CONTRADICTIONS OF BUDGET REFORM IN RUSSIA
Fomina Elena 1
Russian lastest fifteen years’ reforms present no analogue in history. That is why both the legislative base and the realization of these transformations keep up to some internal contradictions. That fact on the whole refers to the reform of the budget system and budget process in this country which was developing in 2005-
2006 years. The forwarded changes have got the aim of implementing the State construction practice in the Russian Federation with a true federative content.
Budget federalism supposes a sufficiently autonomous operation of all levels of budgets with the transparent share of income and expense functions at state and local power levels, with financial equaling of territories. One of the necessary conditions for these principles practical realization is the economic independence of regions and territories. It
’ s known that the regional differentiation according to its economic development level is a reality for all federative states, however, such clear-cut contrasts are typical only of this country. First of all, this is connected with the administrative-territorial division, which has been inherited by modern
Russia from the former highly centralized state. Setting up productive forces in the
USSR was being organized according to quite distinctive principles. The 1990’s economic crisis consequences have aggravated this problem concerning municipalities inside the same subject of the Federation.
The up-to-date situation in Russia could be characterized having the strong federal centre, and just this circumstance allows starting the transfer of some state functions performance to regions and municipalities. However, such decentralization of expense plenipotentiaries could not be provided with adequate tax decentralization because of the above mentioned reasons. Only 8-10 subjects
(total 88) of the Russian Federation could be considered as regions-donors. 80% of total tax incomes of Russian consolidated budget have acquired the federal status due to a successful solution of the financial equaling. That one concerns internal relations of almost all regions. Only 350 municipalities from 12000, which have
1 Head of financial department , the Bashkir Academy of Public Administration and Management under the auspices of the President of the Republic of Bashkortostan, Russia, Ufa.

been set up by now, have some sufficient potential for self-finance. The complex of “smoothing” funds, which have been used before at the federal level, now passes on to regional budgets. Such statements are confirmed, for example, in the
Law of the Republic Bashkortostan “About Relations Between Different Level
Budgets”, adopted on 15.07.2005. According to preliminary estimations more than
70% of incomes of the consolidated budget of the Republic Bashkortostan will be redistributed within the Republic’s budget. That will really produce dependent disposition in some municipalities and liquidate stimuli in order to increase the income’s base among the other regions, more financially provided. The above and other contradictions of changes could minimize the main reform’s content, just developing democracy from below, realizing by citizens their effective participation in management on local, and, then, state level.
Innovations in inter-budget relations appeared in our Republic as early as on
1.10.2005 year. There will be considered the first results of forwarded changes in our research. There will be provided concrete recommendations for increasing the productivity of budget regulations and budget process at the regional level.
Chapter 1: The Substantiation of the Actuality of the Local Self – management Reform
The Russian Federation Constitution (1993) declaimed the local self – management as the main principle of power and management organization at the local level for the first time. It is very difficult to create market economic structures if there is no quite successfully functioning local self – management system, inasmuch strong and stable financial, economic and social relations develop just at the local level. That’s why the process of municipal units’ budgeting gets such a great significance, as it is impossible to build really federative state relations without a stable financial base of the local units.
The last period the question of local self – management reform was widely considered both by press and by all involved power and management organs. That is quite adequate for this theme, because local self – management is:
1) nearer to people, than the state power;
2) in the constant dialogue with them;
3) there, where people live and work, realize their constitution rights and freedoms.
At first the actuality of the municipal reform as the most significant for Russia was stressed by the great Russian writer A.I. Solgenizyn. In his work “How We Should

Arrange Russia” (1991) he proposed beginning democratic transformations just from below by developing the local self – management (or “zemstvo”). There was declaimed in The Message (2000) of The Russian Federation President: “… Russia is, first of all, its people. And their well-being and high-quality life are the main tasks of any power.” In 7 months, in February 2001, V.V. Putin said about the
“misbalance between the local self – management functions and the volume of its resources”. So it is necessary to change “principles of tax policy and interbudget relations”.
Chapter 2: The Main Results of the Reform’s First Phase
Significant changes in local self – management organizing were implemented after the adoption (6.10.2003) of The Federal Law # 131 – FL “About Total Principles of Local Self – management Organizing in the Russian Federation”, which starts from 1.01.2006, and The Federal Law “About total principles of organizing of law
– giving (representative) and executive organs of state power of the subject ’
of the
Russian Federation”.
In order to provide uniformity between these laws and the other legislative base, regulating the social finance management, there were accepted some changes and additions to The Budget and Tax Codes:
- in fact 4 levels of the budget system, including local budgets of two types: the budget of municipal regions (town districts) and budgets of town and village settlements;
- legislative confirming of tax incomes for every budget on the constant
(long-term) base;
- correcting the list of federal, regional and local taxes, sharing municipal region’s and settlement’s incomes;
- delimitation of the competent objects and expenses obligations among power levels.
The analysis of the realized delimitation of expenses and incomes plenipotentiaries allows to conclude: the misbalance of expense obligations and proper incomes of municipal units will increase during the reform’s developing. Until today 80% incomes of local budgets of regions of the Republic of Bashkortostan were formed with the financial help from the Republican budget. In 2000 – 2005 years from
20% to 23,6% of the republican budget’s expenses were spent on the financial help to local budgets. The non-uniforming of territories’ economic development greatly influences re-distributing processes intensity both in this region, and in Russia on the whole. For example, 60% of all tax incomes, forwarded into Russian budget system from the Republic of Bashkortostan, come from one city (Ufa). At the same time only 28% of these incomes is Ufa’s property and the Republic of
Bashkortostan’s budgets, and 72% goes to the federal budget.
Chapter 3: The improvement of budget equaling of municipal units

The operation of the up-to-date mechanism of the municipal budget equaling is like balancing incomes and expenses and is not adequate to local self – management role increasing, so it has to be cardinally changed.
The changes, introduced to the Budget Code in 2004, will principally transform the method of budget equaling, which must be used since 2006.
There are two ways of town and village settlement budget equaling – from RF subject’s budgets (donations from the Regional fund of a settlement’s financial support) and from municipal region’s budgets (donations from their funds of a settlement’s financial support). Besides a subject of the Federation realizes equaling of budget maintenance of municipal regions and town districts with donations from Regional fund of financial support of municipal regions (town districts), which could be on whole or partly substituted for by additive rates of deductions from federal and regional taxes, coming to budgets of municipal regions (town districts) (Figure 1).
Regional (subject of
F) fund of financial support of regions
(towns)
Regional (subject of
F) fund of financial support of settlements
Region’s (municipal) fund of financial support of settlements
Municipal
Regions
Town
Districts
Settlements
Figure 1: Total scheme of budget equaling of municipal units
At the same time some intermediate variant is possible – delegating a subject’s of
Federation regulations to the sphere of a settlement’s budget equaling to the municipal regions. If budget maintenance of a settlement and municipal region
(town district) until equaling is twice as higher than the average level of the subject of the Federation, there could be stipulated subventions from this settlement’s budget of regional fund in the law of budget, accepted by this subject of the
Federation (Figure 2). It seems, using for the first time law negative transferts, having sufficiently through low criteria of exceeding will deprive stimulus for increasing tax base of municipal units and deteriorate an investment climate.

The volume of assets’ withdrawal should not exceed 50% of difference between real budget maintenance and its double average level of a subject of the federation.
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
Fund of financial support of municipal units non dotated be dotated
Municipal units superprovi ded
-negative
-fact
-positive
Figure 2: The scheme of negative transfert
It seems, this position should be added: the volume of withdrawal couldn
’ t be more than 25% of difference between 5-multipled middle and fact budget maintenance.
Comparative characteristics of equaling funds is presented in Table 1.
Comparative characteristics of financial support’s funds
Table 1
Fund The source of assets
Who transfert gets Estimation of transfert
Form of transfert
Regional
(SF) fund of settlement’s financial support
Regional
(SF) fund of municipal region’s
(town district) financial support
Proper incomes of subventions from budgets of superprovided settlements
(negative transferts)
SF
Proper incomes of subventions
SF from budgets of superprovided municipal regions and
All settlements, not exceeding double middle level the
All municipal regions (town districts), not exceeding determined criteria’s level
Per person Dotations.
Equalling of budget maintenance, taking account objective into differences
Part of fund –
Additive rates from tax on private person incomes.
Subventions to municipal regions
(if there is delegation rules)
’ s of
Dotations
Transferts per person
Additive rates from tax on private person’s incomes

1,2
1
0,8
0,6
0,4
0,2
Regional
(municipal) funds of settlement’s financial support town districts
(negative transferts)
Proper incomes of municipal region
All determined the settlements, not exceeding criteria’s level per person
As it will be determined in regional (SF) method of equaling and taking into
Dotations account objective differences
The indicator of estimated budget maintenance of municipal unit is determined as index of tax potential. It’s necessary to mention those objective difficulties which are inescapable by using a new method of equaling. It’s sufficient to point out tell about the absence in tax organs of accumulated information, permitting to estimate tax potential of newly created municipal units. Index of budget expenses greatly depends on efficiency of budget organizations, supplying budget services in one or another municipal unit. It is confirmed by our accounts, which show great differentiation of this index even through regions’ of Ufa (the same city), each of them until 2006 was an independent municipal unit (Figure 3).
1,4
2002
2003
2004
2005
0
D yo m sk y
Ka lin in sk y
Ki ro vs ky
Le ni ns ky
O cty ab rs ky
O rd jo ni ki dz ev sk y
So vi et sk y
Figure 3: Indices of budget expenses of the city’s municipal units (c. Ufa)
For regulating municipal budget maintenance the subject of the RF had to fulfill the following:

to estimate proportion of expense obligations: the subject of the RF – municipal regions, towns and settlements;
to estimate income possibilities;
to correct expense obligations for attaining balance between incomes and expenses;
to assign unique norms for local budgets (considering the necessity of equaling);
to calculate a settlement’s budget maintenance;
to put criteria’s level of budget maintenance;
to calculate subventions from a settlement’s budgets into Regional (SF) fund of a settlement’s financial support;
to account the volume of Regional (SF) fund of a settlement’s financial support;
to distribute Regional (SF) fund of a settlement’s financial support;
to assign additive norms of deductions from tax on private persons incomes, which substitute donations on the whole or partly;
to distribute the “delegated part” of Regional (SF) fund of a settlement’s financial support;
to calculate initial budget maintenance of municipal regions and towns;
to assign criteria’s level of budget maintenance;
to calculate the volumes of subventions from a region’s and town’s budgets to Regional (SF) fund of municipal regions and towns support;
to distribute Regional (SF) fund of municipal regions and towns support;
to assign additive norms of deductions from tax on private persons incomes to a municipal region’s and town’s budgets (substituting part of donations per person);
to accept the method of municipal fund of a settlement’s financial support distributing.
Thus, the real volume (share) of assets, transferred to local budgets as donations or tax deductions, will depend:
on strategic challenge of state power to a subject of the RF organs between maximum equaling and stimulating activity to increasing income potential of municipal units;
on the rate of equalizing municipal tax base spreading.
The application of transparent methods could allow to shorten the intervals in budget maintenance of individual territories and provide rational and effective usage of budget assets.
Chapter 4: The Improvement of Normative Base of Budget Expenses’
Planning
The expenses of municipal budgets should be formed in accordance with expenses regulations of municipal units, which in the mentioned above FL-131 are very

wide and not clear. For example, there is no clear explanation of the term “the creation of conditions for cultural services of inhabitants”. Is it to support culture organization with all resources, in other words, to have budget culture organization or it means only not to disturb? If there is no specification in the Law, such a Law can not be a law of direct action. The definition of “expenses’ obligations” is not correct and clearly determined in Russian budget legislation.
Since 1998, when The Budget Code was adopted, the best practices in the budget expenses’ planning was connected with the application of minimum state social standards to absolute fulfillment of debt obligations. The Budget Code determined the normative method of budget expense’s forming, but practical realization of this position was delayed until the Federal Law “About Minimal State Social
Standards” was adopted. After that there were published 2 President’s Decrees, 4
Resolutions and 1 Instruction of the RF government. As this Law has not been adopted till now the legal base for budget expenses’ forming is absent.
Later the question about minimal state social standards appeared in federal laws #
95-FL “About putting changes and additives in Federal law”. “About total principles of legislative and executive organs of RF subjects state power”
(04.07.2003) and # 131-FL “About total principles of local self-management organization in RF” (6.10.2003)”. The first of these laws gives to organs of RF subject’s state power the right to establish “regional minimal social standards and other norms of RF subject budget expenses…”. The necessity of federal or regional state minimal social standard’s application, when the subvention’s volume for state plenipotentiaries’ execution is calculated, is stressed in the federal law #131-FL.
Besides that, this law gives local self-management organs the right of establishing municipal minimal social standards and other norms of budget expenses for local importance questions decision.
In autumn 2003 the State Duma adopted in the first reading the Federal law “About minimal state social standards” (the project of law #209727-L), but there were not established any concrete standards by this project.
The history of minimal state social standards development ended when the federal law “About putting in the changes into the Budget Code of RF in the sphere of interbudget relations’ regulation” #120-FL (20.08.2004) was adopted. The definition of minimal state social standards and connected with it norms and positions were excluded from RF budget legislation by this law.
It seems, the refusal from the normative method of budget expenses’ forming is explained by two reasons: firstly, this method contradicts the budget federalism main principles; secondly, this method is not universal, as it is appropriate for only some state and municipal obligations. For example, it is entirely not applicable for state and municipal debt obligation’s commitment.
But the financial system needs the objective, and if it’s possible, universal method of budget expense’s forming. The first, but very significant step in this direction is connected with the federal law #120-FL adoption: “all levels’ budget expenses’ forming is realized in accordance with expense obligations, caused by legislatively determined plenipotentiaries’ delimitation among federal, regional and local bodies”. Thus the fundamental definition of expenses’ obligations was introduced

to the budget legislation for the first time. Only those norms and law’s positions, which directly form the obligation of a power’s organ to provide one or another subject with the budget assets, could be considered as sources of expenses’ obligations.
However, for realization of the new expenses’ forming principles there is to be performed a great deal of work, for example, for executing positions of Item 87
(BC RF) in the sphere of creation and charge of expenses’ obligations register.
Our analysis shows, introducing the term “expense obligations” requires systematic correction of a lot of BC items for substitution taken before normative method of budget expense forming (planning).