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Number 4(8), autumn, 2003
Number 8 of the journal Kazan Federalist (in english)
KAZAN CENTER
OF FEDERALISM
AND PUBLIC
POLICY
/ Kazan Center of Federalism and Public Policy / Publications / Journal Kazan Federalist / 2003 / Number 4(8), autumn, 2003 / Bases of intergovernmental relations between the center and the regions return to homepage
Bases of intergovernmental relations between the center and the regions
 
 
 

:
  • Vadim Khomenko, Nataliya Kuliagina
The political and economic aspects of the organization of intergovernmental relations first became a crucial issue at the national and regional level during the times of the collapse of the Soviet Union. In that period, the trend toward disintegration of the common economic space formed and developed as well. The federal center also demonstrated then that it was incapable of financing most of its former financial obligations. The chaotic process of decentralization of regional finances continued until the mid-1990s. Later on, there were developed more or less unified approaches to managing accruals and deferrals which mostly replaced former individual bilateral agreements.

Vadim Khomenko*

Nataliya Kuliagina

Bases of intergovernmental relations between the center and the regions

 

Global genesis and initial methodological conditions for problem solution

 

The political and economic aspects of the organization of intergovernmental relations first became a crucial issue at the national and regional level during the times of the collapse of the Soviet Union. In that period, the trend toward disintegration of the common economic space formed and developed as well. The federal center also demonstrated then that it was incapable of financing most of its former financial obligations. The chaotic process of decentralization of regional finances continued until the mid-1990s. Later on, there were developed more or less unified approaches to managing accruals and deferrals which mostly replaced former individual bilateral agreements.

It is important to keep in mind that development of intergovernmental relations and searching for an optimum variant is an ongoing process taking place in all developed countries. It would be incorrect to reduce it only to the forms of crises in politics and economy. It is well-known that competition between regions with high degree of tax and budget autonomy have greatly contributed to the successful development and economic growth of such countries as the Netherlands of the 16th and the 17th centuries, England of the 18th century, the USA, as well as modern China.

Liberalization and the increased role of regional and local budgets in solving territorial development   tasks make a general trend in development of intergovernmental relations in the countries of Western Europe. In Germany, for instance, it happens in the process of replacing the model of cooperative budget federalism with the corresponding model of competitive federalism. At the same time, a crucial principle is brought to life: the means of regional and local budgets go towards realization of corresponding functions and initiatives of those levels. The functions of the federal center cannot be fulfilled with the means of the lower level budgets.

While there exist general principles of intergovernmental relations, their individual forms differ considerably. They are determined by specific socioeconomic conditions of each country as well as by the genesis of federalism and the mentality of the population and the leading elites. In this connection, tax shares between different levels of the budget, the structure of taxes left at the disposal of separate territorial budgets, as well as the amounts and direction of transfer deeds differ significantly from country to country. Therefore, it is incorrect to tie the model of intergovernmental federalism being formed in Russia with the Swiss, German, or American variants unless we distinguish a number of specific and general conditions which would make the Russian model similar or different to/from its corresponding analogs.

When forming the bases of the intergovernmental federalism model, it is even more important to define a corresponding goal or a group of goals which will initially direct the process. The goals usually include the following:

 Equalizing territorial development

 Solving national tasks and satisfying national interests (for instance, development of industrial and transport infrastructure, providing vital conditions for education and healthcare development, etc.)

 Creating stimuli for developing the initiative of separate territories.

 

The Russian list of goals can be extended with the following:

  promoting the sociocultural development of separate nations and peoples (which was not initially included in forming the German and the American models of intergovernmental organization);

 creating supplementary centripetal economic gravitation, the lack of which would cause the vast Russian territory to collapse under the influence of market processes.

 

The first Russian goal intensifies the processes of the budgetary decentralization, while the second one is oriented toward the opposite.

The necessity of realizing specific Russian intergovernmental goals is quite problematic from the market viewpoint since they weight the realization of many market laws. However, those goals have become a part of the mentality of ethnicities and peoples of the Russian state. Even though the strategic weakening of their action is inevitable, artificial forcing of that process can cause social and political cataclysms.

The above-mentioned goals, being initially contradictory to each other, can be achieved through a system of compromises. The complexity of arriving at a rational compromise in the Russian conditions is caused not only by possible increase in a number of goals, but also by a significantly varying system of tax revenue sources. The natural resource base of the Russian economy in general and economically strong regions in particular raises the problem of receiving and distributing the natural interest.[1] On the other hand, huge degrading property potential and results of numerous subjective approaches to governing regional economies demand that the role of property taxes be significantly increased.[2]

 

Level of intergovernmental federal development in Russia at the turn of the 21st century

 

Reforms of intergovernmental relations in Russia have gone through three stages: 1991, end of 1993 and 1994, and 1999-2001. In 1991, there was created the base of the new tax system of Russia. The intergovernmental relations part borrowed from the previous experience the regulating taxes distributing main tax revenues between the budgets of different levels. Chaotic decentralization caused the growth of territorial budget in revenues and expenses of the budgetary system, but it did not have a clear legislative base being regulated mostly by individual agreements.

At the end of 1993 and in 1994, there were created unified bases of federal tax deductions to the regional budgets. In the same period, tax authorities of the federal subjects were extended (basically, there was introduced a regional profit tax); there was created the Fund of Financial Support of the Regions (FFPR) which transferred its funds according to a certain formula.

The mid-1990s system of intergovernmental relations partially satisfied the external characteristics of intergovernmental federalism, but is still lacked a solid legislative base, being primarily oriented toward distributing (according to the yearly laws On federal budget) budget resources between different regions and levels of budgetary system. In 1996-1998, intergovernmental relations were affected by increased subjectivism; regional finances were in deep crisis; non-monetary execution of budgets and delay of payments to the government employees became massive; and the debt of regional and local budgets has grown incredibly.

In 1998, the government adopted the first of its kind medium-term Concept of reforming intergovernmental relations in the Russian Federation in 1999-2001. Its main tasks have generally been achieved. The main task was to form a new system of financial support of the federal subjects. During 1999-2001, the Fund of Financial Support of the Regions has been reformed. There has also been implemented a new, more objective and clear method of transfer distribution which is directed at equalizing the budget funds of the regions and creating stimuli for conducting rational and responsible budget politics in the regions.

The above-mentioned method evaluates regions budgetary security based on indices of budget expenses and tax resources (indices of tax potential). Transfers of FFPR are directed toward raising budgetary security of the regions with unit (per capita) tax resources below national average. Thus, the least developed territories are guaranteed a minimal level of budgetary security.

In 2001, there was created the Fund of Compensations which (unlike FFPR, equalizing general budgetary security) targets toward financing federal mandates (salaries, welfare payments and benefits, various allowances) i.e. obligations, given to the regional budgets by federal laws. in 2001, the Fund of Compensations distributed transfers and subsidies between all federal subjects (regardless of their financial security) in order to finance the federal laws On public welfare payments to citizens with children and On social protection of the disabled in the Russian Federation. Besides, within the federal budget there were also created the Regional Development Fund (supporting investments in public infrastructure) and Fund of Regional Finances Development (competitive support of budget reforms).

In accordance with the Constitution, there has been conducted an inventory of federal mandates and legislation regulating expenses of budgets of all levels; the Budget code has been corrected; measures have been taken to pay the taxes on sites of actual work of enterprises. There have been elaborated Temporary methodical recommendations to the federal subjects on regulating intergovernmental relations; the Program of technical support to the regional budget reform, supported by a loan from the World Bank, is being implemented. Individual agreements on benefits and privileges have been replaced with standard agreements defining the obligations of the federal subjects on rehabilitation of state finances.

However, the above-mentioned significant landmarks in the development of intergovernmental relations make us take a critical look at the actual condition of intergovernmental relations in the context of comparative international analysis.

The current system of Russias intergovernmental relations is characterized by the high level of centralization of financial budgetary flows. During 1990s, the share of income (before transfers) of the regional budgets has grown from 40% to 56% of the general budget income, being as low as 49% in 1999. This number continued decreasing in 2000, which was caused by the growth of federal incomes due to export duties and some changes in the taxation legislation. Nevertheless, it still exceeded 40%.

As can be seen in picture 1, by the end of the 1990s, Russia approached China and some economically developed federations, like Germany and USA, being ahead (on the degree of decentralization) of Brazil, India, and Mexico. Decentralization of expenses in the budgetary system of Russia was lower than that of incomes, which was mostly defined by relatively insignificant amount of financial aid in the incomes of regional budgets.

 

 

Picture 1. Share of regional budgets in incomes (before intergovernmental transfers) and expenses of consolidated budgets of some countries.

Note: all incomes before transfers, including split taxes. Evidence from Russia is dated 1999, Australia and Germany 1998, China, Switzerland and USA 1997, India 1996, Canada 1995, Brazil 1994.

 

In 1999, the share of federal transfers in general incomes of consolidated budgets of the Russian federal subjects comprised about 15% (picture 2). This state of things is significantly different from that in India, China and Mexico, where transfers comprised more than 30% of subnational budgets incomes, as well as from that in Brazil, where the given quotient exceeds 25%. Out of all countries from picture 2, Canada has a lesser share of transfers than Russia did. However, in Canada, the share of the regional budgets incomes is higher, which allows for a higher level of decentralization of expenses.

The share of transfers was different for different federal subjects. While many subjects did not get more than 10% of their income in transfers, more than 20 of the less developed regions received about 50-60% of their income in transfers.

 

 

Picture 2: Share of intergovernmental transfers in general incomes of regional (consolidated) budgets in some countries.

Note: evidence is given on the same dates.

 

The policy of transfer distribution of the early 1990s was not sufficiently transparent, taking into consideration the individual budgetary needs of the regions and thus weakening the stimuli and responsibility of subnational authorities. In the recent years, methodology and distribution of federal transfers to the regions have greatly improved. This has been demonstrated through concentrating the main part of the financial aid in the Fund of Financial Support to the regions-federal subjects (FFPR). The methodology and distribution of funds of this Fund became more transparent, rigid and less dependent on the politics of concrete regions. The FFPR transferred more than 1% of GDP in 2001. If we look at the combination of FFPR transfers with subventions and subsidies from the Fund of Compensations (since the expenses financed through those sources were previously taken into account by FFPR distribution process), we can conclude that about 60% (1.5% of GDP) of all federal financial aid was given through formalized channels in 2001.

However, beyond FFPR there still exist different less transparent ways of financial aid to the regions, such as various budgetary loans, debt relief (or deferral of repayment) and the so called mutual settlements.

The trend toward centralization of funds in the federal budget was continued in the beginning of this century (see the data of Table 1). As we can see from it, the 40% share of tax incomes of the federal subjects budgets in the consolidated budget of the Russian Federation witnesses that in this aspect, Russia has entered the group of typical developing countries.

 

Table 1

Tax income of the consolidated budget of the Russian Federation in 1996-2001 (shown in billions of rubles; until 1998 in trillions of rubles).[3]

 

 

1996

1997

1998

1999

2000

2001

Tax income of the consolidated budget

473,0

100,0

594,1

100,0

564,6

100,0

1007,5

100,0

1707,6

100,0

2345,0

100,0

Tax income of the federal budget

218,7

46,2

262,6

44,2

253,3

44,9

509,7

50,6

964,8

56,5

1460,4

62,3

Tax income of the budgets of subjects of the Russian Federation

254,3

51,8

331,5

55,8

311,3

55,1

497,8

49,4

742,8

43,5

884,6

37,7

 

At the same time, the total share of federal financial aid in the income of consolidated budgets of the federal subjects comprised 17% in 2001.[4] That is, increased financial aid to the regions in the period of increasing re-distribution of charges for the benefit of the federal center can be compared with the aid given by developed, rather than developing countries. Thus, the contradiction between reduced volumes of tax revenues in the regional budgets and a comparatively small volume of secondary re-distributed funds for the benefit of the regions, characteristic of the late 1990s, will remain in effect in the beginning of this century. As a whole, the general share of the regions in the expenses structure of the RF consolidated budget will remain low. It did not exceed 56.6% in 2001.[5]

The trend to reduce the opportunities of the regions in replenishing their budgets with taxes contradicts long-term trends in those European countries which are somewhat similar to Russia as far as their intra-federal financial interactions are concerned. Even in Germany, which has historically developed features of a unitary state, the share of lands in the structure of distributed tax revenues in the after-war time has grown practically one and a half times (see Table 2)

 

Table 2

Distribution of general tax revenues on different levels of government (%).

 

Years

1951

1960

1970

1980

1989

1996

Federation

58

54,9

54,8

50,1

48,7

47,8

Lands

28

30,6

33,1

35,4

36,9

39,8

Communities

14

14,5

12,1

14,5

14,4

12,4

 

Excessive compression of budget opportunities of the federal regions concerns not only quantity, but also quality. According to the existing estimates, more than 80% of tax revenues of regional and local budgets are formed at the expense of deductions from federal taxes. Only 15% of official (declared in papers) revenues of regional and local budgets are formed by the taxes managed in one way or another by the corresponding subnational authorities, and even these taxes face rigid federal limits (including the maximal rates). In this respect, Russia cannot compete with the majority of other federal states, especially such developed federations as Canada, Switzerland and USA where subnational authorities possess full autonomy in selecting taxes, tax deduction bases and tax rates.[6]

In general, only a few countries have a higher degree of budget centralization than Russia does (Mexico, Brazil).

The size and structure of expenditures of the regional authorities are an object of rigid governmental regulation. Besides, during 1990s, regional and local budgets were vested with significant obligations on various federal laws which were not supported by income sources (unfunded federal mandates).[7] Most of those mandates are concerned with payments or benefits in covering utility bills, expenses on transportation and other kinds of services for certain categories of population. Even though these mandates were no more than recommended since 1993, their indefinite legal status was the reason why they are often viewed as mandatory, especially by courts.

In this article, we do not have an opportunity to provide a detailed analysis of spending the funds, concentrated in the federal budget. However, we can follow the main tendency: as paradoxical as it sounds, the recently increased volume of those funds coincided with decreased level of financing of federal purpose-oriented programs of socioeconomic development, as well as with general tendency for reducing their number. The programs themselves lack proper structure, are not tightly connected with each other and are not oriented toward optimization of branch priorities and territorial location of production forces. Whether the regions will receive financial support is determined by an average Russian quotient of budget security, rather than by actual needs of the regions and their population. The lack of minimal social standards does not allow to evaluate the adequacy of expenses on corresponding goals. Besides, the potential of regions self-development is almost not taken into consideration. Thus, even though there appeared a trend toward formalizing the distribution of financial aid, most of it is still being distributed without exact criteria and procedures, which makes it a vital need to develop and legalize the methodology of budget equalizing and progress of intergovernmental relations.  Largely due to the above-mentioned reasons, the list of regions with high level of government subsidies practically has not changed. It includes (besides Chechen republic) the Republic of Tyva, Ust-Ordynsk Buryat Autonomous Area, the Republic of Dagestan, Komi-Permyak Autonomous Area, the Republic of Ingushetia, Jewish Autonomous Region, Agin-Buryat Autonomous Area, Karachayevo-Cherkess Republic, Koryak Autonomous Area, Kabardino-Balkarian Republic, the Republic of North Ossetia, the Republic of Adygeya, the Republic of Altai, Altai Territory, Chukot Autonomous Area, the Republic of Kalmykia, Briansk region, Amur region, Ivanovo region. The share of their expenses, financed by the government, only grows. It varied from 43% to 87% (in separate regions) in 2000, while in 2001 the range reached 48% to 86%. A big number of regions receive financial aid. For instance, in 2003, 71 out of 89 regions of the country received money from the Federal Fund of Financial Support to the Regions of the RF.

It is also important to mention that regional budgets are mostly replenished by the so called hard-to-collect taxes. It suffices to say the value-added tax comes to the federal budget in full, while the income tax comes only in the amount of 25%.[8] Gradual compression of formal budgetary opportunities of the regions and the fact that the federal center stops being directly responsible for the socioeconomic processes in the regions gave rise to the situation where the regions started looking for and developing non-budgetary forms of implementation of the regional authorities obligations and powers. It starts with the fact that regional administrations almost always use the resources of local enterprises and financial institutions in order to provide and finance budgetary services. For instance, many large industrial enterprises still have objects of social infrastructure, including housing, hospitals, and day care. They continue to support them (especially the profitable ones), even if they officially lie in the municipal competence. There exist other wide-spread ways of how large enterprises can subsidize regional economies: they can support unprofitable retail outlets, building new housing, roads, monuments, sport facilities, etc. The forms of payback compensation from the regional authorities include direct or hidden tax benefits, restructuring of debt, bankruptcy or competition protection and so on and so forth. Regional authorities often build similar relations with the so-called authorized commercial banks which service various financial flows of regional administrations, grant loans to cover budget deficit and issue promissory notes for tax and budget payments. In general, such practice is widely spread.

Creating various non-budgetary funds is another significant trend which is independently developed by the regional authorities. It greatly expands their opportunities of restructuring financial flows under the conditions of limiting politics of the federal center. Voluntary contributions in those funds can be regarded as a variant of non-formal fiscal policy. Finally, regional authorities often have special accounts for various fines, other non-budgetary payments and unplanned extra budget means gained through economizing on certain expenses. Moneys going through such accounts usually constitute up to 5% of the official budget income, but this quotient may be higher in separate regions. Regional authorities probably have other opportunities to consolidate funds remaining at their disposal. However, such practice means the following: regional authorities have to expand the sphere of informal relations with enterprises and organizations. The latter makes them dependent from the interests of certain regional financial and industrial groups and presents less opportunity for objective evaluation of the regions socioeconomic and market development. It is obvious, that it can also be regarded as a factor of corruption development. On the other hand, under the conditions of deficient formal funding of socioeconomic development, regional administrations can transfer their responsibility on the financial state of the region to the federal center.

In recent years, the government of the RF has undertaken a number of measures to solve the above-mentioned problems. The important step in that direction was The Program of Budget Federalism Development in the Russian Federation until 2005, adopted in 2001. The goal of the program is to form and develop a system of budgetary organization which would enable regional and local authorities to implement their own tax-budgetary policy within the limits of their legally set competencies and powers. Such system was also defined to provide the following:

  create long-term stimuli for the authorities of federal subjects and local self-government to implement a policy of economic development of their respective territories;

  maximally efficiently use the tax and other resources of respective territories to provide budgetary services;

  equalize citizens access (regardless of their residence) to primary public services and social guarantees;

  reach an agreement on issues of distribution of tax-budgetary powers across different levels of authorities;

 prevent and/or neutralize disproportions in regional development.

 

Some statements of this program were reflected in the budgets for 2002 and 2003. There also have been attempts to develop the statements of this Program into a system specialized normative acts.

However, it would only be possible in case methodological problems were solved, and the latter, in our opinion, does not receive sufficient attention.

 

Conceptual approach to the strategy of building a Russian model of intergovernmental relations

 

Analyzing the structure of goals the Russian model of intergovernmental relations is based on, we can notice that equalizing territorial development is a priority. The recently increased socioeconomic gap between different regions is being criticized. The positive dynamics of some regions development is usually associated with the concentration of industries and/or resources on their territories and special relations with the federal center. The latter has an element of truth. However, we cannot ignore the fact that there are poorly developing regions among those rich in natural resources and vice versa.

Unfortunately, the organizational element of this dynamic is barely taken into consideration, while its importance has been clearly demonstrated in the years of reforms. On the other hand, within the limits of agreements with their possible political appearances and certain legal contradictions included, there was going on an empirical search for a rational volume of rights and powers given to certain regions and supported by a corresponding amount of regional budgetary resources. Unfortunately, economic evaluations of realizing those rights and powers have not been conducted, either taking into consideration or not taking into consideration the use of natural interest.

The chaotic process of movement toward the model of competitive federalism (using the terminology of German models) has been substituted by backward movement toward cooperative budgetary federalism. The latter again demonstrated the lack of clear strategies in implementing Russian reforms, and, more importantly, the absence of their regional component. Externally, the whole process resembles a permanent counteraction between the federal center and the regions, where each party receives or loses certain privileges for itself with varying success. Due to the lack of sufficient number of serious arguments, results always resemble a plot or a political defeat.

Unfortunately, on the wave of the growing number of unitary elements, there appear extreme theoretical approaches, opinions and statements which, if realized, would take Russia away from the general context of European and international federal development. As an example, we can quote an opinion of a number of highly-rated (both politically and academically) authors: The regulating taxes are usually tied with the myth that the 50:50 proportion is claimed to protect the regional interests. But more than half of all taxes are collected on the territory of 10 federal subjects where 22% of the population lives; the latter are the ones which gain most from the decentralization of tax proceedings. The majority of the federal subjects and countrys population are objectively interested in partial redistribution of monies among regions, and therefore, in raising the share of the fiscal budget in tax revenues. According to the estimates of the Center of Fiscal Policy, in order to provide equal budget security for all federal subjects, it is necessary to concentrate 85% of tax revenues in the federal budget, and then redistribute half of them as financial aid to the regions.[9] It is obvious that we cannot support this opinion even in spite of the above-mentioned conclusions. 

Based on the above-said, we can outline the following stages of formation of the Russian system of intergovernmental relations which would meet the development needs of the Russian federal state:

1. Define the overall economic potential of each region, taking into consideration an interest part (referring to various kinds of interest natural resources, territorial, political, etc.)

2.  Increase the role of property taxes, since they are easily calculated and can stimulate the use of regions potential. The potential should be differentiated in separate elements (such as key and current assets, human resources, land, water, underground resources) which should be assigned separate tax rates. It is important to mark the parts of the regional interest structure which do and do not depend on the activity in the region. Say, the interest of the process of oil extraction from the new wells does not depend on the activity of regional leaders, individual enterprises or organizations. However, in case old unused wells start functioning again due to technological innovations developed in the region, the interest will be considered a product of that region. The situation will be viewed as such until these technologies are not used universally (i.e. by non-regional enterprises and organizations beyond the regional borders). Accordingly, the interest of the first kind will mostly go to the federal budget,[10] while the right to use the second kind of interest will be assigned mostly to the region. 

3. Taking into consideration varying structures of industrial capital and varying speeds of its circulation, income tax should be the second most important element of the taxation system. It functions as a correcting tax.

4. It is crucial to provide minimal subjectivism and, simultaneously, reach a real consensus between the needs and abilities of the federal center and regions in the process of selecting tax distribution forms. If we take into account the opportunities for stimulating regional management activity and simplifying tax relations between the federal center and the regions, the progressing point of view regarding total division of tax and tax revenues between levels of Russian budgetary system becomes even more attractive. In the process of splitting tax revenues, an element of political haggling will be inevitable, since it is supported by the active legislation which gives the federal government an opportunity to change the law on distributing tax revenues between different levels of the budgetary system. In addition to that, the rights of local and regional authorities to introduce taxes and define their rates should be extended considerably. It is recognized by classic theories, that regional and local authorities are better served by taxes with immobile or locally formed tax base permitting to avoid external negative effects and other problems. However, it is still necessary to see that both the splitting and the single-channel systems have certain advantages, as far as the system of long-term legal acts is concerned. In this case, the regions are interested in replenishing both their own and the federal budgets. We suppose that subjectivism and undermined stimuli for self-development can take place even in case of implementing not split tax system. The latter can happen if the federal center inflates tax rates without considering the volumes of regional taxes, the actual tax-paying ability of the regional enterprises and the needs for centralized funding of regional development.

The world already has tax-distributing models which combine the above-mentioned approaches in one way or the other. Russia must select the most suitable variant or a combination of variants for itself.[11]

5.  Assigning functions to a region and, respectively, tax volumes entering regional budgets should be conducted in accordance with norms of financing each of those regional functions. The number of functions assigned to the region should be determined by the possible payoff of means in question: if the efficiency of their use reduces after the assignment of function, then the region is not quite ready to tackle the function yet. It is a very simple step-by-step mechanism of measuring the rational volume of rights and powers of a region. If the tax base funds are not enough to implement a new function, then transfers or loans may be used to reach the goal.

6. The proposal of the Yabloko political movement in regard to giving local authorities the right to gain 50% of regional and 30% of federal taxes collected above plan on their territory deserves being approved of, since is stimulates the initiative of regional and local authorities to replenish both their own and the federal budgets. Another plan proposed by this movement suggests giving the federal subjects a right to gain 30% of the federal tax proceedings collected above plan on the territory of a given subject.[12] It is important to see that the foreign experience gives us an idea of a wide range of variants of how to raise the regional and local initiative for replenishing the federal budgets, when all parts of the hierarchy of power benefit from the profit. For instance, in the USA issue and place the so-called non-market federal stock for states and municipalities with high revenue position. The states and municipalities have to buy that stock using the funds gained from issuing their own regional and local bonded loans.

7. Generally, based on the above-said, we should currently strive for expanding the autonomy of regional and local authorities to determine the volume, structure and financing of certain kinds of expenses. However, such important shared powers as education and healthcare might gain from by being co-financed by local and regional budgets and federal subsidies, the latter ensuring the implementation of national minimal standards of providing the respective budget-covered services.

8. There should be developed and set certain time limits for a region to reach a desirable level of profit-earning capacity (i.e. the correlation of difference between the summed regional gains and losses and the regions gross product) and overall rating of socioeconomic development. If the corresponding goals are not reached by the set date, some re-organizational activities might be conducted to help the situation (the same would apply in case of critical number of late payments on regional loans):

  The region might be directly governed by the federal center;

  The region might become a part of a neighboring stably developing region;

   The region might fall under the jurisdiction of the creditor region.

The list of reorganizational activities can be extended. In any case, they should include a business base for regional development.

However, when forming the structure of the Russian intergovernmental organization and raising the issue of regional financial autonomy, it is important to bear in mind that if the federal government cannot handle rigid budgetary limits due to political or other reasons, decentralization of power might undermine the economic efficiency growth and macroeconomic stability in general. If the regional authorities grow almost certain to think that the federal center will compensate them for their local financial losses, they will be very little interested in managing their budgets responsibly, and the federal governments receiving compensation funds from loans or printing of money can produce a financial crisis. Prime examples of the latter are the crises in Argentine in the 1980s and in Brazil in late 1980s-early 1990s. Not keeping this circumstance in mind is one of the most painful phenomena of developing countries and countries in transition, drastically reducing the potential of their implemented reforms. Externally, it is frequently viewed as inefficient decentralization of financial systems in those countries. Therefore, the primary issues concerned here should be creating a legislative base of fiscal responsibility and rigid budget limits for regional authorities, as well as improving staff development of their financial organs.



* Vadim Vasilyevich Khomenko, Doctor of Science (economics), professor, director of the economics department of the Institute of socioeconomic and legal sciences of the Academy of Sciences of the Republic of Tatarstan (ISEPN AN RT).

Nataliya Gennadyevna Kuliagina, Candidate of Science (economics), research associate of the economics department of ISEPN AN RT.

[1] In the Republic of Tatarstan, the share of taxes with an interest element (such as land tax, property tax, payments for using natural resources), with exception of payments for using subsurface resources, made an insignificant share of all taxes 26%. Such situation is connected with the low tax rates, as well as with the fact that barometers of market are not used to determine the costs of natural management objects and real estate. For instance, cadastral value of land is used to compute the land tax; the balance value of property is also significantly below the market price which satisfies the businessmen; there does not exist a unified state-adopted system of taxation of natural resources use because the concept of interest-based natural management have not been realized; etc.

[2] As it has been demonstrated by the results of 2001, lowering the rates of a number of non-property taxes in order to bring out from the shade potential taxpayers has not proved to be efficient. For instance, tax income growth in Tatarstan was 2.1% in 2001 (from 47,884.3 million rubles to 48,694.1 million rubles), while the volume of industrial growth was 6.7%.

[3] Rossiiskii statisticheskii ezhegodnik. 2002: Stat. sb. /Goskomstat Rossii. M., 2002. pp. 531-533.

[4] http://www.iet.ru/.

[5] Estimations of IEPP: http://www.iet.ru/.

[6] For instance, income tax rates, charged by the authorities of different states in the USA, vary from 2 to 12%. In Japan, individuals pay the state tax, as well as that of prefecture and the local income tax.

[7] In 1999, responding to a corresponding inquiry, 68 out of 89 federal subjects presented data on composition and volume of federal mandates. Even though regional authorities usually did not include optional (in their opinion) mandates, the volume of 25 largest federal mandates (indicated by at least 10% of all regions) reached 60% of the expenses of the consolidated regional budgets.

[8] The Federal Law (Federalnyi Zakon) from 12.24.2002  #176-FZ O federalnom biudzhete na 2003 god (On federal budget in 2003 transl.).

[9] This opinion is a generalization of positions of the following authors: Iu. Beletskii, B. Granville, L. Grigoryev, V. Dudkin, A. Ivanter, P. Kuznetsov, L. Lopatnikov, N. Maksimova, T. Nesterenko, Iu. Petrov, V. Popov, G. Railo, S. Sinelnikov, B. Kheifets, V. Khristenko, S. Khursevich, E. Iasin and others. It was presented in chapter 3 of the book: Sotsialno-ekonomicheskie problemy Rossii. 2001. St.-Peterburg. Norma Publishing House.

[10] Certain distribution of this interest between the federal center and the region is possible, if we take into consideration necessary regional expenses to compensate ecological damage caused by production of natural resources. Besides, in some cases this kind of interest may be used for development of scarcely populated regions without other sources of income. In the latter case, temporary legal acts stating the use of the corresponding interest (or part of interest) as a source of income for regional and local budgets should be adopted.

[11] In the opinion of Viktor Khristenko and Aleksei Lavrov, five such models can be outlined: the Soviet, the Chinese, the American, the Canadian, and the German. (Delovoi Ural. 1998. December 25). The Soviet model suggests the highest level of centralized decision-making on regions revenues and expenses. The regions stimuli for increasing income and rationalizing expenses are reduced, and the load of the higher-level budget is constantly growing. The Chinese model combines the Soviet variant with the elements of single-channel system. Taxes are usually collected by agreement, individual legal norms are practiced, too. At the same time, the center does not interfere with the socioeconomic development of the regions meeting their tax goals. The leaders of the regions that have not met their tax goals are dismissed from their appointments. Such model creates certain stimuli for developed or privileged regions. However, it also promotes corruption, nepotism, merge of state authorities with business, bargaining around budget resources, etc. Rigid party leadership levels off those negative sides to a certain extent. The American model suggests a classic budgetary federalism model. The federation, the states and municipalities have their own non-overlapping taxes and even their own autonomous tax services. Financial aid is mostly distributed as goal-oriented subventions using definite formulas. Goals are determined by national priorities. The volume of financial resources redistribution is relatively small; inter-regional contrasts are rather significant. This model is of little use to Russia, due to lack of many primary conditions, primarily, civil society. However, certain elements, procedures and technologies can be adapted to fir the Russian reality. The Canadian model is essentially a socially oriented variant of the American model. The taxes here are partially non-overlapping, however, there are common taxes, too. In the process of distributing tax proceedings, the method of adding on to the rates is widely used: provinces and municipalities have a right to add their rates to the basic federal rate. There are various and quite sophisticated schemes of equalizing the budget security. This variant is close to the optimal combination of economic effectiveness and social justice. Many elements (adding on to the rates, equalizing schemes) can be adapted to fit the Russian conditions. However, the authors suppose that direct copying of the Canadian model in Russia may give rise to the political processes of decentralization, since the Canadian model assumes a rather loose federation. The German model is based on common taxes, and proceedings from them are distributed among all its levels. Partial redistribution (i.e. varying deduction norms) also takes place in order to bridge the gap between rich and poor lands. There is not much direct financial aid from the higher level budgets, but there exist numerous large federal and joint programs of regional development. Spending powers are distributed according to the principles of classic budgetary federalism. Social justice is provided in the process, but economic effectiveness is somewhat damaged. Many elements of the German model are close to the current Russian system (which can be explained by historical genesis: Russia and Germany are former empires, i.e. federations formed from above but not grown from below, like the USA, Canada and Australia). The authors think, that Russia should aim between the Canadian and the German models, adapting certain elements of the American experience in the process.

[12] Of course, here it is the principle that it important, not the respective distribution percentages of the above-plan proceedings (the latter have an element of subjective evaluation and can be further discussed in academic and applied contexts.)


 
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