Gouzel Singatullina - Senior Lecturer at Kazan State University, Candidate in Economic Sciences 

The Inter-budgetary Relations in the Russian Concept of Federalism

Interbudgetary relations are the most complex and burning direction of the perfection of budgetary federalism.  They are connected with the fact that the relative independence and autonomy of the territorial budgets is imposed on the specificity of the state structure. The problems of budgetary federalism are especially urgent for Russia because of its size, geographical extension, historical and national specificity of separate regions.

Budgetary federalism assumes that the financial relations of the subjects of the Russian Federation with the federal center are aimed at the efficient formation and use of national financial resources. These relations are formed taking into consideration the influence of the diverse factors of historical, geographical, political, economic and ethnic-cultural significance.

The usual pattern of interrelation of the budgets of the subjects of the Russian Federation with the federal center covers: 1) the distribution of taxes at the levels of the budgets; 2) budgetary flattening; 3) loan-administrative relations; 4) address-target relations. The analysis of the existing pattern of budgetary federalism has shown that there is an instant necessity to reform it in the following directions:

·       Reform of the present model of division of the rights of management and account authorities between the federal center and the subjects of the federation;

·       Reform of the present model of division of tax authorities and the applied scheme of smoothing of the vertical misbalance in the system of budgetary federalism;

·       Creation of the pattern of smoothing the horizontal financial misbalance, formation of the scheme of flattening payments;

·       Formation of the program schemes of long-term flattening of levels of socio-economic development of the subjects of the federation.

The global practice confirms that the decentralization of financial resources is expedient to the extent that it allows to fulfill functions of the state at all levels using state financial resources with a peak efficiency (minimum losses). A number of functions are of a national character (defense, state security etc.), therefore it is inexpedient to decentralize the financial resources for their accomplishment. The costs of financing these functions should be undertaken by all subjects of the federation that is achieved by splitting the system of taxes and formation of the federal budget.

In the Russian budget-tax system the level of centralization is overestimated practically in all elements of the system of budgetary federalism. In the tax sphere it is manifested: 1) in the domination of the federal taxes in the incomes of the budgets of all levels (the share of the federal taxes in the structure of the incomes of the funded budget constituted 82,8 % in 1999; in the tax incomes of the budgets of the subjects of the Federation it constituted 66,1 %); 2) in the majority of the taxes of the subjects of the Federation and in local taxes the formation of the tax base and the limits of the tax rates also are regulated by the federal legislation; 3) in Russia the pattern of distribution of the tax incomes between the budgets, which  rigidly binds the budgets of the center and the subjects of the Russian Federation to each other, is actively used. The structure of the distribution of the incomes of the funded budget of the Russian Federation on levels of budgetary system (table 1) testifies to it.

Table 1. The incomes of the funded budget of the Russian Federation 1999, billion. Rubles (not taking into consideration the financial help to the budgets of other levels) 

Drawn up and calculated by the Russian statistical yearbook / State Statistics Committee of Russia. - Ì., 2000. p.p. 504-505.

In the field of mechanisms used to smoothen the horizontal financial misbalance and in the system of financial flattening, the domination of a federal authority is manifested in the following: 1) in the conservation of significant redistribution of financial flows which are locked to the federal budget 2) in the construction of a system of transfer deeds, by which the article by article account not only of the incomes of the budgets of the subjects of federation, but also of their expenses is made at a federal level 3) in the hidden redistribution of incomes both from the own and fixed sources of the budgets of an inferior level through the system of transfers.

The most trouble-making component of the inter-budgetary relations is the distribution of the rights of management and of the account responsibility. The acting constitution of the Russian Federation defines the rights of management of the Federation and the rights of joint management of the federal center and the subjects of the federation. Thus, the question of the rights of the subjects is not unequivocally considered and requires a settlement.

The structure of distribution of expenses of the funded budget of the Russian Federation is characterized by the following proportions (table 2):

Table 2. Expenses of the funded budget of the Russian Federation 1999, billion. Rubles (not considering financial help to the budgets of other levels)

Drawn up and calculated by the Russian statistical yearbook / State Statistics Committee of Russia. - Ì., 2000. p.p. 504-505.

As we can see, the expenses of financing the national defense and the international activity are under the exclusive federal jurisdiction, while the expenses of the municipal economy are under the exclusive jurisdiction of the subjects of the federation (19,5 % from the total expenses of the budgets of the subjects of the Russian Federation). All other categories of expenses are realized from the budgets of both levels. Thus the following tendencies are evident:

·       The regional budgets fund 77 % of the expenses of socio-cultural events (which constitute 43 % of all expenses of the budgets of the subjects of the federation);

·       The share of the federal budget in the total amount of the subsidies to agriculture is negligible. The main load here is on the budgets of the subjects of the federation;

·       If earlier the main amount of expenses on industry, power and construction was paid from the federal budget, now budgets of the subjects of the Russian Federation fund more than 45 % of these expenses;

·       The financing of a part of the expenses of municipal economy of the separate subjects of the federation is made from the federal budget in the hidden form. It concerns those subjects of the federation where the own incomes of the budget do not cover even this one item of expenses;

·       The lack of financing separate categories of expenses from the federal budget results in the fact that some items, which are under complete competency of the federal level, begin to be funded at the expense of the budgets of the subjects of the federation.

The basic direction of reforming the pattern of division of the account responsibility becomes precise, and unequivocal becomes the distribution of the responsibility of financing concrete categories of expenses from the budget of the appropriate level and the inadmissibility of both hidden redistribution of authorities for the benefit of the subjects of the federation, and shifting off the responsibilities of the subjects of federation on financing expenses onto the federal budget.

 During the last years the tax system of Russia has undergone essential changes. At the same time the problem of its re-structuring from the point of view of the distribution of tax authorities and the elimination of the vertical misbalance still requires to be solved. In the global practice there are three basic widely applied patterns of distribution of tax authorities in the system of budgetary federalism: distribution of tax sources and their separate use; division of the received tax incomes; sharing of the same tax base.

At present all three basic modes of distribution of tax authorities between levels of the budgetary system are formally used in the Russian Federation, but the role of these three forms is not identical. The division of the federal taxes among the budgets of all levels unequivocally dominates, second form by importance is sharing of the profitable base, and the role of separate use of sources is extremely negligible.

The result of essential overestimation of the status of many federal taxes is the necessity to distribute practically all federal taxes between the federal center and the subjects of the federation. Consequently there are significant redistributed flows, powerful counter financial resources flows, constant conflicts concerning transfer of the taxes and norms of their distribution. In 2000 the ratio of the share of the incomes of the federal budget and the budgets of the regions was 54,2 % and 45,8 % correspondingly. Meanwhile the Budgetary Code establishes 50 % to 50 % ratio.

The basic directions of reforming the system of budgetary federalism in a part of distribution of tax authorities are as follows:

1)  the unequivocal determination of the taxes on which the sharing of tax base by the federal, regional and local budgets can take place.

2)  the unequivocal determination of tax sources completely fixed with the subjects of the federation as sources of income of the appropriate levels. It seems expedient to transfer the determination both of the taxed base and the rates on the category of the taxes under the jurisdiction of the subjects, leaving for the federal level only the establishment of general principles of taxation of the given subjects.

3)  the unequivocal settlement of property rights concerning various kinds of natural resources with all subjects of the federation. This settlement should include not only generalizing formula about joint or common property on these or other resources, but also the mode of their operation, the right of taxation, the mode of utilization of the incomes from the property of resources etc.

4)  the stating the admissibility or impermissibility of transfer of various elements of economic (in particular, tax) burden beyond the limits of the jurisdiction of the subject of the federation.

One of the main shortcomings of the existing pattern of budgetary federalism is the sharp vertical misbalance of the budgetary system consisting in the significant excess of volume of the actually formed account authorities of the funded budgets of the subjects of Federation in comparison with their budgetary security. Excessive growth of the expenses load on the sub-federal level of the budgetary system calls for the subsequent redistribution of the remedies among parts of this system, causes the creation of counter financial flows, creates artificial grantability of the territorial budgets and increases the number of the regions - receivers of financial support. Here it goes about the refusal of a policy « of a carrot and a stick » and the formation of a new, stimulating inter-budgetary policy, perspective both for the territories - donors and the recipients. It is expedient to carry out the division of the expenses authorities including taking into consideration the global experience, which offers to use the principles of territorial conformity, subsidiarity and efficiency (the budget expenses are fixed at the level   that provides the greatest efficiency of their realization).

The next vital question of  inter-budgetary relations is the smoothing of the horizontal misbalance and the formation of the scheme of flattening payments. The necessity of flattening transfers is predetermined by a significant degree of differentiation of the subjects of the federation by their level of economic development, financial potential and budgetary income per capita. In the Russian Federation the parameter GNP per capita varies from the minimum to a maximum within the limits of 14,5 times (in Australia 1,4 times, Canada 1,8 times, Switzerland 2,2 times, Brazil 8,3 times).

The working model of transfers at the expense of the federal fund of financial support to the regions does not yet meet the requirements of efficient development of the national economy of the state as a really federal one, despite its constant improvement The number of regions receiving transfers from the federal budget does not decrease but grows: in 1995: 66, in 1996: 75, in 1997: 81, in 1998 – 1999: 76 subjects of the federation. Average grantability of the budgets of the subjects of the Russian Federation constituted 20 % in 1999 according to the calculations of the Russian Ministry of Finance and differs from 1 up to 90 % of the total sum of the incomes. Thus, the practice of transfers from the federal budget to the budgets of the subjects of the Russian Federation has not only resulted in flattening the level of socio-economic development of regions, but has also aggravated their discrepancies. The dependence of the regions from the help of the federal budget increases.

The flattening of the budgets by the level of income under the conditions of essential differentiation of the level of the income of the population and the level of prices in the regions does not lead to a real flattening of the financial possibilities of the regions in ensuring the population with the defined standard set of state services. Attempts to introduce the adjusting of the ratio of expenses per capita (either by economic regions or by groups of regions) unequivocally raise the interest of the subjects of the federation in escalating the current expenses to the detriment of the expenses of capital character. The accounting of current expenses and the insurance of the incomes, sufficient to cover the defined level of the accounted current expenses of a scheduled period to the subjects of the federation, introduces a subjective element.

It seems expedient to reconsider the approach of the definition of the transfers and henceforth to understand financial flattening not only as the flattening of the incomes of the budgets of the subjects of the federation, but also as the financial mechanism of flattening of financial possibilities of submission of a definite standard (or minimum guaranteed) level of state services to the population. It is also expedient to define the volumes of financing of the expense authorities of the budgets of all levels on the basis of the state minimum standards.

The state minimum social standards are regulated by the state qualitative and quantitative characteristics of major social needs of a person at the minimum necessary level, availability of which is guaranteed by the state on a free or paid basis at the expense of budgetary funds or non-budgetary funds. Minimum social standards are individual or grouped specific parameters of necessary security with major social services and values in their natural form according to their classification.  The minimum necessary standards of expenses are a monetary expression of social standards, they are differentiated as far as the regions and even municipal formations are concerned. Today’s task is to work out the norms of expenses at the federal level, which is extremely necessary for the improvement of the system of transfer payments.

It seems that the priority in the reformation of the pattern of horizontal flattening should be the adoption of the Law on Budgetary Flattening coordinated with all subjects of the federation. It is the law, rather than the annually reviewed technique, that should regulate the principles and mechanisms of granting to the regions the flattening transfers. Thus, the normalization of the inter-budgetary relations demands the creation and legislative stating of the precise and transparent mechanism of horizontal flattening which does not permit the hidden redistribution of authorities and functions.

The radical changes of the transfer policy directed to the increase of the financial independence and the responsibility of the regions, encouragement of their own efforts in overcoming budgetary crisis, growth of profitable basis of the regional and federal budgets, acceleration of socio- economic reforms, are necessary in such conditions.

It is necessary to note that there are definite positive shifts in the sphere of inter-budgetary relations. Regulated separation of expenses and incomes among the budgets of all levels has already started; the obligations of the regional and local budgets assigned to them without determination of the sources of finance have been reduced. In 2001 the Government of the Russian Federation should develop and affirm the program of the development of budgetary federalism for a period till 2005. Its basic objective is the establishment of a precise division of expense and profitable authorities allowing the provision of financial independence and the responsibility of the regions, the increase of their interest in the efficient management of public finance and the support of economic development of regions.

At the same time deeper and more vigorous reforming is required. The modernization of the budget-tax relations within the framework of the accepted pattern of fiscal federalism demands the following measures: 1) the precise separation between the levels of power of the terms of reference, on the basis of which it is necessary to define volumes of obligatory public expenditures of each level 2) the change of proportions of tax receptions in the budgets of different levels with the purpose of reducing the grantability of the regional and local budgets, the growth of their financial self-sufficiency 3) the transition from the universal grants to a system of extremely located subventions 4) the application of special procedures to increase the productivity of financial support of the regions.