Institute for the Economy in
Transition
Regional Fiscal Technical
Assistance Project
Ilya Trunin
Intergovernmental Transfers Reform in
Russia: Trends and Perspectives
www.iet.ru
Washington, DC - May, 7 2004
Budgetary System in the Early
Transition Period
• Sharp decrease in the public revenue during transition to
a new tax system
• Decentralizing public expenditures instead of cutting
them down
• Need for preventing the federation from decay
• Emerging of the practices of unfunded mandates as an
alternative to decrease public expenditures in
accordance with revenue possibilities
• Using intergovernmental fiscal transfers and shared
taxes in political process
Results: unstable and inefficient system of
intergovernmental fiscal arrangements
www.iet.ru
First Stage of the Intergovernmental
Fiscal Reform – 1993 Constitution
• New principles of federal-regional-municipal relations –
formally close to 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 – a formula based equalization grants
• Growing amount of unfunded mandates and political
reasons (the federal government kept being dependent
of 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
www.iet.ru
Second Stage of the Intergovernmental
Fiscal Reform – 1998 Crisis
• The process of federal grants allocation went out of
control
sharp decline in tax revenue
• Introduction of new principles of equalization grants
allocation
• Refraining from changing the results of formulabased calculations as well as from providing large
discretionary grants
• Tax revenue allocation between the budgets
• Conceptual programs of the fiscal federalism reform
Results: Hardening budget constraints for the
regions, new psychology of grants allocation
www.iet.ru
Federal Grants to the Regions Since 1992
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%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
www.iet.ru
Horizontal Fiscal Imbalances in 2002
(Lorenz curves for main tax revenues per capita)
www.iet.ru
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
www.iet.ru
Adjusted Fiscal Capacity Equalization
Principle in Russia
www.iet.ru
Positive Impacts of the Reforms
•The new system has been established that has got many features of
an efficient system of intergovenmental 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
www.iet.ru
Current Deficiencies of the Transfers System
• No further improvement of the system since 2001
• No improvement at the regional-local level
• Grant allocation formulae due to various corrections have
become complex and non-transparent
• Importance of discretionary grants increased again (formulabased grants share in the total federal grants amount fell to 5758 %)
• Changes to the federal budget act during the fiscal year lead to
softening budget constraints of the regions (in 2003 two
amendments in July and November increased total amount of
grants by 30%, allocated at discretionary basis)
• Region still do have the opportunity of obtaining financial
resources from the federal budget on a negotiable basis (loans
on preparation to the winter season, wages in the public sector,
liquidation of natural disasters)
www.iet.ru
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 control
over regional governments in political sense
• Many reforms in different sectors (taxation, natural
monopolies etc.) at the same time lead to seeking
compromise in less important areas
• Intergovernmental transfers reform should follow
general federative reform that really started in 2003
only
www.iet.ru
Main Features of the Current Reform Plans
Related to Intergovernmental Transfers
• Elimination of unfunded mandates: normative
regulation, financing and administration powers will
be 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
www.iet.ru
Main Features of the Current Reform Plans
Related to Intergovernmental Transfers
• Actual start of the reform at the sub-regional level
(implementation of a complicated system of
different grant 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
• Normative regulation of the transfers mechanism
(federal laws and government acts)
• Introduction of “negative transfers” at the subregional level
www.iet.ru
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
www.iet.ru