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The 1996 Law on Budget does not envision asexpenditures the expenses on servicing the GKOs; neither does it envision thevolumes of maturity payments on GKOs as financing (just as it was before). Atthe same time, the expenditures item includes the expenses on repayment of thedomestic debt (0.6% of GDP), which need to be accounted for in the financingsection. The growth of the expenses on the service and repayment of the Statedebt (in the Budget it amounts to 0.4% of GDP, compared with 1995) is,objectively, conditioned by the transfer to the Budget financing by borrowingsin the domestic money market and the growth of the Russia’s external debt. But this processhas no relevant reflection in the Budget.

The Budget increases by 35% theexpenditures on the assistance to the other levels of the State administration(from 1.76% of GDP in 1995 to 2.38% of GDP). It is known that, beginning from1994, the mechanism of relationships between the Federal Budget and the budgetsof subjects is based on the use of the uniform methodology of calculation ofthe financial assistance to the regional budgets from the special Fund forFinancial Support; the latter is formed within the Federal Budget at theexpense of 22% (in 1994; compare with 27% in 1995) of the federal share of theVAT.

In accordance with the Law on the Budgetfor 1994, the Fund for Financial Support of the subjects of the RussianFederation gave assistance to such subjects of the Russian Federation which hadthe per capita budget income for the preceding year lower than the average inthe Russian Federation (Federation subjects needing assistance) and to suchsubjects for which the own incomes and the additional money received from theFederal Budget were insufficient to finance the current expenses (Federationsubjects needing special assistance).

The main drawback of this approach was thatthe calculations of the average per capita income did not take into account theincomes of the regional extra-budgetary funds (including the hard currencyfunds). Besides, they were not corrected neither accounting for the use, in1993, of the differentiated rate of the VAT, nor by the sum of the grants andcredits from the Federal Budget (including for the targeted programs). Thecalculations of the transfers failed to take into account such strategic factoras the differentiation of the prices levels by regions. As a result, relativelyhigher grants were given to the southern regions at the expense of the northernones, which is, obviously, against any logic. Numerous regions sup[port the lowprices level just due to the federal transfer payments allowing to financesubsidies.

The approach used in 1995 was, on thewhole, similar. Herewith, as it has already been noted, the fact is importantthat the monthly statistics of the Ministry of Finance does not reflect thereal volumes of the resources transferred from the Federal Budget to the localones, because, in many cases, the Ministry of Finance decreases the sums of thetransfers, increasing the share of the VAT kept by regions. This results indifficulties with the analysis of the real situation with the grants to localbudgets.

The draft Budget for 1996 supposes certainchanges of the order of formation of the fund for financial support of regionsand of determination of the shares of individual regions in this fund. The fundfor financial support of regions is supposed to be formed not by the allotmentsfrom the VAT, but from the 15% of the sum of the tax revenues of the FederalBudget (with the exception of the sums of the 10% Personal income tax and thesums of the import duties).

It is supposed, that, just as in thepreceding years, the financial assistance will be given to the regions with theannual budget income per capita lower than the average in Russia. Thecalculations of the budget incomes is based on the expected estimate of the1995 revenues, taking into account the projections for 1996. To determine theregions needing special support, a new method, differing from the earlier one,is proposed. The regions needing special support will be considered such ones,in which, in 1996, the volume of the budget incomes plus transfers isinsufficient to finance, in 1996, the budget expenditures (accounting for thecapital investments). Herewith, the expenditures forecast is based on thecurrent expenditures of the regions for 1991, taking into account the relevantdeflator indexes and certain corrections.

Taking into account the two statuses of theregions, the above fund is split into the two parts from which the transfersare to be allotted to the regions needing support and to the regions needingspecial support. The proportions between the two parts of the fund aredetermined on the basis of the calculation (according to the 1996 data) of thesums of the money making the difference with the average per capita budgetincome by the regions needing support, and the sums of the money making thedifference with the sums required to cover the current budget expenditures forall the regions needing special support. On this basis, the proportions betweenthe two parts of the fund for 1996 were determined: 65.79% for the regionsneeding support and 34.21% for the regions needing special support. Todetermine the shares of individual regions, the relevant calculations are to bemade.

For the regions needing support:

• the differencebetween the per capita budget income of the relevant region and the average percapita budget income of all the regions of Russia, as of the forecast for 1996,is to be determined;
• in the event theper capita budget income of the relevant region is lower than the average percapita budget income of all the regions of Russia, this difference is to bemultiplied by the number of population of the relevant region. Further on, theresult is to undergo the correction: for this the correction factor of theregional expenditures divided over the per capita population incomes andmultiplied by 0.95 (without capital investments) is to be calculated. Thisfactor is to be multiplied by the preceding sum of transfer.

Further on, the so calculated sums of themoney making the differences with the average per capita budget incomesforecast for 1996 by all the regions of Russia are to be summed up by all theregions needing support. Further on, the shares of each region in the total sumof this money are to be determined. These shares are to be applied to the moneyactually received by the relevant part of the fund.

For the regions needing specialsupport:

• the differencebetween the current budget expenditures (without capital investments) and thevolume of the budget incomes, as of the forecast for 1996, is to bedetermined;
• further on, thesums of the money lacking to cover the above expenditures, are to be summed upby all the regions needing special support, and the share of every relevantregion in the total sum of this money is to be determined. The results areconsidered the relevant shares of the regions in the fund for financial supportof regions and are to be applied to the money actually received by therelevant part of the fund.

We believe, that, when estimating theincomes of regions in 1996, a special attention should be paid to the potentialrevenues of the relevant budgets calculated banked upon the forecast taxationbasis, the effective rates of the federal taxes, and the average (by Russia)rates of the regional and local taxes. This will create incentives for a morecomplete development of the local taxation systems.

The calculation of the transfer to a regionneeds also to take into account the ratio of the average Russian prices levelto that of an individual region. The levels are to be calculated based on theprices of the representative set of goods, observed in regional and districtcenters, and used for the calculation of the aggregate price index on theconsumer goods and services published by the RF Goskomstat.

Budget deficit.The Budget Law supposes the deficit of 3.85% of GDP. It supposes that thefinancing by the domestic borrowings will amount to Rb51.6аtrln. Thecontinuation of the practice to use, to finance the Budget deficit, theborrowings from the Russian financial market without direct credits by theCentral Bank as sources of its coverage, needs an attentive planning of thisprocess in order to change the structure of the domestic State debt for thebenefit of the long-term borrowings. The external financing sources amount toRb32.5аtrln (this includes the sum of the supposed IMF credit of US$3аbln). Tothe moment when this report was being written, the decision to grant to Russiathe US$102аbln EFF credit was practically made, during the visit ofM.аCamdessus, Manager of the IMF to Moscow. In 1996, Russia is to receive thefirst tranche of this credit, US$4аbln.

Outlook on Public Finance for1996

Current changes in tax laws. On 1аJanuaryа1996, critical amendments to the tax laws, approvedin 1995, took force and effect. The Law УOn Amendments and Supplements to theLaw of the Russian Federation УOn the Profit tax of Enterprises andOrganizationsФФ, of 25аAprilа1995, envisions to cancel, from 1аJanuaryа1996,the tax on the excess of the labor payment over the normalized value. Themeasures having the purpose to limit the growth of the labor payment, discussedduring a long period, were not, yet, taken to the beginning of this year;hence, the, for the first time during the observed period, the new fiscal yearbegins without rationing the labor payment.

The Federal Law of 25аFebruaryа1995, УOnthe Special Tax from Enterprises, Institutions, and Organizations to Financethe Support of the Principal Branches of the National Economy of the RF and toEnsure the Stable Operation of the Entities of these BranchesФ envisions tocancel, from 1аJanuaryа1996, this special tax.

Just as during the preceding years, basedon the Resolution of the Government of 25аNovemberа1995, the fixed assets, asof 1аJanuaryа1996, are to be re-estimated in accordance either with the indexespublished by the Goskomstat, or by a direct recalculation to the prices formedas of 1аJanuaryа1996.

On 8аDecemberа1995, the Law УOn theSimplified System of Taxation and Accoutanncy for the Small EnterpriseEntitiesФ was promulgated, after a long discussion. This Law ensures thepossibility to substitute the complex of the taxes fixed by the relevant laws(except the customs payment, allotments to the extra-budgetary funds, Stateduties and license fees) by a unified tax on income or return (as the relevantadministrations of the subjects of Federation may decide) of a small enterpriseor businessperson. The category of the small enterprises covers the ones whichemploy less than 15аpersons.

Certain amendments have been made to thelist of the VAT privileges, as well. The Law of 30аNovemberа1995, releases fromtaxation, from 1аJanuaryа1996, the scientific research works; the production byeditors, publishing houses, and printing offices, of the newspapers, magazines,and books relative to the education, science, and culture; and the turnoversrelative to circulation of the mass media. The profit from the sale of the massmedia products, as well as that from the sale of the books relative to theeducation, science, and culture will be tax-free, at the condition such profitis used for the investments relative to the principal activities.

An important factor of the taxation policyis the new prolongation (Resolution #1245 by the RF Government dated18аDecemberа1995) of the effectiveness of the temporary order of use of themoney inflowing to the settlement (current) assets of enterprises beforeMarchа1996. After this term, an enterprise will be able to receive apostponement for the payments to the budget only upon having approved by thetaxation authorities the schedule of repayment of the arrears before1аJanuaryа1997. The Resolution envisions that the norm of reservation of themoney for labor payment in all the money inflowing to the account of suchentity will make either 10% or 20% for the debtors (in function of the initialnorm, i.e., 30%, 40%, or 50%) before 1аMarchа1996.

In accordance with the Presidential decreedated 19аJanuaryа1996, the alternative order of registration of the debts ofentities to the Budget was confirmed. In accordance with the above Decree, anentity will be able to receive a postponement for the payments to the budget atthe condition that it pays, during the period from 1 Aprilа1996 to 1Octoberа1996, half of the sum of the debt, in the equal, 5% of the total sum,shares every quarter-year, with the penalty of 30% annual. Further on, theorder is envisioned of the repayment of the remaining debt during the next fiveyears. The document has expanded the list of the privileged activities forsmall enterprises, added privileges for the 3rd and 4th years of functioning,if the revenue from the relevant activities amounts to not more than 90%; butthe term of repayment of the privilege has been extended to5аyears.

On 1 Januaryа1996, the Law#а227‑FZ, УOnAmendments and Supplements to the Law of the Russian Federation УOn the Profittax of Enterprises and OrganizationsФФ of 31аDecemberа1995, took force andeffect. In accordance with the newly promulgated Law, among the Saving Bank(Sberbank) institutions, the branches at the level of the Federation subjects(territorial banks) become tax payers, in accordance with the summarybalances.

Industrial, construction, and transportenterprises are considered small enterprises if the number of the personsemployed does not exceed 100 (before the figure was 200). The criteria ofconsideration of an entity as a small entity (including the average number ofpersonnel) are fixed by the Federal Law УOn the State Support of the SmallEnterprise in RussiaФ.

An important change consists in thecorrection of the residual cost of the fixed assets and other property by theinflation index when determining the profit at its realization. This measure isintended to activate the renewal of the fixed assets and the replacement of theequipment to the entities which can use it more efficiently. The actualimplementation of the above order will begin when the indexes, fixed by the RFGovernment begin being published. The gross profit accounted for at taxationincludes the profit from the sale of land plots.

The Law includes, as well, the clause oncompensation of the privileges on capital investments, in the events suchprivileges are implemented or transferred within the two years following therelevant grants.

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