Some changes into the draft budget thegovernment introduced before its second reading on 25 December taking intoaccount the situation on the financial markets formed by the November financialcrisis. As a result of GKO yield growth, expenditure on the domestic debtservice was increased by Rb 7 bn which, to certain extent, was offset by theexpenditure on the foreign debt service--by Rb 3.6 bn, of which on tied foreigncredits--by Rb 3.3 bn, and on contributions to the internationalorganisations-- by Rb 0.3 bn.

As table 11 well shows, as a result of allamendments, the draft 1998 budget undertook some transformations. Submitted forreview by the State Duma on 25 August 1997, the draft budget foresaw the volumeof GDP of Rb 2,750 bn. Compared with the first variant, the draft budgetapproved in the second reading envisaged the volume of GDP of Rb 2,840 bn.Budget revenues are being planned at the level of 12.94 per cent of GDP whichis by 0.6 per cent more than in the first variant. Expenditures were increasedby 0.43 per cent which allowed to somewhat reduce the forecast level of thebudget deficit. Main changes in the revenue side of the budget are related to arevenue increase from income tax by 0.7 per cent of GDP and somewhat increasein the volume of excises and payments for the use of natural resources as aresult of the amendments introduced into the tax legislation. On the otherside, the revenue part of the budget was reduced by an amount planned accordingto the Tax Code of the tax on capital gains (0.36 per cent). Moreover, plannedproceeds from VAT were reduced by 0.59 per cent of GDP.

Among major changes in the expenditure partof the draft budget which were adopted during the second reading in the StateDuma should be noted an increase of expenditures on the national economy by0.27 per cent of GDP at the expense of increasing expenditure on agriculture bytwofold and financial assistance to the budgets of different levels--by 0.4 percent of GDP and expenditures on the targeted budgetary funds by 0.23 per centof GDP. Simultaneously expenditures on the international activities were cut by0.26 per cent, on the social security policy--by 0.1 per cent ofGDP.

After the adoption of the draft budget in thethird reading on 5 February 1998, some of its expenditure items were amended.In particular, expenditure on state administration and fundamental research andassistance to scientific and technical progress were reduced by 0.13 per centof GDP and 0.1 per cent of GDP correspondingly. On the whole, comparing thedraft 1998 budget adopted in the third reading with the execution of 1996 and1997 budgets, one can note planned growth of budget revenues at the expense ofthe growth of budget tax revenues (by more than 1.5 per cent of GDP comparedwith 1997) which is being somewhat levelled by a decline in the non-taxearnings at the expense of a reduction in proceeds from public property by 0.06per cent of GDP, proceeds from the sale of the public property--by 0.41 percent of GDP. An increase in budgeted expenditures and deficit are being planned(about 2.3 per cent of GDP and 1.43 per cent of GDP correspondingly comparedwith 1997). Among the expenditure items, the biggest expenditure growthcompared with 1997 is being planned on the international activity--by0.2 percent of GDP, science--0.14 per cent of GDP, social services--by 0.56 per centof GDP mostly at the expense of the growth of allocations on culture (0.13 percent of GDP compared with 0.04 per cent of GDP in 1997). It is worth notingthat according to the budget law enacted by the State Duma in the fourthreading, the government is allowed to cut proportionately the budgetexpenditures and direct saved funds (not more than Rb 18 bn) to financing thestate debt service in case the actual sum allocated for that purpose overshootsthe sum fixed in the budget law. An important aspect of the budget law enactedin the fourth reading is the right of the government to carry out proportionalsequestration of the expenditure items in case of revenue shortfall eachquarter but not more than by 5 per cent of the planned expenditures. It isworth noting that the government proposal to reduce expenditures by Rb 28 bn insome way looked better compared with the right for the expendituresequestration. The reason is the fact that the recipients of the budget fundswill in their majority be guided by the targets of the budget expenditureswhich can result in a chain growth of non-payments in the economy as a resultof overestimated expectations.

Fiscal federalism.While drafting and adopting the 1998 federal budget, steps were taken to reformthe distribution of the financial assistance to the budgets of the Federationsubjects out of the federal budget by way of transfers from the Fund for thefinancial assistance to the regions (FFPR). The volume of the FFPR was reducedfrom 15 per cent in 1996-97 down to 14 per cent of the federal budget taxrevenues except customs duties. Attempts directed at the improvement of thesystem of interbudgetary relations were aimed at providing a more conditionedcharacter (possibility to adjust the amount of transfer in case of a failure toenforce the federal standards while reforming the housing sector), a moretargeted one (introduction of a special transfer in the amount of 3 per cent ofthe federal budget tax revenues accrued to the territorial funds of theCompulsory medical insurance through the territorial Treasury agencies) as wellas a reduction in the number of recipient regions (by way of an additionalreducing ratio using the rate of allowed overshoot of budgeted expenditure of asubject of the Federation over its revenues to the tune of 10 percent).

On September 10, 1997, the State Duma enactedthe Federal Law No. 126 FZ "On Financial Basis For the Local Self-government inthe Russian Federation" which was signed into law by the President on September25. That law permanently assigns a number of regional and federal taxes formunicipalities. Before the adoption of that law there was no single legislativeact regulating financial relations between regional and local budgets in thearea of sharing the regional and federal tax revenues. For example, the Law "Onthe basis of the budgetary rights and rights to form and use extra-budgetaryfunds of legislative and executive branches of power of the republics whichcomprise the Russian Federation, autonomous oblast, autonomous okrugs, krais, Cities of Moscow and St.Petersburg and Bodies of Local Self-government" provided the paymentrates from the income tax and the property tax for enterprises. The Law "On thefinancial basis for the local self-government" provided minimum fixed paymentrates to the municipal budgets on the following federal and local taxes: profittax, personal income tax, value added tax on goods and services produced on theterritory of the Russian Federation, property tax on enterprises,correspondingly in the amount of 5 per cent, 50 per cent, 10 per cent, and 50per cent from the share of a subject of the Federation on average for asubject; on excise taxes on liquor, vodka and alcohol beverages--5 per cent andon the remaining goods--10 per cent of the share of a subject of the Federationon average for a subject.

However new rate will not significantlyinfluence the volume of revenues of the local budgets. Our estimates show thata bigger share of the corresponding tax receipts compared with the shareprovided by law remained in the vast majority of municipalities during1996-1997.

The adopted law envisages the formation ofthe Fund for financial assistance to the municipalities on the regional level.The main purpose of the Fund consists in creating possibilities for a moreobjective sharing of financial assistance from the budgets of the Federationsubjects. The disbursement of funds from the Fund can be carried out by usingthe single for all municipalities of the RF subjects criteria. That way,preconditions are created in order that the non-targeted financial assistanceto the local governments is shared between the local budgets on the basis of"transparent" approach and was available for forecasting and supervision of thelegislative bodies and the electorate.

Forecast of the federal budget revenues

While drafting the forecast for the 1998budget revenues, we considered two scenarios for the economic development.According to the first scenario, the real GDP will drop by 1 per cent and theprice growth will come to 5 per cent; according to the second scenario thegrowth of GDP next year will amount to 3 per cent, and the price growth withconstitute 10 per cent.

Under those circumstances and assuming thatthe monthly seasonal movement through time of the real GDP remains in 1998 atits 1997 level, we have obtained two GDP volumes which correspond two scenariosof economic development. One constitutes Rb 2,850 bn on the assumption for thereal GDP growth and second constitutes Rb 2,750 bn on the assumption of thereal GDP decline in 1998. While forecasting a possible level of tax withdrawalsfor 1998, we assumed that the 1998 level will remain at its 1997 level whichconstituted 9.1 per cent of GDP. Under such premises, tax revenues willconstitute Rb 259.3 bn (GDP--Rb 2,850 bn) and Rb 252.6 bn (GDP--Rb 2,780 bn).In 1997 the growth of the shortfall constituted 1.23 per cent of GDP. If thegrowth of the shortfalls of tax receipts remained at its 1996 level, then inthese circumstances the tax revenue level would constitute 10.33 per cent.Under such level of tax withdrawals, the taxes in 1998 can constitute the sumof Rb 294.3 bn and Rb 286.8 bn correspondingly under the growth of the real GDPand under its decline by 1 per cent.