund of financial support toregions will allow regional authorities to compensate for high power expensescharged to private homes by giving targeted grants to low-income groups of thepopulation. On the other hand, if public authorities of a certain territory ofthe Federation mean that other types of expenses are more preferable comparedto compensation of power charges, they will have an opportunity to use thereceived funds for other purposes. Analogous reasoning can be used for fundsallotted as federal support of Northern supplies. In this connection itshould be noted that the Programme of development of budget federalism in theRussian Federation, which will be discussed below, envisages that targetedallocation of funds as part of subsidies from the Fund of Financial Support ofRegions will be abandoned.

At present the procedure of subventionsdistribution from the Fund of Co-Financing of Social Expenses is not completelyclear. According to the plans of the Government means from that fund aresupposed to be allotted as share subsidies for co-financing of regionalauthorities’ expensesto provide housing allowances for citizens, which shall promote the housing andcommunal services reform in regions. But the practical side of implementationof this suggestion, the system to control the effectiveness of regional housingsubsidies and the procedure of share subsidies allocation itself are not workedout by the Government properly.

As for the means from the Fund of RegionalDevelopment it should be noted that financing from this Fund of the Federaltarget programme Socio-economic development of the Republic of Tatarstan isviewed as ineffective. In spite of the fact these means are allotted tocompensate for deficient republican budget revenues because the republic isgoing over to the tax and duties payment procedure envisaged by the federal law(the previous year the budget of the republic, as stated above, due to the samereasons was allotted a total subsidy of 11 billion roubles), it its viewed asinexpedient to give federal means to this territory of the Federation takingits high revenue potential into consideration, the released funds should berather given to needy regions. On the other hand, it should be admitted thatfinancing of this programme from the federal budget is a sort of payment forthe republic’s returnto the common zone of federal budgetary legislation.

In addition to the above-mentioned oneshould point out the ineffectiveness of several items of the federal financialaid of sub-national budgets, envisaged by previous years’ decisions. It is viewed asinexpedient subsidies to the resorts of the city of Sochi (850 million roubles)as far as untargeted support of separate municipalities that are not closedmunicipalities is not one of the objectives of the federal budget. As analternative one can suggest that a special federal target programme fordevelopment of the resorts of the city of Sochi is established and theseexpenses are financed by means from the Fund of Regional Development. Alsoineffective, as we see it, is the financial aid to the budget of the city ofMoscow aimed at a partial compensation of its expenses as the capital of theRussian Federation (this support is given in from of a transfer of stocksbelonging to the Federation for a total nominal value of 6 billion roubles).When federal means were allotted to this territory of the Federation as anannual procedure (though in form of stocks and shares in recent years) therewere not produced any calculations of expenses and benefits arising from thecity’s performance ofits functions as the capital.

It is still unclear what kind of procedurewill be used when distributing subsidies to stabilize revenue bases ofterritories of the Russian Federation that are allotted to those territorialbudgets that sustain heaviest losses due to innovations in the federallegislation and were not envisaged when other types of federal financial aidwere distributed. The government shall work out a procedure for distribution ofthese means. The procedure, as we see it, shall be supported by demands toregional authorities in the sphere of budget policies. In particular,allocation of such subsidies can be accompanied by conclusion of contracts withpublic authorities of the territories of the Federation – receivers of federal funds– that will oblige thecorresponding regional authorities to take measures to improve and reform theirregional finances.

As before big amounts of means in form ofsubsidies and subventions are transferred to closed municipalities and to thebudget of the city of Baikonur. Calculation procedure for this type offinancial aid remained secret due the specific character of the receivers ofthis financial aid, but as in previous years the federal budget law imposesstringent requirements on the closed municipalities. In particular, provisionsof the law restrict possibilities of authorities of the closed units to grantextra tax allowances.

On the whole provisions of the 2002 federalbudget law about financial aid to budgets of other levels should be viewed asaimed at a higher effectiveness of federal financial aid to sub-nationalbudgets by means of a bigger share of financial aid distributed in accordancewith a procedure regulated by different legislative acts and by demands to thereceivers of financial aid intended to ensure control of an effective andcorrect use of federal means.

Programme forDevelopment of Budget Federalism in the Russian Federation until Year 2005

The Russian Federation budget federalismdevelopment programme for the period until year 2005 was adopted in summer200126. This document was adopted as a part of inter-budgetary relationsreform started in 1998 when the Concept of improvement of inter-budgetaryrelations in the Russian Federation in years 1999-2001 was approved. ThisConcept posed for public authorities of different levels primary tasks ofdeveloping such key elements of multi-layer budgetary relations as distributionof tax receipts and tax authorities and reform of the system of federalfinancial support of territories of the Federation. Summing up achievements ofthe concept one can positively state that the main goals in the sphere ofreform of the system of federal financial support of territories of theFederation were secured. At present the main source of non-targeted financialaid to regional budgets is the Fund of Financial Support of Regions; means ofthe fund are distributed among territories of the Federation according to acommon for all regions method that is based upon figures of tax potentials andexpenses requirements of regional budgets. Funds aimed at investment support ofregions and their financial invigoration are accumulated in the Fund ofRegional Development and the Fund of Regional Finance Development.

Federal authorities in developing the systemof federal financial support to territories of the Federation reached beyondthe tasks put by the Concept of improvement of inter-budgetary relations in theRussian Federation: within the federal budget there were established theCompensation Fund and the Fund of Co-Financing of Social Expenses. Their tasksare financing of certain federal expenditure assignments on the regional leveland allocation of means to territories of the Federation with the object of aquicker transition to the target payment system of housing subsidiesaccordingly.

The task of improving inter-budgetaryrelations from the point of view of tax policies set in the Concept was notperformed in full. It should be noted though that this state of affairs wascaused by objective reasons, namely by the fact that perfection ofinter-budgetary relations is one of many tasks of the present tax reform. As aresult it is not always possible to introduce changes to tax legislation, onlyin cases when these changes meet the requirements of effectiveness in improvinginter-budgetary relations.

The new Programme adopted by the Governmentin 2001 sets for public authorities a greater scope of problems in the sphereof inter-budgetary relations reforms, regional and municipal finances. TheProgramme envisages the following reforms in the sphere in question: regulationof budget arrangement of territories of the Federation, distribution of taxpowers and revenues sources of authorities at different levels of power,improvement of financial support to subordinate budgets and improvement ofpublic finance controls on the level of regional and municipal administrations.

The programme of development of budgetaryfederalism for the first time officially set the problem of budget arrangementregulation on the regional level. Causes of this problem lie in the fact thatthe federal legislation at present describes only one level of localadministration that has budgetary rights. At the same time legislativeprovisions allow establishment of local governments in accordance withsettlement pattern as well as several municipal units on a single territory.Pursuant to the present legislation all municipalities including those locatedon the same territory have equal budgetary rights. At present the problem ofco-existence of different municipalities is solved differently on differentterritories of the Federation. To solve this problem on the federal level thedocument in question suggests to legislators to permit establishingmunicipalities of different levels and to fix the procedure of discriminationof expenses and tax powers between municipal units of different levels.

The Programme separately examines ways tosolve problems of non-financed expense powers, i.e. decisions of localauthorities about budget expenses of subordinate authorities not accompanied bydecisions on corresponding financing of the expenses. This problem is caused bythe fact that the current budget legislation refers the majority of types ofbudget expenses to co-financed expenses. As far as there is no legallyadopted pattern of discrimination of expense powers among authorities ofdifferent levels, there exist no obstacles for federal and regional authoritiesto impose new expenses on budgets of lower levels, the more so since therequirements of the Budget Code to accompany expense demands by decisions oncorresponding financing are not followed anywhere in Russia.

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