Transcript Межбюджетные отношения в России: основн

Institute for the Economy in
Transition
Consortium for Economic Policy
Research and Advice
Ilya Trunin
Reform of Fiscal Federalism in Russia:
Budget Constraints at the Subnational
Level of Government and Subnational
Fiscal Behavior
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Kingston, ON - November, 22 2004
General Overview of the Project
• Review of the recent reforms in the area of fiscal
federalism in Russia (2001 – 2003)
• Analysis of the impact of the reforms on the fiscal
behavior of the regional governments in Russia
• Analysis of the redistribution and stabilization features
of the system of intergovernmental transfers and tax
sharing since 2001
• Modeling the budget constraints of the regional
governments in Russia
• Analysis of the institutional aspects of the
intergovernmental fiscal relations mechanisms
• Recommendations and economic policy options for the
next stage of reform starting in 2005
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Main Results of the Project
• Extension of the fiscal behavior and fiscal
redistribution models we built earlier for the
period of 2001-2003
• Analysis of the soft budget constraint problem as
applied to subnational governments behavior, its
factors, effects etc.
• Analysis of the soft budget constraint problem in
different countries
• Analysis of theoretical models of subnational
budget constraints and empirical estimates for
different countries
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Main Results of the Project (continued)
• Theoretical model of subnational
government budget constraints based on the
game theory approach
• Empirical estimates of the budget
constraints of the regional governments in
Russia
• Review of the institutional features of the
fiscal federalism systems
• Policy options and recommendations for
economic policy in Russia (in work)
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Intergovernmental Arrangements in the
Early Transition Period
• Sharp decrease in public revenues during transition to a
new tax system
• Decentralizing public expenditures instead of cutting
them down (from about 60% GDP)
• Need for preventing the federation from decay
• Emerging of the practices of unfunded mandates as an
alternative to decrease consoldated public expenditures
in accordance with revenue possibilities
• Using intergovernmental fiscal transfers and shared
taxes in political process
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Results: unstable and inefficient system of
intergovernmental fiscal arrangements
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First Stage of the Intergovernmental
Fiscal Reform – a 1993 Constitution
• New principles of federal-regional-municipal relations –
similar to many of the modern federations
• Legislative allocation of tax revenues and taxing powers
across levels of government – to a possible extent
• New system of intergovernmental transfers with its key
element – formula-based equalization grants
• Growing amount of unfunded mandates and political
reasons (the federal government kept being dependent
on strong regions) hampered the fiscal reform process
Results: Excessive decentralization in case of reach regions
and strong centralization concerning the majority of the
subjects of the Federation
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Second Stage of the Intergovernmental
Fiscal Reform – a 1998 Crisis
• The process of the federal grants allocation went out of
control
a sharp decline in tax revenue
• Introduction of new principles of equalization grants
allocation
• Refraining from changing the results of formula-based
calculations in the parliament as well as from providing
large discretionary grants
• New proportions of the tax revenue allocation between the
federal and regional budgets
• Drafting conceptual programs of the intergovernmental
fiscal relations reform
Results: A new framework for allocation of resources
across levels of government
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The Main Features of the Federal Grants to
the Regions at Present
1. Equalization Grants – a formula-based mechanism, equalization of
regional fiscal capacity adjusted for expenditure needs differentials
2. Compensation Grants – formula-based specific purpose grants
aimed at funding certain federal mandates
3. Regional Finance Reform Grants – conditional grants to regions
performing regional finance reform program
4. Social Expenditure Grants – matching grants aimed at funding
certain most important regional expenditures
5. Regional Development Grants – specific purpose grants to finance
regional public investment in infrastructure
6. Other Grants and Loans – numerous grants (road construction,
compensation for changes in federal legislation, etc) allocated mainly
on discretionary basis
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Tax Reform and Intergovernmental
Fiscal Relations
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•
•
•
•
•
•
•
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Main Regional and Local Taxes
Before the Tax Reform of 2000-04
Corporate Income Tax (in part)
Road Tax (corporate tax on the
turnover)
Housing and Communal tax (tax on
the corporate turnover)
Corporate Tax on Assets (similar to
the property tax)
Sales Tax
Land Tax (both on individuals and
businesses)
Individual Property Tax
Other regional and local taxes and
fees on businesses (on school
maintenance, police etc.)
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•
•
•
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•
•
Main Regional and Local
Taxes After the Tax
Reform
Corporate income tax (?)
Corporate property tax
Tax on Motor Vehicles
Individual Property Tax
Land Tax
Presumptive Tax for Small
Businesses
“Self-taxation”
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Adjusted Fiscal Capacity Equalization
Principle in Russia
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Federal Grants to the Regions Since 1992 (%
of GDP)
3,5%
3,0%
Other Formula-Based Grants
% GDP
2,5%
Compensation
Grants
2,0%
1,5%
Other Federal Grants
and Loans
1,0%
Equalization
Transfers
0,5%
0,0%
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1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
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Tax Revenues of the Different Levels of
Government in the Russian Federation (% GDP)
40%
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35%
30%
Regional Budgets
25%
20%
15%
Federal Budget
10%
5%
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0%
Off-budget Social Funds
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Regional Budgets
12,4%
14,3%
13,06%
11,9%
11,6%
12,7%
11,5%
10,4%
10,2%
9,6%
10,0%
10,0%
Federal Budget
15,8%
10,3%
11,2%
10,7%
9,9%
9,4%
8,8%
10,7%
13,2%
16,2%
18,6%
18,0%
9,7%
10,6%
9,4%
8,2%
8,2%
7,7%
9,6%
8,6%
9,5%
8,2%
5,6%
5,7%
Off-budget social funds
Positive Impacts of the Reforms
• The new system has been established that has got many features
of an efficient system of intergovernmental fiscal equalization
• Federal government started to base its calculations on the fiscal
capacity and expenditure needs indicators rather than on the actual
revenues and expenditures in the previous periods (see
Kadotchnikov, Sinelnikov, Trunin (2002))
• The procedures of formula-based calculations has been elaborated
and introduced to the budget planning practices
• Compensation of unfunded mandates
• Regional (and federal) governments started to get used to the new
philosophy of equalization – unified approach on the basis of the
independent statistics instead of the case by case ad hoc agreements
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Current Deficiencies of the IGFR System
• Large amount of unfunded federal expenditure mandates
denies fiscal autonomy of the regional governments
• Low taxing powers at subnational level of government:
Limits the fiscal autonomy of regional and local governments
Caused by objective reasons (expenditure obligations set by
federal mandates, quality of tax legislation)
• Lack of development at the level of municipal governments
• Growing resources allocated among regions at discretionary
basis causes soft budget constraints and strengthens political
influence of the federal center
• Uncertainty of tax and transfers allocation mechanisms
undermines the efficiency of regional and local decisionmaking
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Reasons for Deficiencies
• Large amount of unfunded federal mandates that
enable regions to apply for additional grants and
federation – to influence regional fiscal decisions
• Unwillingness of the federal center to lose political
control over regional governments
• Many reforms in different sectors (taxation, natural
monopolies etc.) at the same time lead to seeking
compromise in less important areas (like IGFR)
• A real IGFR reform should follow a general federal
reform that will effectively start in 2005 only
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Main Hypotheses (a Fiscal Behavior Model)
Implementation of the formulabased procedures
The equalization transfers
allocation depends more on
fiscal capacity and expenditure
needs indicators than on actual
revenues and expenditures
Allocation of additional federal
revenues based on
discretionary mechanisms
Less importance of fiscal capacity
and expenditure needs
indicators for the total transfers
as compared to 1999-2001
period
Centralization of tax revenues
in the federal budget and
compensation of regional
losses caused by the tax
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Growth of the gap between
revenue and expenditure
indicators while the total
transfers allocation
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Main Hypotheses (a Redistribution and Stabilization Model)
Growth of the interregional differentials in
the real per capita GDP
Growth of the fiscal transfers
progressivity with respect to the
gross regional income
Growth of the federal taxes
progressivity with respect to the
gross regional income
Centralization of the tax
revenues induces by
extraction of oil and
other natural resources
Growth of the federal taxes
progressivity with respect to the
regional tax revenues
Growth of the federal net tax
(federal taxes less federal
transfers) progressivity with
respect to regional income
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A Soft Budget Constraint Problem – Definitions
• Economic agents could take decisions influenced by
the expectations of the additional financial resources
from the principal (similar to a moral hazard
problem)
• A multi-tier structure of government has incentives
for a soft budget constraints (SBC)
• Two main negative effects of the soft budget
constraint:
 Bad financial discipline (accumulation of debt,
inefficient fiscal decisions)
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 Inefficient growth of public expenditures originating
from the additional resources expectation
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A Soft Budget Constraint Problem – Experiences
• Two ways of preventing the SBC problem in a
multi-tier government countries:
 Institutional – creation of the market and public
institutions that prevent emerging the SBC
 Hierarchical – mechanisms involving control by the
central government over the subnational governments
• Institutional mechanisms proved to be more
effective (USA and Canada):
 Long-term anti-bailout policy
 Devolving responsibility for the borrowing and other
fiscal decisions
 Effective political mechanisms in a federation
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A Soft Budget Constraint Problem – Experiences
(continued)
• Mechanisms of hierarchical control could be
inefficient in large and multi-tier federations:
 Scale of problem: “too big to fail” reason (Germany)
 Political influence of subnational governments (Brazil)
• Efficient strategy in a multi-tier government structure
should include decentralization of responsibilities
(negative examples of China and Ukraine)
• Hierarchical control could be effective in small
unitary countries (Norway, Hungary)
• SBC problem could be solved (Argentina)
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A Soft Budget Constraint Problem in Russia
• The Russian Constitution does not contain clear
division of responsibilities between levels of
government
• Lack of market and public institutions aimed at the
making subnational governments responsible for
own fiscal decisions
• Unfunded mandates makes the federal government
implicitly responsible for revenues and expenditures
of subnational governments
• Political weakness of the federal center and
compromise-seeking made the hierarchical control
mechanisms ineffective throughout the 1990-s
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A Soft Budget Constraint Problem in Russia Mechanisms
• Existence of various kinds of discretionary transfers
with unclear mechanisms of allocation
• Nontransparent public finance system, the federal
center is unable to control expenditures for the
purposes of compensation grants when they are
mandated to regions
• Possibility of borrowing from non-market sources:
 employees in the public sector
 service providers (electricity, heating, natural gas)
• Numerous and annual examples of bailouts of
regions and municipalities
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Main Features of the Current Reform Plans Related to
Intergovernmental Fiscal Relations
• Elimination of unfunded mandates: normative
regulation, financing and administration powers will
be clearly assigned to different levels of government
• This envisages increasing role of Compensation
Grants that will finance federal mandates imposed
on regions
• Increasing fiscal autonomy of regional and
municipal governments (more on expenditure that
on revenue side)
• Simplification of the transfers allocation formula
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Main Features of the Current Reform Plans
Related to Intergovernmental Transfers
• Actual start of the reform at the sub-regional level
(implementation of a new system of different grants
types to municipalities of 2 types)
• Need for education of regional authorities that will
implement the new transfers system in a 2-type
municipal structure
• Making the head of subnational governments
nominated by the federal center
• Introduction of “negative transfers” at the subregional level
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Further Reform Agenda
• Creating incentives for responsible behavior at the
regional and municipal levels of government
• Extensive usage of matching grants to pursuit
federal objectives at the regional level
• Creating unified system of federal grants to regions
including various kinds of present discretionary
transfers (road construction, investment programs,
ad hoc grants)
• Moving to real equalization of fiscal capacity from
grants allocation according to “normative” revenues
and expenditures
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