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2.2. National Budget

Budget deficit had a marked impact on the Russian economy in the period prior to the 1998 crisis. Excess of expenditures over revenues was sustainable and recurring year by year. The failure to cover expenditures with tax revenues necessitated monetary financing of the deficit (before 1995 ) and accumulation of borrowings from internal and external financial markets, thus rendering the national economy fairly unstable. The mechanism of reproduction of budget deficit was represented by a constant reduction in tax revenues against substantial liabilities of the government.

In 1996 to 1997, total amount of the general government’s expenditures varied from 46 and 48% of GDP ( refer to Annex 2, Tables 19 and 20 ). Social expenditures remained fairly high owing to a new social legislation adopted at that time, which in many ways preserved the Soviet social commitments and budgeting network, and failed to promote serious reforms in this sector. This was coupled with a continuous growth in debt servicing expenditures. In 1998, budget expenditures at all levels were reduced against 1996 and 1997 due to the 1998 financial collapse, which made it impossible for the government to finance its liabilities of the previous years. Budget expenditures of the general government were reduced by 9 in terms of percentage points of GDP in 1998 against 1997. Further reduction of budget expenditures in 1999 was caused by adoption of a federal budged 1999 which was unrealistic under the existing macroeconomic situation, including underestimated inflation rate and GDP1. Mostly effected were the industries with high share of wages, especially social sector. Total budget expenditures of the general government was reduced by 3,5 in terms of percentage points of GDP in 1999 against the previous year. In the ensuing two years, budget expenditures of the general government was reduced to 34,8% of GDP, which allowed the general government to achieve a surplus over 3% of GDP in the budgets of 2000 and 2001. Then in 2002, budget expenditures grew by almost 5 in terms of percentage points against the previous year and accounted for 39,7% of GDP. Budget expenditures of the general government was reduced by 36,3% of GDP at year-end 2003.

The post-crisis period between 1999 and the present day are represented by a number of macro- and microeconomic trends, as well as various events, which had a strong impact upon economic processes in the country, including the budget policy.

The prices of the traditional Russian export goods – crude oil, gas, nonferrous metals and lumber – established after 1999 had most relevant impact on budget revenues. Since 2000, a considerable share of tax revenues was generated from an excess in actual oil prices over long-term average values. It should be noted that prices of exported raw materials have an impact on budget revenues not only through corresponding taxes ( export duties, Mineral Tax, oil product excises ) but also a general growth in total demand which promotes a growth in tax base of income and profit taxes.

Another relevant factor which had a positive impact on growing budget tax revenues was improved financial situation of domestic enterprises, which was associated with industrial output recovery caused by import-replacement processes and growth in domestic demand.

The factors that had a positive effect on budget revenues include the measures taken by executive government agencies in order to reduce accrued tax liabilities, which was encouraged by a favorable internal economic situation on the one hand and adoption of the first part of the Tax Code on the other hand, increase non-tax revenues related mostly to public and municipal property, as well as improve accounting of extra-budgetary revenues of budget-funded entities as part of the budgetary revenues.

A tax reform was represented by most relevant and profound reorganizations conducted in the postcrisis period. A whole spectrum of effects resulting from amendments introduced as part of the tax reform only can be revealed within a considerable long-term period2. However, there is a set of novations that already effected the revenues of the budget system. In general, a rapid growth in real tax revenues to the consolidated budget was marked in the postcrisis period within the framework of revenues generated to the budget system since 1996. The maximum real growth of tax revenues was registered in 2000, which accounted for about 40% against the previous year, while tax revenues to the consolidated budget reached its maximum in the same period against the entire past period (1997). At year-end 2003 consolidated budget revenues exceeded by 27% that of 1997 in real terms.

Since 1999, redistribution of revenues took place within the budget system, which changed profoundly the balance of revenues between budgets at different levels. Consequently, federal budget revenues in 1999 came to exceed general revenues of subfederal budgets.

A general improvement in budget revenues allowed the government to run budgets not only without deficit, which never occurred throughout the entire period of market reforms in Russia, but also with a considerable surplus during the postcrisis period. Regarding the general budget expenditures over the period since 1996, a relatively quick growth in the consolidated budget expenditures was registered since 1998. In 1999, 2000 and 2002, budget expenditures grew by more than 20% in real terms. In 2002, for the first time in the postcrisis period, the consolidated budget expenditures exceeded that of the 1997 period after allowing for inflation over the given period.

An effective treasury system of budget administration ( primarily at federal level ) allowed non-targeted utilization of public funds to be reduced to zero. At the same time, build-up and administration of liabilities of the budget system according to the input based rather than output based principles will render impossible radical changes in public services. Though experimental results on introduction of new forms of budget financing ( primarily government registered bonds ), as well as the situation with mandatory medical insurance, testify that there is enough efficiency in support to budget expenditures for transition to the input-based financing, the key factor for implementation of a full budget reform is to reorganize the system of state-financed agencies. Such reform is intended to broaden the spectrum of participants in the market of social services, increase responsibility and provide independency, primarily financial one, of organizations operating in social sector. In prospect, various principles of outcome-based financing can be implemented depending on government’s socio-economic performance in social sector.

Another relevant task, which still remains topical, is to adjust social commitments to government’s capacity. The existing ineffective system of financing neither gives way of compliance to the existing and assigned multiple ( often pointless ) social commitments, nor increase in effectiveness of the public sector. Indeed, a huge burden of social commitments, which often render impossible or reflect inadequately the present socio-economic and demographic reality, need to be corrected. Transformation of the system of budgeting and budget administration is a necessary condition for making the Russian financial system less vulnerable to global market fluctuations and relieving the debt load on the economy. This condition can not be dispensed with because the budget will remain vulnerable to any unfavorable situation, even if well balanced.

2.2.1. Budget 2003. General Picture

Tax revenues to the federal budget declined by 0,6 in terms of percentage points of GDP at year-end 2003 against the previous year. However, in 2003 tax revenues to the federal budget were 0,2 less than in 2002 and 0,9 less than in 2001 in terms of percentage points of GDP without allowance for the unified social tax. In 2003, tax revenues to local budgets accounted for 10% of GDP, which corresponds to that in 2002. Therefore, the decline in tax revenues of the federal and consolidated budgets in 2003 was governed, in particular, by reduced revenues from the unified social tax, from 3,1% of GDP in 2002 to 2,7% of GDP in 2003.

The revenues of the federal and consolidated budgets in 2003 accounted for 19,4% of GDP and 31,1% of GDP correspondingly. These figures exceed the revenues of the federal and consolidated budgets between 1998 and 2001, while by 0,7 less than revenues of the federal budget and by 1,0 less than revenues of the consolidated budget in terms of percentage points of GDP in 2002. Budget expenditures at all levels in 2003 were less than in 2002, by 1,4 in terms of percentage points of GDP in the consolidated budget and by 1,0 in terms of percentage points of GDP in the federal budget, whereby the federal budget surplus accounted for 1,7% of GDP at year-end 2003 and 1,4% of GDP for the consolidated budget correspondingly, which exceeds the figures at year-end 2002.

Both budget revenues and expenditures at all levels grew in real terms in 2003 against 2002. In particular, real revenues to the federal budget grew by 5,9% and local budget, by 6,8%. The growth rate of budget expenditures at all levels in 2003 was less than that of budget revenues, a real increase in the federal budget expenditures accounted for 3,8% and local budget expenditures 6,6%, whereby the consolidated budget surplus in 2003 exceeded by 48% the figures of the previous year.

Table 8

Administration of Revenues and Expenditures of Consolidated,
Federal and Local Budgets ( in % of GDP )

1998

1999

2000

2001

2002

2003

1

2

3

4

5

6

7

Federal Budget

Tax Revenues*

8,8

10,7

13,2

16,2

18,6

18,0

including Unified Social Tax

3,1

2,7

Revenues

11,3

12,9

15,4

17,6

20,1

19,4

Expenditures

14,5

14,0

13,1

14,7

18,7

17,7

Deficit (–) / Surplus (+)

–3,2

–1,1

2,4

2,9

1,4

1,7

Table 8 cont’d

1

2

3

4

5

6

7

Local Budgets

Tax Revenues*

11,5

10,4

10,2

9,6

10,0

10,0

Revenues

14,8

13,6

14,4

14,3

14,9

14,5

Expenditures

15,2

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