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An analysis of distribution of financial aid from the federal budget across regions reveals that dependence of consolidated budgets of RF subjects on federal financial support somewhat increased in comparison with the preceding year: while in 2001 about 15 per cent of regional and municipal budgetary expenditures were financed from the federal budgets, in 2002 this indicator exceeded 17 per cent. This trend may be explained by the growth in the total amount of assigned federal funds discussed above (an increase in the amount of FFSR, assignment of additional types of federal aid, and the expansion of the list of federal expenditure mandates financed at the expense of subsidies and subventions from the Compensatory Fund). As before, the list of RF subjects most heavily financed at the expense of federal financial aid include such regions as the Chechen Republic, Republic of Tyva, Ust'-Orda Buryat Autonomous Okrug, Komi-Permyak Autonomous Okrug, the Republic of Dagestan, the Ingush Republic, the Republic of Altai, Yevreyskaya Autonomous Oblast, the KarachCherkesian Republic, Aginsky-Buryatsky autonomous okrug, the Karachayevo-Cherkesskya Republic, the Kabardian-Balkarian Republic, the Koryak autonomous okrug, the Kabardino RUSSIAN ECONOMY in trends and outlooks Balkarian republic, Aguinsky Buryat Autonomous Okrug, Koryakian Autonomous Okrug, the Republic of North Osetia.

On the whole, the analysis of trends in the development of interbudgetary relations in 2002 did not reveal any significant changes in comparison with 2001 with exception of fluctuations of some indicators, such as an increase in the total amount of federal interbudgetary transfers to the budgets of RF subjects and insignificant changes in the structure of tax revenues of regional budgets.

The Law on the Federal Budget for Year The law on the federal budget for year 2003 contains a number of substantial novations concerning the relations between the federal budget and the budgets of RF subjects, as well as formation of regional budgets. The most significant provisions of this legislative act as concerns interbudgetary relations and sub-national finances will be discussed below.

Distribution of Tax Revenues among Levels of Budgetary System The law on the federal budget stipulates some changes in proportions of the distribution of certain federal taxes among budgets of different levels necessary to compensate the losses borne by budgets due to the abolishment of taxes on motor road users and on vehicle owners since January 1, 2003.

The following most significant novations relating to changes in the structure of distribution of tax revenues among the levels of the budgetary system shall be pointed out:

First, the rate of excises on fuel and lubricants (gasoline, diesel fuel, and motor oil) due to the federal budget was lowered to 40 per cent. In the preceding years all revenues generated by this tax were due to the federal budget.

Second, the law on the federal budget stipulates that in 2003 the total amount of revenues from excises on tobacco products shall be transferred to the federal budget, while previously the revenues generated by this tax were equally apportioned between the federal budget and the consolidated budgets of RF subjects where respective taxpayers were situated.

Third, it was proposed to grant the 15 per cent share of revenues generated by land tax, which had been previously due to the federal budget, to regional and municipal budgets to be equally apportioned between these budgetary levels.

Fourth, the law on the federal budget for 2003 has corrected the faults characteristic of laws on the budget for 2001 and 2002, which just stipulated that revenues from excises on vodka and other alcohol products should be equally distributed between the federal budget and the consolidated budgets of RF subjects. As a result, in the course of administration of the revenues of the federal budget federal treasury offices distributed revenues from excises on vodka and other alcohol products in equal shares between the federal budget and the consolidated budgets of RF subjects at each stage of sales (both at the stage producers transferred goods to excise warehouses, and at the stage the goods were transferred from excise warehouses to the retail trade network. The law on the federal budget for 2003 stipulates that the total amount of excises on vodka and other alcohol products collected at the stage of transfer of goods to excise warehouses shall be due to the federal budget and the total amount of excises collected at the stage of transfer to the retail trade network shall be due to regional budgets. As a result, the revenues from excises on alcohol products are more evenly distrib INSTITUTE FOR THE ECONOMY IN TRNSITION uted across the countryТs territory and better correspond to the volumes of consumption of alcohol products across regions.

It is necessary to point out that on the whole the enacted novations concerning the distribution of tax revenues among the levels of authorities will result in an improvement of effectiveness of the system of interbudgetary relations. For instance, the transition to the new methods of apportionment of excises on alcohol products, centralization of excises on tobacco products and decentralization of a part of the land tax will result in more fair distribution of revenues among the levels of authorities, since these developments are aimed to centralize taxes imposed on the base unevenly distributed across the national territory, while tax revenues imposed on the immobile and evenly distributed base shall be centralized.

At the same time, it shall be pointed out that it is planned to decentralize and assign to the consolidated budgets of RF subjects a considerable portion of excise revenues from oil products (60 per cent). In the case it is taken into account that since January 1, 2003, the new procedure governing collection of excises on oil products, which transfers the obligation to pay excises to wholesale and retail trade, this centralization may be viewed as an attempt to redistribute excise revenues in favor of the budgets of RF subjects where oil is consumed.

This approach (not taking into account a possible decline in revenues due to deteriorated collection of excises) will allow to distribute revenues from indirect taxes on use of motor roads among regional budgets in accordance with evaluations of traffic intensity expressed via volumes of wholesale and retail sales of oil products. However, it would seem more feasible to organize collection of excises on oil products similarly to excises on alcohol products, i.e. a portion of the excise exacted from producers is transferred to the federal budget, thus eliminating ineffectiveness related to uneven distribution of respective plants across the national territory.

Financial Aid to Budgets of Other Levels The law on the federal budget for 2003 also contains a number of novations concerning distribution of financial resources provided by the federal budget among subjects of the Russian Federation.

The methods of distribution of resources from the Fund of Financial Support of Regions applied in the course of drafting of the law on the federal budget for 2003 have not changed considerably in comparison with the preceding year. Subsidies for equalization of budgetary security are still distributed among RF subjects basing on the comparison of estimated budgetary security, i.e. indicators of the per capita tax potential adjusted for the interregional index of the volume and cost of provision of base budgetary services. At the same time, 80 per cent of FFSR funds are distributed among all RF subjects where estimated per capita budgetary security is below the national average (the funds are distributed in proportion to the value of the aforesaid deviation), while the balance (20 per cent) is apportioned aiming to equalize per capita budgetary security indicators (the number of regions receiving subsidies from the per cent portion of the Fund and the target level of equalization is determined proceeding from the absolute amount of resources the Fund assigns for these purposes).

At the same time, some changes were introduced in the methods of distribution of subsidies aimed at the equalization of budgetary security and calculation of regional tax potentials and expenditure requirements. For instance, since 2003 the methods applied to distribute RUSSIAN ECONOMY in trends and outlooks transfers have envisaged allocation of so called compensatory payments to certain regions17.

These payments are primarily aimed, as formulated in the methods of apportionment of FFSR resources, to Уmaintain rates of growth in subsidies for equalization of budgetary security at a level at or above that of 2002 as adjusted for inflationФ (12 per cent). In other words, the amount of subsidies to each RF subject shall be set at a level at or below the target stipulated by the law for 2002 as adjusted for estimated inflation rates. The amount of payment is calculated as the difference between the estimated amount of transfer for 2003 and the amount of transfer received in 2002 as adjusted for the estimated changes in the price index (only for regions receiving FFSR financing in 2002). The total amount of these compensations made Rub. 14.7 billion, or 8.5 per cent of FFSR. On the one hand, introduction of such compensatory payments is conditioned by the necessity to obtain approval of changes in the methods of FFSR funds apportionment and initial data, on which the distribution should be based, from RF subjects whose share of transfers declines in relation to the changes. On the other hand, the use of the mechanism of compensatory payments can not be a permanent component of the methods of distribution of equalizing transfers, since the present methodology seems to be non-optimal proceeding from a number of considerations, while its improvement shall result in a decrease in the number of recipients of equalizing subsidies. In this situation maintenance of amounts of financial aid at the previous level would result both in the lack of incentives to enhance the effectiveness of the system of apportionment of transfers on the whole, and the lack of effort to enhance the effectiveness of fiscal policies in regions being major recipients of federal financial aid (excluding subventions for financing of federal expenditure mandates) exceptionally in the form of compensatory payments. Therefore, admitting on the whole the necessity to compensate for sharp fluctuations in financial aid to regions resulting from changes in apportionment methods, it seems that such a mechanism should be more flexible and its role should be reduced to a partial compensation of losses within a predetermined amount. At the same time, the use of such compensations should be justified by considerable changes in the methods and not be reduced to a mechanical repayment of the difference in received financial aid.

It shall be also pointed out that no changes were directly introduced in the methods of calculation of subsidies aimed to equalize budgetary security in 2003. Accordingly, the fluctuations in the amounts of financial support most probably resulted from changes in the initial data. For instance, in the course of calculation of the tax potential index for 2002 there were used initial data on the gross regional product for 1998 and 1999, while calculations for relied on average values registered in 1999 and 2000. Taking into account the fact that the maximal rates of economic growth were observed in 2000, new initial data even used in accordance with the old methods considerably affected the results.

According to the apportionment of resources of the Fund of Financial Support of Regions as stipulated in the law on the federal budget for 2003, the number of RF subjects not receiving FFSR financing remained at the level registered in the preceding year (18 regions).

The methods of distribution of subventions and subsidies from the Compensatory Fund also has not changed considerably in comparison with the preceding period. The only novation was the abolishment of financing of expenditures borne by the consolidated budgets of RF subjects in relation to privileges granted to the military, militia, employees of the Interior It shall be pointed out that in spite of the similar term, such payments do not relate to subventions and subsidies from the Compensatory Fund.

INSTITUTE FOR THE ECONOMY IN TRNSITION Ministry and Tax Police, and customs officials as concerns the payments for housing and public utilities services and communication services at the expense of subsidies from this fund. In stead of this item, the methods of distribution of the CF resources for 2003 envisage assignment of subsidies aimed to compensate for privileges relating to the payments for housing and public utilities services in accordance with the federal law УOn amendment of the law of the Russian Federation СOn principles of the federal housing policiesТ and other legislative acts of the Russian Federation as concerns the improvement of the system of payments for housing and public utilities services.Ф At the same time, proceeding from the initial data underlying the calculation of subsidiesТ amounts, it may be concluding that these subsidies are assigned exceptionally to compensate for privileges granted to disabled persons in relation to the payments for housing and public utilities services.

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