* I*I DP / 3 THE WORLD BANK Internal Discussion Paper EUROPE AND CENTRAL ASIA REGION Report No: IDP-143 THE TRANSFORMATION OF THE REGIONAL FISCAL SYSTEM IN RUSSIA: THE CASE OF YAROSLAVL Lev Freinkman Stepan Titov August 1994 Office of the Vice President Europe and Central Asia Region Discussion Papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research that is circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of its Board of Executive Directors or the countries they represent. ACKNOWLEDGMENT The authors are affiliated with the Moscow Resident Mission of the World Bank and the Institute of Economy in Transition, Moscow. This paper was edited by Philippe Le Houerou and Jeff Porro. Helpful comments and suggestions were provided by Mark Nagel and Nikolai Petrov and our colleagues from the World Bank Fiscal Expenditure mission led by Mr. Le Houerou. We are also grateful to Natasha Veligura and Michelle Mancesidor for help with document preparation. This work was made possible by the help provided by the Institute of Economy in Transition led by Yegor Gaidar and in cooperation with the Yaroslavl regional government, which gave us unrestricted access to data and information. TITLE: THE TRANSFORMATION OF THE REGIONAL FISCAL SYSTEM IN RUSSIA: THE CASE OF YAROSLAVL AUTHORS: Lev Fri-kman and Stepan Titov ABSTRAC The paper looks at the transformation of intergovernment fiscal relations from the point of view of a regional administration in Russia. It also describes changes in local fiscal management. The Yaroslavl region faces a set of budgetary problems typical for Russian regions in the transition, ranging from budget preparation and management, scale of extrabudgetary financing and expenditure verification. The paper shows what the actual priorities of regional government policy are, how these priorities are determined and through which channels and mechanisms they are implemented. Between 1990 and 1993, the manner in which the oblast's budget was prepared, approved, and implemented changed considerably, as did the relationship between the oblast and the federal authorities. However, many vestiges of the former system remain. The central government still exerts control over some aspects of the regional budgets, and oblast, city and rayon budgets are not fully separated. But decentralization is proceeding at a brisk pace, faster than the federal authorities can codify the rules for the game. The resulting uncertainty sets the stage for bargaining with the central government and rent-seeking behavior on the part of the region. The allocation of expenditures between federal and regional governments continues to be a very murky process, particularly with respect to the so-called "national economy" expenditure items, which include expenditures on industry, agriculture, transport, and other infrastructure. The shift in expenditure responsibility in the social areas, however, has been consistent; almost all such responsibilities have been devolved down to the regions, cities and rayons. TABLE OF CONTENTS I.Introduction .................................................................... 1 II. General Economic Characteristics of the Yaroslavl Region ................................ 1 A. Population and Social Development ............................................ 3 B. Concentration of Revenue and Production ....................................... 4 C. Value of Regicaal Production (VRP) versus GDP ................................. 4 D. Output Structure .............. ............................................ 5 III. Overview of the Regional Budget System .............................................. 6 A. Components of the Regional Budget System ...................................... 6 B. The Budget Process ........................................................ 6 C. Financial Interactions with the Federal Government ................................ 9 D. Financial Flows between Federal and Regional Governments ........................ 13 E. Main Actual Budget Trends and Regional Budget Policy ............................ 16 F. Revenue Sharing and Spending Responsibilities within the Yaroslavl Oblast .............. 21 G. Extrabudgetary Funds ..................................................... 24 IV. Analysis of Regional Budget Expenditure ............................................ 26 A. Spending Patterns by Iiunctional and Economic Categories .......................... 26 B.InvestmentExpenditure .................................................... 31 C.SocialSpending .......................................................... 35 V. Conclusion .................................................................... 37 List of Tables Table 1. Budget Transfers to the Agriculture Sector in 1992 ................................. 12 Table 2: Financial Flows between Yaroslavl Oblast and the Federal Authorities in 1992 ............. 15 Table 3. Structure of Russian Consolidated Budget Expenditure by Level of Authority .............. 16 Table 4. Russian Regional Budgets as a Share of GDP in 1990-93 ............................ 17 Table 5. Structure of the Yaroslavl Oblast Consolidated Budget in Comparison with Average Russian Regional Budget in 1992 ......................................... 20 Table 6. Breakdown of Current Transfers and Subsidies by Level of Administration in 199293 ....... 22 Table 7. Tax Sharing between the Oblast and City Budgets in the Yaroslavl Region in 1993 ......... 22 Table 8. Privatization Receipts in 1992 by Level of Government in Yaroslavl .................... 23 Table 9. Comparison of Main Expenditures in Yaroslavl Consolidated Regional Budget under Russian and IMF Classification .......................................... 27 Table 10. Consolidated Budget Subsidies in 1992 ......................................... 29 Table 11. Subsidies in the 1992 Consolidated Oblast Budget by Sector ......................... 30 Table 12. 1992 Fiscal Investments in the Yaroslavi Oblast by Source of Financing ................. 32 Table 13. Capital Transfers from Consolidated Yaroslavl Budget in 1990-92 ..................... 33 Table 14. Sectoral Bi eakdown of Capital Transfers from the Yaroslavl Oblast Consolidated Budget, 1990-92 .................................... 34 Table 15. Social Spending in Yaroslavl Oblast in 1992 by Source of Fancing ................... 35 Table 16. Distribution of Social Expenditures between Oblast and Local Budgets in 1992-93 ......... 36 Table 17. Structure of Social Expenditure in the Yaroslavl Consolidated Budget .................. 37 TABLE OF CONTENTS (continued) Annexes Annex 1. Statistical Appendix Annex 2. Types of Local and Federal Taxes Under Current Russian Legislation Annex 3. Assignment of Expenditure Responsibilities in the Russian Federation Annex 4. Yaroslavl Budgets: Definitions and Reclassification THE TRANSFORMATION OF THE REGIONAL FISCAL SYSTEM IN RUSSIA: The Case of Yaroslavl I. INTRODUCTION 1. Fiscal and tax reform - an essential part of the transformation of Russian economy -- has and will continue to imply significant redistribution of financial flows from the center to regions, a reversal of traditional patterns of socialist budget management. As a result of the political, economic, and fiscal decentralization that took place in Russia since the end of the 1980s and accelerated significantly in 1992-93, subnational levels of government became fiscally independent and responsible for financing most public goods and services in the country. 2. Against this backdrop, the objective of this paper is to describe the evolution of the Russian fiscal system at the regional level, through the example of the Yaroslavl region. Although the Yaroslavl oblast is in bettev economic and fiscal shape than the average Russian region, the regional government faces the same set of problems caused by the unsettled economic environment, new fiscal responsibilities and rapid fiscal reform. Many current budget mechanisms and practices (such as budget sharing within the oblast, budget preparation, preferences in budget policy, recent shifts in budget spending, and the scale of extrabudgetary financing) are typical of the Russian regions. 3. The paper is organized as follows: Section 2 briefly describes the economic features of the Yaroslavl oblast. The main characteristics of the regional budget process are provided in Section 3. The analysis differentiates the fiscal responsibilities of the various levels of government and describes the off-budget components of the fiscal system. Section 4 analyzes changes in the region's consolidated fiscal expenditure between 1990 and 1993. Section 5 summarizes the main findings and recommendations of the previous sections. U. GENERAL EcoNOMIC CHARAcIERmIcs OF THE YAROSIAVL REGION 4.5. The Yaroslavl oblast is a small region in central Russia. Located north of Moscow, the region comprises 0.21 percent of Russian territory. Just shy of 1 percent of Russia's total population lived in the region in 1991 (Annex 1, table 1). Population density is 40.4 persons per square kilometer, close to the average for central Russia. The region represents approximately 1 percent of Russia's total economic potential, a figure that corresponds to the region's population and share of the nation's labor force. 6. In its level of economic development and in the pace of market reforms through early 1993, the Yaroslavl region is an average one, not only for the European part of Russia-the most economically advanced part of the country-but for the Russian Federation as a whole (Annex 1, tables 1-7). Page 1 Russia* Me Tranformation of the Regional Fiscal System 7. During the 1980s the region's economy developed at approximately the same rate as that of Russia in general. According to indices of social advancement, personal income, and consumption levels the region consistently ranked between the 25th and 50th percentiles among Russia's 80 regions. 8. The relatively high standards of living in the region can be partially explained by history and geography: the region is situated at the historical center of the Russian state. However peculiarities of economic structure provide a better explanation. The following items are particularly important: o The relative importance of industry over agriculture in total production; o The high concentration of manufacturing in large plants in the two largest cities (Yaroslavl and Rybinsk); Yaroslavl's plants dominate the Russian market for several products (for example: tires, paints, rubber, and special wood-processing equipment); o The high share of chemical and petrochemical products, civil mechanical engineering, and consumer goods; o The insignificance of extractive industry and other raw materials production, the prominence of intermediate product outputs, the minor role of final outputs, and local industry's broad interregional links; o The prominence of exports and imports; petrochemicals and other chemicals provide stable export income and have long been supported by the central government through centralized subsidized imports. 9. The foregoing factors have all benefitted the region's economic and social development. Large industrial plants supported social investments, housing construction, and wage growth. (In 1991 the region ranked fourteenth in Russia in housing stock per capita.) Export opportunities made it possible to increase consumer goods imports. Excise taxes on oil products and consumer goods provided revenue for local budgets, as did the steady growth in exports and in the population's income. The small role of agriculture spared the region-at least until 1992-the high costs of subsidizing agricultural production and maintaining rural infrastructure. As a result, even when the Soviet consumer market collapsed in 1991, the region suffered less than most of Russia. In 1991, the ratio of the increase in consumer spending to the increase in household income was 0.74 in the Yaroslavl oblast, compared to the Russian average of 0.66. The insignificance of finished goods in the regional output profile helped the region weather the 1992 crisis of adjustment when Russian industry faced a drastic change in final demand. 10. Because of its favorable position, the region traditionally transferred a part of its financial resources to the federal budget: it paid more in federal taxes than it received in transfers and subsidies. In 1990 the difference between produced and consumed national income (NI) exceeded 1 billion rubles, or 22.5 percent of regionally produced national income. (In traditional Soviet statistical usage, regional NI may be described as the sum of the wage bill and profit of all local enterprises except those providing free services (education, health, administration, etc.)). The region ranked 48th in consumed NI and 16th in per capita NI produced. Page 2 Russia. 7he Transformation of the Regional Fiscal System 11. In 1992, growth in household income in Yaroslavl was 30 percent higher than in Russia as a whole (Annex 1, table 5), and the region's share of unprofitable plants (8.8 percent) was one of the lowest in the country, while average enterprise profitability was a very high 54 percent. Industrial arrears (unpaid bills from suppliers, as opposed to unfilled customer orders) as a percentage of industrial output were more than twice as low at Yaroslavl plants than at Russian plants as a whole. The average industrial wage was one of the highest in central Russia, while the consumer price index was relatively low at 11.1 (compared to 12.5 in Russia as a whole). In 1992, the Yaroslavl oblast was one of just nine regions in the Russian Federation where the population's real income dropped by less than 33 percent; the Russian average was 56.5 percent.' 12. Thr continuing prosperity of the Yaroslavl region is explained largely by the presence of the powerful chemical and petrochemical sectors, two of the sectors (along with fuel and metallurgy) boasting the highest price and wage increases in 1992. The relatively small part in Yaroslavl's economic structure of several of the most crisis-ridden sectors (textiles, building materials, agriculture, and defense) also helped the region. Nevertheless, by 1992, the region's relative financial stability had begun to exert acute pressure on the region's fiscal system, because of larger transfers to the federal government. A. Population and Social Development 13. Natural population growth in the Yaroslavl oblast, as in most other regions of central Russia, is negative. In 1991, there were 9.7 births per thousand and 13.4 deaths. A small positive balance of migration in 1991 limited Yaroslavl's population decrease to 0.3 percent. Nevertheless, the aging of the population has placed additional demands on social support budgets (Annex 1, tables 2 and 3). 14. In January 1993, 84.3 percent of the population lived in urban areas. Three-quarters of urban dwellers were concentrated in the two cities of Yaroslavl (43.3 percent) and Rybinsk (17.2 percent). Most of the rural population lives in the area around Yaroslavl city. Six of the seventeen rural rayons contain fewer than 20,000 persons. 15. The extremely high proportion of industry is reflected in the employment structure. Employment in agriculture and services is considerably lower than the Russian average. It must be remembered, however, that because large plants provide workers with a wide range of services and directly.support agriculture, statistics can distort the employment picture. 16. At the start of the second quarter of 1993, unemployment amounted to 36,600 persons (5.2 percent of total employment). These figures are considerably higher than the Russian average. 17. Over the past year, the decline in real income has been accompanied by growing disparities in personal income. According to a March 1993 income survey in the city of Yaroslavl, the ratio of the highest and the lowest income decile was 10:1 (the Russian average is 9:1). In the 1980s the About economic reform development in the regions of the Russian Federation in 1992 [0 razvitii ekonomicheshikh reform v Regionakh Rossiiskoi Pederacii v 1992], Goskontat, Moscow, 1993, pp. 8, 27. Page 3 Russia: The Transformation of the Regional Fscal System same ratio was 4:1.2 With an average monthly income of 10,700 rubles ($18), it is evident that most respondents have faced great difficulties, which, in turn, further tax the social security system. B. Concentration of Revenue and Production 18. Yaroslavl city accounts for 60 percent of the region's total industrial output. As a result, the city accounts for a high share of the region's consolidated budget revenues.' In fact, taxes and other payments by enterprises located in the city are used to subsidize underpopulated rural areas. Such support for the underdeveloped districts is funneled through the oblast budget. 19. As noted above, the Yaroslavl oblast has a particularly high share of Russia's largest enterprises. We studied the region's industrial structure using information obtained from the Russian Goskomstat database for nonmilitary industrial enterprises in 1991. Information on 238 industrial plants and associations in the Yaroslavl oblast was included in the database. About 70 percent of the region's employed industrial workers worked at these plants. They produced more than 83 percent of the region's industrial output. The 50 largest plants (each employing more than 800 workers) produced 81 percent of the output of the mentioned 238 industrial plants and associations and accounted for 31 percent of their total profit. 20. Such concentration is high even for Russia. Whereas one-fifth of Yaroslavl's plants employ more than 800 workers, only one-seventh of all civilian Russian plants do so. In Russia as a whole, such large plants employ 72 percent of the labor force and represent 75 percent of production capacity. The average number of employees at Yaroslavl's plants is 900 persons, 1.5 times more than the Russian average. C. "Value of Regional Production" (VRP) versus GDP 21. GDP is currently computed in Russia (as it was in the Soviet Union) only at the national level; no equivalent figures exist at the oblast level. For lack of adequate information, we could not compute a reliable regional GDP for the Yaroslavl oblast, but instead we adopted a measure we describe as the Value of Regional Production (VRP), expressed in current prices, which comprises regional industrial output, agricultural output, and the value of so-called "paid services" (sales of services to households). VRP is a more precise aggregate measure of total economic activity than industrial output alone, although industrial output is a fair aggregate measure in the Yaroslavl oblast because of its high level of industrialization relative to agricultural production and sales of services. Based on the structure of the national GDP, we estimate that regional GDP would represent about half of the VRP. 22. Using actual Goskomstat data for the Yaroslavl oblast for the years 1990-1991 (absolute figures), rates of growth for 1992, and Ministry of the Economy forecasts for 1993, we computed the following VRPs: 2 "Social and economic situation of the Yaroslavl city population." Unpublished Memorandum prepared by the oblast administration. Yaroslavl, April, 1993. A. Treivish, "A typical crisis in a typical region," Vash 1ybor, no. 1 (January 1993), 12. Page 4 Russia: The Transformation of the Regional Fiscal System 1990: 8,201 million rubles (industrial output -7,101 million rubles, agricultural production - 684 million rubles, paid services - 416 million rubles); 1991: 17,196 million rubles (industrial production - 15,909 million rubles, agriculture - 759 million rubles, paid services - 528 million rubles); 1992 (preliminary estimate): 278,000 million rubles (industrial output - 268,700 million rubles, agriculture - 6,300 million rubles, paid services - 3,000 million rubles); 1993 (forecast): 1,668 billion rubles. D. Output Structure 23. The contribution of industry to the VRP has risen in recent years (Annex 1, table 7). The rise is connected to relative price movements in different sectors. A decline in the relative price of agricultural products has worsened the problems of the sector and increased demands for subsidies from the budget. 24. Before the reforms, four industrial sectors (chemistry, petrochemistry, mechanical engineering, and light industry) accounted for about 80 percent of total production -,qd profit (Annex 1, table A4). 25. Relative industrial price cianges, facilitated by varying rates of decline in production in 1992, resulted in a sharp increase in the share of chemistry and petrochemistry in the industrial production profile and in still greater budget dependence on individual plants in these industries. Poor conditions at many light industry and mechanical engineering plants in the Yaroslavl oblast was largely offset by the stable situation of chemistry. 26. In general, the rate of decrease in industrial production has been quite close to the Russian average. Output in the region fell by 20.2 percent in 1992. In the first quarter of 1993 it was 17.5 percent less than it was a year ago. The greatest decline was in the electrical engineering industry which faced both supply and demand shocks. 27. Regional agricultural performance is also typical for central Russia. In 1991 the rate of subsidy had reached 75 to 200 rubles per 100 rubles of agricultural production.4 In 1992 direct subsidies for cattle production alone were 622 million rubles-2.6 percent of the oblast's consolidated budget expenditure. T. Nefyodova, Yaroslaskoye solo [Yaroulavi's rural communities], Vash Vybor, no. 1 (January 1993), 10. Page 5 Russia: The Transformation of the Regional Fscd System 28. Agricultural efficiency has dropped steadily since the early 1970s. Livestock productivity fell by 20 percent in the period; cereals productivity by 25 percent.' Agricultural efficiency varies considerably in the Yaroslavl oblast, ranging from extremely low to 2-3 times higher than average. 29. In the short run, subsidies to rural areas are inevitable. Although inefficient, such subsidies are presently the only form of support for the rural population. (There is no efficient system of social security in rural areas.) Given the unfavorable outlook for agriculture in the region, calls for government investment in new agricultural projects in Yaroslavl should be viewed with extreme caution. III. OVERVIEW OF THE REGIONAL BUDGET SYSTEM A. Components of the Regional Budget System 30. The budget system of the Yaroslavl oblast consists of the (i) oblast budget, (ii) the budgets of the 6 cities and towns under the oblast's jurisdiction, (iii) the 17 rayon budgets, including the budgets of towns under rayon jurisdiction, (iv) the 23 budgets of units known as posyolky, which are smaller than towns, and (v) of the 225 villages (syola). The consolidated budget of the Yaroslavl oblast includes all these budgets. The great majority of the oblast's population lives in six cities and towns under oblast jurisdiction; the same is true for the local enterprises that are the region's main taxpayers. For this reason, we combined rayon budgets, the budgets of towns under rayon jurisdiction, and posyolky and village budgets under the heading "rayon budgets," leaving, for purposes of this analysis, four levels of regional budgets: the consolidated oblast budget, the oblast budget, the budgets of cities and towns under the oblast's jurisdiction, and rayon budgets. Because we could not obtain good draft statistics for all four levels for 1993, we used only consolidated figures for 1993. Therefore, almost all expenditure and revenue items in 1993 are not fully comparable with the previous years. B. The Budget Process 31. Between 1990 and 1993 the preparation, approval, and implementation of the oblast budgets underwent considerable, even revolutionary, changes. At the same time, the nature of the relationship between the regional and federal governments changed as well. Before perestroyka, the regional authorities had little opportunity to make independent economic policy, and regional budgets had no independent standing. The role of the regional authorities was simply to implement a centrally prepared budget. In the late 1980s, local authorities expanded their role in the budget process. In particular they earned the right to retain surpluses from the previous fiscal year and to introduce some local taxes, including a land tax. At the same time, enterprises under the jurisdiction of the Soviet Union and the Russian Republic significantly increased their payments to oblast budgets. This process quickened in the early 1990s." Ibid. 6 Daniel Berkowtz and Beth Mitchneck, "Fiscal decentralization in the Soviet Economy." Comparative Economic Studies, 1992, Suner, 6-10. Page 6 Russia: The Transformation of the Regional Fiscal System 32. The oblast budget is less and less a detailed schedule of revenues and expenditures blessed in Moscow. Accompanying the growing independence of the regional authorities, oblast budgets owe more of their shape and content to discussions among legislators at sessions of the oblast Soviet of People's Deputies. Guaranteed financing of regional expenditures from funds at a higher budget level has practically disappeared; in the past, if an item of local budget spending had been agreed on with higher authorities and adopted in a budget plan, the corresponding expenditures were automatically financed, whatever the level of local revenues. Abandonment of such practices, once complete, will constitute a significant step toward effective separation of budgets. Another important change is the newly earned right of regional governments to structure their own budget spending and to redistribute funds among various expenditure items during the implementation of budget, 'ins. 33. The prereform system of administrative control will not disappear all at once, however. Even now, representatives of the regional department of finance pay regular visits to the Russian Ministry of Finance to reconcile the regional and federal budgets, a process dubbed "protection" of the regional budget. This complicated negotiation process was (and still is) repeated at a still higher administrative level-within the central apparatus of the Russian federal government and the corresponding commissions of the Russian parliament, where regional leaders fight for privileges for their oblast (for exampie, an increase in the share of value-added tax that the oblast will be allowed to keep). For example, in January 1993, the Yaroslavl's authorities obtained from the federal government an import tvx exemption for equipment bought for the oblast's police forces, thereby saving the oblast approximately $48,000 (or 5 percent of the oblast's hard currency fund revenue). 34. National rules by which federal budget allocations were keyed to measures of existing capacity in the region (so-called provision norms) are still being used to substantiate expenditures and to bolster budget requests. Such provision norms, and thus actual allocations to lower level budgets, depend more on past allocations than in other measures of need. As a result the patterns of funds allocated to lower budgets help preserve interregional disparities and even increase per capita budget inequality . 35. The law on "budget rights"' contains the notion of the "minimal budget," the minimum amount of regional budget revenue needed to cover the minimal financial needs of the region as defined and guaranteed by the state. The law also defines "minimal norms of social provision," or minimal levels of delivery of the most essential social services per capita. The norms referred to in the statute have yet to be established, with the result that the minimal budget concept has not yet been implemented. Article 9 of the law on budget rights declares that a certain percentage of the minimal budget requirements must be guaranteed. In 1993, local budget revenues had to make up not less than 60 percent of the minimal budget; since 1994 the minimum requirement has been 70 percent. However, the Russian government has not implemented this requirement, primarily because of the difficulty of guaranteeing even minimal financial needs in an environment of high inflation. 36. In fact, the law on budget rights preserved the traditional intergovernment bargaining procedure as a core element of the budget process. Several important taxes are shared among various "About basic budget rights and rights to form and to use extrabudgetary funds of legislative and executive bodies of republics belonging to the Russian Federation, autonomic oblasts, autonomc okrugs, krays, oblasts, rayons, the oities Moscow and St. Petersburg, and local authorities," adopted on April 15, 1993. Page 7 Russia: The Transformation of the Regional Fiscal System levels of administration, and no explicit rules exist to govern such sharing. As a result regional governments tend to underestimate revenues in the budget drafts they submit to the federal ministry of finance. On the other hand, they overestimate the expenditures needed to support the regional economy, particularly local social expenditures. The purpose of such maneuvers is to demonstrate that ordinary regional revenues are insufficient to preserve the so-called minimum required volume of public services that must be provided by the region. If the region can show it is unable to provide the required minimum, it may be able to bargain for beneficial rates of federal tax sharing or additional direct federal budget transfers." 37. Poor budget separation creates strong incentives for regional rent seeking: Regional authorities deliberately overestimate the fiscal problems of their regions in order to extract additional federal subsidies and other benefits. The 1993 budget of the Yaroslavl oblast was purposely drafted to show a deficit for just this reason. At the same time, a system of local extrabudgetary funds helps local authorities hide from their federal counterparts a significant portion of the money at their disposal. Such funds amounted to about 7.7 percent of the revenue of the 1992 consolidated budget. 38. In practice, the distinctions between oblast, city, and rayon budgets, which in essence are a single whole, are very uncertain, and various forms of both explicit and implicit oblast transfers to lower budgets exist. As at the federal level such transfers (see below) are allocated through a combination of adherence to the status quo and bargaining, but the role of the status quo is more significant; the bargaining power of local administrations is still weak. Despite the fact that a large share of total social spending is financed from local budgets, the regional budget continues to be very centralized, and fiscal decentralization within the oblast has been more timid than decentralization from the federal level to the oblast. The slow rate of fiscal decentralization within the oblast makes sense under the present conditions. At least it spares local authorities some of the problems associated with the political clout of large enterprises. In addition, the employees of the oblast government are generally better trained than those of the rayons and cities. 39. The budget process within the region is very similar to the federal process. Similar bargaining over tax sharing and direct grants takes place, but the regional government is in a stronger position to resolve competing demands. The variation of budget requirements among rayons is less than the variation among the regions of Russia. Links between oblast ane rayon governments are much closer on average than the links between the federal and oblast administrations. The regional authorities have a better understanding of the actual budget constraints that confront the rayons. Simultaneously, they have strong incentives to avoid the growth of social disparities among the rayons of the region. 40. The region's financial authorities were unable to adapt quickly to high inflation in 1992. In the past annual budgets had been very similar, and the budget execution was typically very close to the budget plan. In contrast, in 1992, actual budget revenues and expenditures were multiples of the initial budget plans. The problem was such that no annualized budget even appeared in 1992; the region operated on quarterly budgets. * Martinez-Vazques. Financing Social Expenditures in the Russian Federation: The Role of the Oblast and the Rayon Governments. Unpublished Memorandum. Georgia State University, Atlanta, 1993, August, p.4, 9-11. Page 8 Russia: The Transformation of the Regional Fiscal System 41. In 1993, however, budget planning improved significantly. Inflation forecasts for the year were based on local analysis and on the profit predictions of local firms. All 1993 budgets contained a quarterly breakdown of annual revenue and expenditure indexed for inflation (the indexes ranged from 1.5 to 2). Although the regional authorities ignored the official inflation forecasts of the Russian Ministry of Economy and did not consult closely with local plants, which are major taxpayers, to prepare their budget, the regional finance department is to be commanded for the progress made over the previous year. 42. The regional authorities' attempt under the current Russian budget law to divide the 1993 budget into a current budget containing mandated or priority iteir .-Ad a development budget of capital expenditures will be worth monitoring, as will the development of s(veral special budget programs. 43. Drafts of rayon, city, and oblast budgets and of extrabudgetary funds are approved by legislative bodies at each level of administration. The oblast budget, the regional hard currency fund, and plans for several other extrabudgetary regional funds, along with the proposed shares to be retained by the oblast budget from various taxes and the amounts to be transferred to the rayons and towns of the oblast are approved by the oblast soviet. Beca"se budgets are approved in rather highly aggregated form, the executive retains substantial maneuvering room in the allocation of funds within the aggregate categories. Budget recommendations are considered first by the so-called maly (small) soviet, a group consisting of the chairs of the committees of the regional soviet. The legislative session devoted to the 1993 budget increased expenditures for several items by approximately 10 percent over the initial finance department draft. Overspending during the budget year is not subject to review in subsequent legislative sessions. 44. Although article 12 of the Russian budget law permits the regions to finance their expenditures through borrowing, Yaroslavl's authorities have not done so. Just once, in spring 1993, the local government received P three-month loan (at a highly negative real interest rate) from the regional branch of the Road Fund. C. Financial Interactions with the Federal Government 45. Since 1990, the respective rights and obligations of the federal and oblast authorities have changed. In a nutshell, the most important changes are: Revenues: 0 The scope of taxing authority is more precisely defined. New taxes have been introduced. The rules governing the allocation of federal subsidies have been made more explicit (see Annex 2). In addition, the regions have been granted the formal right to establish extrabudgetary funds. Page 9 Russia: The Transformation of the Regional Fiscal System Expenditures: 0 The number of sectors financed by the regional budget has grown. The regional budget now covers, in whole or part, health insurance, social security and welfare, housing and utilities, local transportation and communication, kindergartens, primary and secondary schools, retraining, food subsidies, culture (including museums, theaters, libraries), mass media, agriculture, consumer services, and numerous organizations under oblast, city, and rayon jurisdiction. The fact remains, however, that responsibility for spending in many areas is still shared by several levels of government. Revenue Sharing 46. Federal budget laws in 1992 and 1993 granted the Yaroslavl oblast 20 percent of the value-added tax, 69 percent of the tax on corporate profits (22 percent of profits), 100 percent of personal income tax, about a half of the excise tax on alcohol and oil products, and all local taxes. The same tax- sharing arrangements apply in most Russian regions. At the same time, many regions have gained the right to retain up to 50 percent of VAT, and the average VAT share retained by the regions was 24.4 percent in 1992.* Some regions receive a share of export and import duties. 47. Although Yaroslavl is technically eligible for federal grants (subventions), it receives none because it is relatively prosperous."o Meanwhile, regional leaders have attempted to expand the region's VAT share to 40 or 50 percent. They managed to obtain 40 percent for the third quarter of 1992, grounding their request on the need for additional and more even financing of agriculture in summer. In the beginning of September 1993, the soviet of the Yaroslavl oblast, imitating the decisions of local authorities throughout Russia, unilaterally increased the VAT share to be transferred to the local budget from 20 to 50 percent.1 Since Boris Yeltsin crushed the parliamentary uprising against his leadership, there have been no attempts to implement the decision. 48. A department of the federal tax service collects all federal and regional taxes, as well as revenues destined for extrabudgetary road funds. Payments to other extrabudgetary funds are collected independently by the management of those funds. A few types of local taxes--for example, the business license fee collected by Yaroslavl city-are collected by the a special tax administration. 9 Oksana Dmitrieva, "Political games round the budget," Moscow News, July 11, 1993 (Russian language edition). to The distribution of federal grants is regulated by Russian law. "About subventions to republics belonging to the Russian federation, to krays, oblasts, autonomic oblasts, autonomic okrugs, the cities of Moscow and St. Petersburg" adopted on July 15, 1992. According to the budget law of April 15, 1993, a subvention is a targeted subsidy from a higher level budget to a lower level budget over a fixed period of time. By the middle of September 1993 about 30 Russian regions had issued resolutions on partial withholding of their tax payments to the federal budget. (Nezavisimaya Gazeta, September 1, 1993). The volume of the regions' arrears to the federal budget was estimated at the beginning of November 1993 as one trillion rubles, more than 1 percent of GDP (Moscow News, November 14, 1993, Russian language edition). Page 10 Russia: The Transformation of the Regional Fiscal System Expenditure Responsibilities 49. The assignment of expenditure responsibility among levels of government is far less transparent. As a result, it is often very difficult to determine which level of administration finances which subsectors of the regional economy. As shown in Annex 3, federal, regional and other budgets overlap in many areas. 50. The federai government finances the following activities in the region: o Projects carried out under various federal investment programs; o The bulk of social security financing-predominantly from federal extrabudgetary funds. For instance, since 1992 pensions have been paid through the regional department of the Federal Pension Fund (in 1990 a portion of pensions was paid from oblast budget). o Subsidies to industry and agriculture, including directed credits. Examples are the current subsidies offered to agricultural producers for buying fertilizers and fuel. o Consumer subsidies for food staples. For example, about one-third of milk subsidies in the region were federally financed in 1992, a sharp decrease in real terms in comparison with 1990-1991. o A portion of operating expenses, including wages, of administrative bodies under federal and mixed federal/regional jurisdiction. These include the tax inspectorate, the regional government's finonce department, and the regional branch of the central bank, as well as expenses related to the court system (except notarial offices) and the federal police. o All postsecondary institutions and student scholarships in the oblast are federally financed. Vocational training schools were financed by the oblast at the beginning of 1993, but effective May 1, 1993, that responsibility was shifted back to the federal budget. o Maintenance of federal infrastructure, including communications networks, main gas pipelines, and some river transport. 51. When the federal government fails to meet its financial obligations on time, the oblast must spend its own funds. This happened quite frequently in 1993, for example, when students scholarships were raised and when federal employees received a pay increase. This practice boils down to a forced, interest-free advance from the oblast to the federal government. In turn, regional governments pay themselves back by withholding tax revenue transfers to the federal budget. This extremely inefficient way of solving budget conflicts increases the existing public finance anarchy and hampers an orderly decentralization procmss. Although a presidential decree issued on October 27, 1993, im,ases sanctions on regions that fail to transfer tax revenue to the federal budget, the problem will remain if the federal government continues its sequestering budget practice. Page 11 Russia: The Transformation of the Regional Ascal System 52. Financial support to the agricultural sector is a very good illustration of the prevailing overlaping of spending responsibilities between federal and oblast governments. Table 1 breaks down 1992 budget allocations to agricultural and food processing enterprises in the Yaroslavl oblast.12 Allocations to the sector were divided almost equally between the federal and regional budgets. 53. The regional government bears most of the expenditure responsibility for the social sphere: housing, local infrastructure (including utilities), and very specific branches of the productive sector." The bulk of social welfare spending comes from the consolidated oblast budget. In a typical provincial city such as Yaroslavl the federal role in financing health, culture, and primary education is insignificant. Table 1: Budget 7n ers to the Agricutaum Sector in 1992 TOTAL of which: in millions of rubles Federal Regional Subsidies to agricultural producers 4,956.1 51% 49% - fuel 618.4 100 0 - semen purchases 23.8 0 100 - maintenance of social sphere 1,228.0 30 70 - livestock production 2,635.0 52 48 - interest 450.9 100 0 Investments in fixed capital 1,776.4 28 72 Food processing subsidies 501.5 0 100 Others 1,297.5 37 63 TOTAL transfers 8,531.5 45 55 54. The following general changes in revenue and expenditure sharing should be highlighted: o Tax reform has offered the regions much more independence with respect to budget resources. 12 Information provided by regional department of agriculture. The information does not include investments from extrabudgetary funds or tax exemptions for agricultural enterprises financed from the oblast budget (estimated as 769 million rubles). Data in the table differ slightly from subsidy information presented in the 1992 oblast budget. 1s The terms "budget social expenditure" as well as "expenditure on social sphere" in Russian budget should not be confused with the western terms, "social welfare" or "welfare program." Social budget expenditures primarily cover spending on education, public health, culture, and the operating costs of the social protection system. In Russia, pensions and other transfers to the population, which constitute the core of western welfare programs, as a rule are paid from federal extrabudgetary funds, not from regular budgets. Page 12 Russia: The Transformation of the Regional Fiscal System o Although locally introduced taxes provide a very insignificant share of regional budget revenue, it cannot be said that local government has too little taxing authority; the right to establish extrabudgetary funds has enabled localities to expand the fiscal revenues of regions well beyond the limits of federally established taxes. o Regional independence in expenditures is less clear, and the federal government has several ways of shifting spending responsibilities to local authorities. Therefore the decentralization of the Russian fiscal system remains incomplete. D. Financial Flows between Federal and Regional Governments 55. The multichanneled system of federal transfers to the regions presents the greatest challenge in analyzing intergovernmental financial flows in Russia. Federal authorities continue to finance regional economic activity not only through the budget (capital investments, welfare spending, and subsidy programs), but also through federal extrabudgetary funds (EBF), federally subsidized credits to enterprises located in the region (delivered through regional finance department or directly to the largest firms), deliveries of heavily subsidized imports, and other occasional benefits accorded to the region and particular local enterprises. 56. It is nearly impossible at present to develop an accurate and comprehensive estimate of the consolidated regional financial balance. No one at the regional or federal level is responsible for, or apparently very interested in, this issue. In particular, there are no regional breakdowns of the distribution of subsidized imports, of direct transfers from branch ministries and sectoral extrabudgetary funds, of federal spending on the social sphere or the national economy (except for budgeted investments), or welfare payments from EBFs. Most federal budget expenditures for education, public, health, and culture are transferred by the federal ministry of finance to other ministries, which then make regional breakdowns of their spending but do not report them to the Ministry of Finance. On the revenue side, it is difficult to assess the share of federal import/export taxes collected on the territory of a particular region. The breakdown of federal EBF revenue between the Moscow-based and regional administrations of such funds is not clear. 57. Our attempt to balance the financial flows between the Yaroslavl oblast and the federal authorities is depicted in table 2. In view of the limitations noted above, the figures in the table should be taken as rough approximations. The table compares total federal transfers to the region (direct budget transfers, budgeted investments, subsidized federal credits, allocations from federal reserves, individual benefits) with the total volume of federal taxes collected in the oblast, including payments to federal EBFs. Such transfers to the region are not homogeneous. They involve different mechanisms of transfer (grants, heavily subsidized credits), different financing sources (Central Bank, Ministry of Finance, line ministries), and different recipients within the oblast (oblast government, particular enterprises). However, all are used to channel federal funds into the regions. 58. Table 2 shows that in 1992 the Yaroslavl oblast received from Moscow only about half of what it remitted to the federal government. Net transfers to Moscow from the region were equal to approximately 8 percent of the VRP or 82 percent of the consolidated regional budget revenue. Regional payments to the federal budget were in line with its share of the Russian population, but per capita Page 13 Russia: The Transformation of the Regional Fiscal System transfers to the region were almost half the Russian average. For each resident of the region the net outflow was about 15,000 rubles, about 4.5 times higher than the 1992 Russian average and about 25 percent of average annual wage in the region. In the sane year, at least 11 regions received more from the federal government than they transferred." 59. Fair regional distribution of federal funds is one of the most acute problems in the design of a functioning system of fiscal federalism in Russia. As of 1993, there were no clear mechanisms or criteria governing such distributions. Budget transfers have been used partly for political purposes; for example, grants have been made to autonomous republics to secure their support for the government in Moscow. In addition, the level of equalization grants is relatively modest. As a result, financial pressure on poor regions and interregional disparities increased considerably.' The government is continuing to discuss fiscal equalization for 1994.16 60. Most of the federal contribution to Yaroslavl's regional budget took the form of investments and federally subsidized credits. From a fiscal point of view such credits to local firms are very close to explicit subsidies. They are characterized by their heavily negative interest rate, high level of nonrepayment, and allocated administratively on the basis of the financial need of the recipients rather than their creditworthiness. The directed credits received by the oblast in 1992 amounted to about 12 billion rubles, or 44.2 percent of the region's consolidated budget revenue and half of the loans received from the Russian central bank at its Yaroslavl branch (at the central bank discount rate). The sum represents about 35 percent of total credits outstanding in the region's commercial banks. This means that the regional credit market was heavily influenced by directed credit programs in 1992. 61. The process of allocating federally subsidized credits, including the selection of recipients, involves negotiations among the leaders of the oblast, the managers of the largest en9terprises in the oblast, and federal authorities in Moscow. An analysis of the largest of the directed credit programs - the working capital credits -- shows that the largest regional enterprises receive the bulk of such credits (the 19 largest recipients received about 60 percent of the funds allocated to the region under the program). 14 For information on the regions that had a net positive balance with Moscow in 1992, see L. Smirnyagin, Political federalism versus economic federalism, Segodnya, June 25, 1993. is Oksana Dmitrieva, "Political games round the budget," Moscow News, July 11,1993. Philippe Le Houerou, Decentralization and fiscal disparities among regions in the Russian Federation, World Bank, Europe and Central Asia Region, February 1994. 16 Mark Nagel, et al., "Basic principles of fiscal federalism," Ministhy of Finance (Moscow), Macroeconomic and Finance Unit, unpublished memorandum, August 1993. Page 14 Russia: The Transformation of the Regional nscal System Table 2: fnancal flows between the Yaroslav Oblast and the Federal Authorles in 1992 Yaroslavl Oblast All Russian Yaroslavl as % regions, bln. rbl. of Russian total bln. rbl as % of as % of Budget VRP Revenue (1) (2) (3) (4) (5) = (1)/(4) Budget Revenue 27.20 100.00 9.78 2343.4 1.16 Revenue of EBF's 24.00 88.24 8.63 n.a. - Federal 21.90 80.51 7.88 3290.0 0.67 - Local 2.10 7.72 0.76 n.a. TRANSFERS TO REGION: 20.79 76.44 7.48 3518.3 0.59 1. Budget transfer 0.78 2.87 0.28 273.8 0.28 - Net mutual payments 0.34 1.25 0.12 100.1 0.34 - Budget loan 0.44 1.62 0.16 31.2 1.41 - Subventions 142.5 2. Budget investments 3.96 14.56 1.42 442.6 0.89 3. Budget r des to agricultural 3.81 14.01 1.37 358.2 1.06 4. Direct Credits 12.03 44.23 4.33 1980.3 0.61 - Agriculture 1.44 5.29 0.52 258.6 0.56 - Grain procurement 3.13 11.51 11.51 614.2 0.51 - Centrosouz 0.15 0.55 0.55 40.5 0.37 - Conversion (c) 0.36 1.32 1.32 93.7 0.38 - Investment 0.45 1.65 1.65 105.3 0.43 - Working capital 6.50 23.90 23.90 600.0 1.08 - Northern regions 268.0 5. Government reserve fund 0.11 0.40 0.40 4.6 2.42 6. Parliament reserve fund 0.10 0.37 0.37 7.6 1.31 7. Individual benefits (b) 451.2 TRANSFERS FROM REGION 43.09 158.42 15.50 4017.6 1.07 1. Federal taxes (a) 29.29 107.68 10.54 2247.1 1.30 - Profit tax 6.37 23.42 2.29 645.9 0.99 - VAT 19.54 71.84 7.03 1500.7 1.30 - Excise 3.38 12.43 1.22 100.5 3.36 2. Federal share of EBFs (a) 13.80 50.74 4.96 1770.5 0.78 BALANCE 22.30 81.98 8.02 499.3 4.47 Memo item: VRP 278.00 1022.06 100.00 21600.0 1.29 Source: Authors' calculations based on iformadonfrom Russian Ministry ofFmce, the Ofice ofthe President ofthe Russian Federation, Goskomstat, Yaroslav oblast administration NOTES: (a) rough estimate (b) for 9 months of 1992 (c) includes credits for separate industrial subsectors Page 15 Russia: The Transformation of the Regional Fiscal System E. Main Actual Budget Trends and Regional Budget Policy 62. Sudden economic changes caused by the disintegration of the USSR and the reforms in Russia, coupled with complicated regional relations with Moscow, influenced the consolidated regional budget in 1990-1993. The analysis of the revenues and expenditures in Yaroslavl's consolidated budget (excluding extrabudgetary funds) shows a clear increase in the share of regional financial resources that move through the regional budget (see Annex 1, table 8). The revenue share rose from 5.08 percent of VRP in 1990 to 7.18 percent of VRP in 1991 and 9.4 percent of VRP in 1992. Expenditures grew from 4.96 percent of VRP in 1990 to 7.54 percent in 1991 and 8.43 percent in 1992. The significant shift of fiscal power from Moscow to the regions is even more impressive when local extrabudgetary funds (totalling 0.74 percent of VRP; see Annex 1, table 13) that did not exist before 1992 are included. 63. The increase in the role of the oblast budget is part of the dramatic fiscal decentralization that has occurred in Russia recently. For the country as a whole, regional budget expenditures increased from about 15 percent of consolidated budget expenditures in the 1980s to almost 40 percent in 1992 (table 3). Table 3: Structure of Russian consolidated budget expendium by level of authoriy, 1985-87 and 1992, in billions of rubles 1985 1986 1987 1992 1. Consolidated Regional budget, total 34.8 36.3 39.0 2258.9 2. Budget of Russian republic 65.9 69.1 66.1 3569.9 3. Former USSR budget (Russian share is 123.8 136.0 144.9 - estimated as 61 percent of all-Union budget) 4. Republican and all-Union together, 189.7 205.1 211.0 3569.9 (" 2"+"3") 5. Russian consolidated budget, ("1"+ "4") 224.5 241.4 250.0 5828.8 Share of consolidated regional budget, ("1" as percent 15.5 15.0 15.6 38.8 of "5") Source: Gosudarstvennyi buydget SSSR 1981-85. Stat.sbornik, Moscow: Fmancy i statistika, 1987, pp. 74,80, Gosudarstvennyi buydget SSSR 1987 St.sbornk, Moscow: Financy i statistika, 1988, pp.54,56; 64. In parallel, Yaroslavl's consolidated regional budget reflected only 17 percent of total taxes collected in the oblast in 1988,1" whereas in 1992 we estimate the propertion to have been approximately 48 percent. 17 Nekotorye pokazateli, characteizuyshiye vozmo7hnosti perekhoda teritorii RSFSR na principy samofinansirovaniya i samoypravleniya, Moscow, Goskomstat RSFSR, 1990, vol. 3, p. 69. Page 16 Russia.: The Transformation of the Regional Fiscal System 65. Significant as it may be, the growth of regional budgets as a share of the federal budget in fact overestimates the rate of fiscal decentalization in Russia, given the existence in 1992-93 of huge extrabudgetary funds, approximately 80 percent of which were accumulated at the federal level and were at the disposal of various units of the Russian government. In 1992 the revenues of EBFs accounted for about 18.4 percent of GDP." A more precise estimate of the actual growth of local budgets in the national economy can be gained by comparing such budgets with GDP (table 4). In 1990-93 the share of total regional budget revenue increased from 8.5 percent of GDP to 14.9 percent, while the share of total expenditure grew from 9.1 percent to 16.6 percent. Thus the degree of actual fiscal decentralization, although significant, is smaller than might be expected given the shift in the country's consolidated budget. Table 4: Russian regional budgets as a share of GDP in 1990-1993, in percent Memo item: Revenue Expenditure GDP, billion rbl. 1990 8.5 9.1 626 1991 12.4 14.9 1,160 1992 13.2 12.9 17,450 1993 14.9 16.6 162,300 Source: Authors' calculation from Goskomstat data 66. On the whole, fiscal decentralization has proceeded rapidly, while the total tax burden in the country (including payments to extrabudgetary funds) has remained about the same." Recent reductions in social spending by firms have further increased the role of the regional budgets. However, the lack of clarity in intergovernmental relations, especially with respect to expenditure assignment, fostered rent seeking behaviors. 67. The consolidated oblast budget showed a small surplus in 1990 and a small deficit in 1991; 1992 was characterized by a surplus of about 1 percent of VRP, despite a large regional credit program financed through the oblast budget. The 1992 surplus (about 2,500 rubles per capita) was among the highest regional per capita surpluses in the country. When privatization receipts are included, only 6 of 89 Russian territories had a larger budget surplus; 5 of these were regions enjoying large per capita federal grants. Total per capita regional budget revenue was the seventeenth highest in Russia, but is Michael Delyagin and Lev Freinknan, "Extrabudgetary funds in Russian public finance," Research Papers of the Radio Free Europe Research Institute, vol. 2, no. 48, December, 3, 1993, p. 50. 19 Sergei Sinelnikov, "Gosudarstvennye finansy v 1992," Unpublished Memorandum, Institute of the Economy in Transition, Moscow, January 1993. Page 17 Russia: The Transformation of the Regional Fscal System spending per capita ranked only twenty-eighth.2 The existence of such a large budget surplus can be explained only by the unsettled economic environment coupled with poor budget planning and the substantial new tax revenues that accrued to the regional budget. 68. The significant annual increase in total expenditures in the oblast's consolidated budget between 1990 and 1992 (see Annex 1, table 8) was financed by increases in current revenues. The annual tax increase amounted to about 2 percent of VRP. However, the personal income tax and the profit tax were rather unstable. The former rose in 1991 and dropped in 1992, while the latter decreased in 1991 and increased rapidly in 1992. On the whole, however, personal income and business profit taxes, taken together, increased steadily from year to year and accounted for more than half of current revenues. 69. Property tax revenues were also uneven; a rise in 1992 compensated for only half of the 1991 shortfall. The payroll tax decreased sharply-from 0.63 percent of VRP in 1990 to almost zero in 1992. Domestic taxes on goods and services showed a small, uneven increase over the period. Such taxes were replaced by business profit tax as the prime source of tax revenues in 1992. The structure of these taxes changed as well during the period, as the turnover tax was replaced by the VAT and excise taxes. 70. The stable increase in nontax revenues as defined in Annex 4, including revenues from property and entrepreneurial activities, should be noted. Nevertheless, such revenues still constitute a very small share of the total. Capital revenue as a share of VRP remained at a stable, small level. 71. Overall, the main change in the revenue structure of the regional consolidated budget was caused by the rapid growth of taxes on goods and services. The rate of growth on the profit tax revenues was in line with the increase in total revenue. The rate of growth in other taxes was much smaller. 72. During the same period, there was a significant shift in the structure of expenditures. Spending on the national economy grew much more rapidly than spending in the social sphere. The fastest growing expenditure items were: agriculture, transportation and communication, fuel and energy sector, and housing and utilities. With the exception of social protection, social expenditures (health, education, art and culture) grew at a lower-than-average rate. The rapid growth of the "national economy" expenditure compensated the cuts in federal spending for such purposes. The oblast government tries to support the restructuring of local enterprises through financial assistance. The influence of the managers of the largest state enterprises also helps explain this growth. 73. A short-term loan program subsidized directly from the budget is another example of new regional government interventions in enterprise activity. The credits in question were extended at a 20 percent annual interest rate when the market rate exceeded 100 percent. About 500 million rubles in such credits were granted in 1992, representing 2.0 percent of total consolidated budget expenditures and roughly 1.5 percent of total 1992 regional commercial bank credits. 2o Le Hoeron, Decentralization and fiscal disparities, Tables 3, 9. Page 18 Russia: The Transformation of the Regional Fiscal System 74. In contrast to recent actual budget trends, the 1993 budget plan calls for revenues to decrease to 7.76 percent of VRP and for expenditures to drop to 7.85 percent of VRP (Annex A, table 8). The budget deficit is to be limited to 1,527 million rubles, or 0.09 percent of VRP. All types of revenues (except personal income taxes) are slated to decrease. The budget plan is indicative of the present tendency to produce unrealistic budgets that overestimate actual fiscal problems in an effort to extract additional federal support. The 1993 budget plan also calls for sharp reductions in all expenditures -- except those for agriculture. Such a shift would be virtually impossible to accomplish in such a short period of time. In fact, the consolidated budget execution data for the first half of 1993 are significantly different from the initial budget plan. Total revenues have reached 12.8 percent of VRP and total expenditures, about 12.1 percent, with no budget deficit. 75. Table 5 presents a comparative analysis of the structure of Yaroslavl's 1992 consolidated budget. The most significant source of additional revenue was the profit tax (33 percent higher per capita than the Russian average) and excise taxes (three times higher than the national average). Per capita budget expenditures in the oblast were very close to the Russian average despite much higher expenditure on the national economy (especially on investments). Social expenditures were slightly lower, but this was compensated by much higher than average social expenditures by local enterprises. 76. Compared to the pre-reform era, the share of social expenditure i; the consolidated regional budget declined far over 60% i the mid-80s to 42% in 1992. Conversely, national economy outlays increased substantially from 5% in the mid-80s to over 20% of total regional expenditures in 1992. 77. Growing intervention by local authorities in regional economic matters can be detected in the area of budget policy preferences. In early 1993 the oblast soviet expressed the following priorities in budget policy: 0 support for social and industrial infrastructure in rural areas: 1.2 billion rubles (0.9 percent of the total consolidated budget expenditure), including a federal subsidy of 373 million rubles; o production support for the agro-industrial complex: 4.1 billion rubles (3.1 percent of consolidated budget expenditures); o support for rayon budgets to maintain residential housing and related construction in the social sphere; o subsidies for basic consumer goods: 3.1 billion rubles (2.4 percent of consolidated budget expenditures); o direct support for low income groups: 0.2 billion rubles Page 19 Russia: The Transformation of the Regional Fiscal System Table 5. Structure of the Yarodld oblast consolidated budget in comparisor* with average Russian regional budget in 1992 Structure Per Capita Ratio Total, bin. rbl % of Total Rev./Exp. Thous. rbl. (5)/(6) Yar. Russia Yar. Russia Yar. Russia % (1) (2) (3) (4) (5) (6) (7) REVENUESO 27.2 2343.4 100.0 100.0 18.510 15.759 117.5 - Profit tax 12.1 920.4 44.5 39.3 8.231 6189 133.0 - Personal income tax 3.9 429.6 14.4 18.3 2.665 2.889 92.3 - VAT 4.9 498.2 18.0 21.3 3.318 3.350 99.0 - Excises 3.4 111.0 12.4 4.7 2.296 0.746 307.5 EXPENDITURES b 24.3 2301.4 100.0 100.0 16.511 15.476 106.7 - National Eoonomy 12.1 963.5 49.9 41.9 8.240 6.479 127.2 - Investments 5.1 363.4 20.9 15.8 3.444 2.444 140.9 - Food Subsidies 0.5 69.7 2.1 3.0 0.350 0.469 74.6 - Social Expenditures 9.3 971.6 38.2 42.2 6.314 6.534 96.6 - Administration 0.7 68.8 2.8 3.0 0.457 0.463 98.7 BALANCE - 1 2.9 42.0 12.1* 1.80 1.999 0.283 707.1 FEDERAL TRANSFERS 0.785 273.8 3.2* 11.9 0 0.533 1.841 29.0 - Subventions 142.5 6.2 0.958 - Net mutual payment 0.343 100.1 1.4 4.3 0.233 0.673 34.6 - Budget loans 0.442 31.2 1.8 1.4 0.300 0.210 143.1 BALANCE - 2 3.7 315.8 15.3 0 13.70 2.532 2.124 119.3 SOCIAL EXPENDITURES BY ENTERPRISES 5.8 471.6 23.9 * 20.5 0 3.943 3.171 124.3 Source: Mmnisry of Finance; Goskomsat Including rivatization receipts and funds available at the beginning of the year. Ibdeayloans. As % i oxpnditure of corresponding budgets. 78. Four out of five of these priorities involve direct subsidies to agriculture and related industries. Expenditures for such purposes from the consolidated oblast budget totalled more than 10 billion rubles in 1993-6 percent of all expenditures in the consolidated budget. 79. The regional government has developed several large-scale programs to reorient or convert production in the face of structural changes in demand. Because budget constraints are severe, however, attempts are being made to find external sources of financing (federal budget, foreign investors). Page 20 Russia: The 7ransformation of the Regional Fiscal System 80. Although the oblast's conversion problems are not as acute as those of most Russian regions, the regional government has begun a program of plant conversion support for 1993.2 Its basic priorities are consumer goods manufacturing, medical and agricultural goods, and food processing equipment. A mixed scheme for financing the program has been proposed. The total financing sought is on the order of 1.5 billion rubles (1.1 percent of consolidated budget expenditures), 14 percent of which would come from enterprises involved, 40 percent in investment credits from the oblast budget (at 20 percent interest), and the rest from the federal budget (37 percent in direct investment credits from the Ministry of Finance and 9 percent in budget grants). 81. The regional social development program calls for 20.6 billion rubles in 1993 (1.24 percent of anticipated VRP or 15.7 percent of consolidated budget expenditures) including 8.6 billion from the oblast budget and 12 billion from rayon and city budgets. The basic trends in these activities are as follows: o benefits and subsidies for certain groups (children, the disabled, families with many children); o food price controls (a profitability limit on bread production and sale, subsidies to bakeries, dairies, and meat processing plants); o budget financing for social programs, including housing construction; o transfer of enterprises' social infrastructure assets to local authorities. F. Spending Responsibilities and Revenue Sharing within the Yaroslavl Oblast 82. As stated above, at the regional level, budget revenues and expenditures are not strictly separated by levels of government. Before approval by the local soviets, the draft budgets of all the administrative units within the regions have to be approved by the oblast administration. On the expenditure side, each level of government drafts its budget in accordance with the expenditure "norms" (e.g., the cost of each student is "x" rubles) inherited from the central planning era. However, the oblast administration determines the inflation rate forecasts to be used for determining these expenditure needs. Based on the latter, the oblast administration determines the tax sharing arrangement within the region and the amounts regional grants to the cities and rayons. In this process, all new budget programs at the rayon level are in fact financed from the oblast budget through transfers. 83. The current structure of expenditures in the Yaroslavl consolidated budget is very similar to the Russian average in the mid-1980s: oblast 20 percent, large cities 50 percent, rayons 30 percent. However, as observed in the case of federal-regional expenditure assignment, the assignment of expenditure responsibilities within the Yaroslavl oblast is quite murky and shifting. Expenditure assignment follows broadly the benefit area principle: Expenditure for social infrastructure spending (including capital investments) as well as housing and utilities are typically the responsibility of the "suboblast" levels. As shown in Annex 1, table 12, several other types of expenditures (e.g., retail price 21 "Yaroslav regional program of work programs at enterprises being converted," Unpublished Memorandum prepared by the oblast administration. YaroslavL, January 1993. Page 21 Russia: The Transformation of the Regional Fiscal System subsidies) are distributed in the same way. The oblast budget serves as the primary source of financing for the rural gas pipeline system, and the regional social security program (in order to prevent conflicts and disagreements among rayons). Some of these programs are financed jointly by cities and the oblast, for example, the Yaroslavl city water system. However, as illustrated by table 6, the assignment of expenditure responsibilities within the region is still shifting. Table 6. Breakdown of current ransfers and subsidies in Yaroslayl, by level of admintamon in 1992-93, in percent Target of subsidies 1992 preliminary 1993 draft budget Oblast Local Oblast Local Gas distribution 100% 0% 100% 0% Public transport 9 91 18 22 Service sector for households 68 32 100 0 Construction project design 100 0 100 0 Pharmacies 99 1 26 74 Rural cinemas 22 78 13 87 Housing and utilities 5 95 6 94 Food processing (to compensate for low 41 59 100 0 prices) Households (to purchase) fuel 49 51 50 50 84. Tax sharing rules applicable to the largest cities, which generate the most tax revenue for the oblast budget, but not the town of Uglich, which in 1993 was allowed to retain all of the taxes it raised. Other local budgets reserve 100 percent of their tax revenues (except amounts paid to the federal government). In 1993, the largest cities contributed as follows to the oblast budget: Table 7. Tax Sharing between the Oblast and City Budgets in the Yaroslavl Region in 1993, as percentage of total tax revenues City Personal income tax Corporate profit tax VAT Oblast Cities Oblast Cities Oblast Cities Yaroslavl 20% 80% 29.7% 39.1% 10% 10% Rybinsk 20 80 30.6 38.1 0 20 Rostov 20 80 34.4 34.4 0 20 Pereyaslavl- 50 50 34.4 34.4 0 20 Zalesskii Tutaev 70 30 47.2 21.6 0 20 Note: Figure denotes percentage of tax revenues remitted to oblast and cities budgets. The balance accrues to the federal budget. Tax sharing norms were similar in 1992, except that the share of the profit tax accruing to the oblast rose somewhat in 1993. Page 22 Russia: The Transformation of the Regional fiscal System 85. All other taxes and revenues (including other excises, state duties, forest income, water and land use payments, and property tax on legal entities), except for privatization receipts, are retained by the cities and rayons. As in the case of the federal budget, a few taxes provided most of the revenue collected by cities and rayons. Minor local taxes and nontax revenue constituted an insignificant part of the revenue base of local budgets. Nevertheless, oblast authorities have been eager to claim the major part of such revenues for the oblast budget. 86. Table 8 demonstrates that privatization receipts were divided between oblast and local budgets in approximately equal portions in 1992. Table 8: PriWadzation receipts in 1992 by level of government in Yarslavl TOTAL, in in percent millions of rubles Oblast Local TOTAL receipts, of which: 723.3 55.4 44.6 - privatization of state assets 713.6 56.1 43.9 - privatization of land 1.3 0.0 100.0 - privatization of housing 8.4 0.0 100.0 87. There are 23 local taxes which, under current Russian law, may be collected by cities and rayons. As a rule, federal tax authorities set limits on local tax rates; within those limits, local soviets are free to set the rates. (See Annex 2). 88. The Yaroslavl oblast and rayon administrations enforce nearly all of the taxes listed in Annex 2, although to very different degrees. The most common taxes are: (1) liquor license fee (16 of 21 local governments require a fee for such licenses) (2) local police tax, (3) land-development tax, and (4) trade license fee (the latter three are used by 13 local governments). The less common taxes are: (i) street-cleaning tax (1 local government), and (ii) tax on the use of local symbols (4 local governments). 89. Important changes were made in the allocation of revenues from the consolidated regional budget between 1990 and 1992 (See Annex 1, table 12). Oblast budget receipts increased from 0.55 percent of VRP in 1990 to 3.34 percent in 1991; in 1992 they decreased slightly to 3.16 percent. In contrast, rayon tax receipts decreased from 1.6 percent of VRP in 1990 to 0.7 percent in 1991 and 1992. City tax receipts rose steadily from 2.59 percent of VRP in 1990 to 2.76 percent in 1991 and 5.09 percent in 1992. The tax reform of 1991-92 widened the tax base of the oblast budget and provided clearer rules for allocating tax receipts among federal, oblast, city, and rayon budgets. Thus tax reform abolished a variety of turnover taxes, implemented unified rates for sales taxes, the value added tax, and excises, which are all relatively stable taxes. It discontinued allocations of profit tax rates among enterprises on an individual, case-by-case basis, and replaced these with a more uniform tax on profits. Page 23 Russia: The Transformation of the Regional Fiscal System 90. As a result, the revenue side of the budgets of different levels of government within the region became much more transparent. Tax collection now reflvcts more closely the tax base of cities and rayons. Subsidies for rural areas are more explicit. In comparison with actual needs and traditional spending patterns, the current tax base is more than adequate in urban areas and grossly inadequate at the rayon level. Shortfalls in the rayons are made up through transfers from higher-level budgets. The share of rayon budgets in total budget revenues decreased four-fold, but the share of expenditures, at 20 percent, was roughly the same as it was in 1990. The opposite shift occurred in the share of the oblast budget: its revenue share increased three-fold, but expenditure decreased from 34.2 to 19.5 percent. 91. Explicit intraregional grants within the consolidated regional budget increased from 1.75 percent of VRP in 1990 to 2.98 percent in 1991; they then fell to 1.67 percent of VRP in 1992, but still constituted nearly 20 percent of total expenditures. However, it should be noted that in 1990 funds were transferred from rayons to the oblast budget; in 1991 transfers were made in both directions; but in 1992 intraregional grants flowed from the oblast to the rayons budgets. Such grants for cities and rayons are expected to reach 3.81 percent of VRP in 1993. 92. The following trends in intra-oblast budget flows should be noted: o the share of total intra-regional transfers decreased, while reflecting the oblast government's priorities, transfers to rayon budgets rose; 0 some centralization of total revenue has occurred in the oblast budget, but spending has become more decentralized since 1990. G. Extrabudgetary Funds 93. Regional branches of federal extrabudgetary funds (EBFs), as well as local extrabudgetary funds, operate in the Yaroslavl oblast (Annex 1, table 13). Most were created in 1992. Unfortunately, exhaustive data concerning the extrabudgetary funds is not available. In particular, information about the expenditure side of these funds is almost systematically lacking. What is known is that in 1992 most federal extrabudgetary funds had a large positive balance ranging from 25 percent to 75 percent of their revenues? The fact that standard extrabudgetary fund statistics do not include precise information on the share of fund revenue collected in the region and transferred to the federal funds makes regional budgetary analysis extremely difficult. 94. On the whole, according to the available data, the resources available to both the local branches of federal EBFs and oblast EBFs amounted to 8.63 percent of VRP and 91.8 percent of consolidated oblast budget. The 1992 revenue of the Yaroslavl branches of all federal funds was 21,926 million rubles (7.89 percent VRP and 83.9 percent of consolidated budget revenues). At least 37 percent of those revenues remained in the region; the balance was transferred to Moscow. 2 Delyagin and Preinkman, "Extrabudgetary funds in Russian public finance." Page 24 Russia.: The Transformation of the Regional Fiscal System 95. The Yaroslavl branch of the federal pension fund is the largest federal fund in the oblast. Its revenues amounted to 11,556 million rubles in 1992 (4.16 percent of VRP and 44.24 percent of the consolidated regional budget revenue). The resources of this fund come from a wage tax and expenditures (for pensions, benefits, and for operating expenses of the fund) are made in accordance with guidelines set by the federal pension authorities in Moscow for each region of the country. A portion of the fund's revenue remains with the employers. The rest of the revenue is placed in a commercial bank and is transferred to the federal fund administration only after the deadline for transfer has passed. 96. The 1993 regional employment program as approved by the oblast administration must be financed from the regional branch of the federal employment fund (3.4 billion rubles, 0.2 percent of forecast VRP, or 2.6 percent of consolidated budget revenue). The major trends in fund allocation are the following: unemployment benefits (29 percent of total planned expenditures), investments in new jobs (28 percent), retraining (10 percent), and transfers to the federal unemployment fund (10 percent). The regional employment program also is supposed to provide job assistance for several groups (e.g., the young and the disabled), as well as support for migrants and for small business." 97. The Hard Currency Fund is the largest of the EBFs established by the oblast administration. Its revenue comes from a special export tax (10 percent of hard currency payments from all oblast exporters plus 50 percent of revenues from oil products exported under the additional regional export quota negociated with the federal government). The fund's 1992 revenue was US$5.163 million (about 1,177 million rubles using the average 1992 ruble rate of 228 to the dollar), 0.42 percent of VRP, and 4.51 percent of consolidated budget revenue. The fund's actual expenditure was US$4.654 million, or 1,061 million rubles in 1992 (0.38 percent of VRP and 4.53 percent of consolidated budget expenditure). In practice, all expenditures were capital transfers: US$2.6 million was spent to buy potato planting equipment, US$1.9 million for cabbage planting equipment, US$146,000 for computers and software, US$20,000 for veterinary pharmaceutical, and $21,500 for a Mercedes. Overall, 98.8 percent of expenditures went to the agriculture sector; those expenditures constituted about 33 percent of regular budget expenditures for agriculture and forestry. 98. The 1993 revenues of the Hard Currency Fund were expected to be about US$10 million (or about 10 billion rubles at the rate of a thousand rubles to the dollar), 0.60 percent of anticipated VRP and 7.64 percent of consolidated budget revenues. In the first quarter of 1993 US$1 million was converted to rubles to finance the oblast budget. These funds were granted to the agriculture sector for the spring planting. The anticipated 1993 expenditures of the Hard Currency Fund were medical equipment (US$1.5 million), road repair equipment (US$1 million), pharmaceutical (US$500,000), herbicides and veterinary pharmaceutical (US$400,000), cabbage planting equipment (US$1 million), clinate control equipment for the museum (US$210,000), automated knitting equipment (about US$500,000), and reconstruction of the Rybinsk city center (US$300,000). Finally, the regional government plans to establish an oblast hard currency credit fund of US$2 million to lend to enterprises. 2 *Yaroslavl regional employment program for 1993," Unpublished Memorandum prepared by the regional administration, Yaroslavl, April 1993. Page 25 Russia. The Tansformation of the Regional Fiscal System 99. The Hard Currency Fund is the greatest single source of targeted investment funds provided by the region. Its role as a reserve fund to cover unexpected costs is also very important. From the regional authorities' standpoint, another advantage of such a reserve is that it is hidden from the federal government. Unfortunately, the roles of investment and reserve financing are still poorly understood by the administration, as the monies are spent very ineffectively, chiefly for agriculture. 100. There is another oblast fund, the Unified Extrabudgetary Fund, which is managed by the regional government. Its revenue comes from interest on regional government deposits, 40 percent of traffic fines, additional revenues from liquor sales, a share of other fines, and revenues from the ownership rights of the Yaroslavl oblast Property Fund in local enterprises. Income from the fund is spent for various social programs. Control over the fund was long in dispute between the oblast executive and legislative authorities. Smaller funds with the same title and with the same sources of financing exist in rayons and cities. 101. The oblast's Fund for Charity and Health is made up of voluntary assignments from profits and income from auctions and subbotniks (unpaid Saturday labor). The fund helps the disabled, pensioners, and single mothers. Its revenues are insignificant. 102. A few other small funds-the oblast's Social Stabilization Fund, municipal and rayon social security funds, the Yaroslavl city communication fund, etc-function at the oblast, city, and rayon levels. IV. ANALYSIS OF REGIONAL BUDGET EXPENDITURE A. Spending Patterns by Functional and Economic Categories 103. The level of aggregation of expenditure categories used by the Ministry of Finance (MoF), obscures the analysis of the government's sectoral spending. For example a large number of items included under "national economy" should in fact be reclassified under social expenditures. Therefore the analysis of spending presented below is based on a major exercise of reclassification of budget expenditures. The details of this reclassification exercise are presented in Annex 1, table 16. 104. Table 9 shows presents the differences in functional budget expenditures under the IMF's Government Finance Statistics Manual (GFS) classification and the Russian finance ministry classification. 105. It also shows that over 90 percent of the oblast's consolidated expenditure is concentrated on two categories, namely "national economy" and social outlays. o National Economy, 28.3 percent of total expenditures, including agriculture, 13.9 percent; food processing, 2.2 percent; transport and communication, 7.4 percent; o Housing and Utilities, 23.5 percent; Page 26 Russia: The Transformation of the Regional Fiscal System 0 Social and Cultural, 44 percent, including education, 16.9 percent; public health, 16.0 percent; social security, 8.3 percent; culture, 2.7 percent. Table 9: Comparison of main expenditures in Yaroslavl consolidated regional budget under Russian and IMF classfLcations, in percent of total expenditures 1990 1991 1992 Ministry of Finance classification National economy 23.0 44.7 52.2 Social and cultural 67.6 45.0 39.6 GFS functional classification National economy 11.5 32.8 28.3 Housing 14.4 11.9 23.5 Social and culturd 68.8 51.4 44.0 Source. Authors' calculations. 106. Some of the more important spending trends that emerge from the functional budget classification presented in Annex 1, table 8 are the following, as shares of total expenditure: o Spending on housing and city utilities (HU) became the single largest expenditure item in 1992; o Health and education expenditures increased in 1991 and then fell below their 1990 level in 1992. Health and education are the second and third largest expenditure items. o Subsidies for food products (including food processing) rose dramatically in 1991 to become the largest expenditure category and then fell equally dramatically in 1992 as a result partially of direct federal subsidies to agricultural producers and some foodstuffs (e.g., grain); i.e., regional subsidies were replaced by federal ones. 107. The economic classification of the Yaroslavl consolidated budget presented in Annex 1, tables 9 to 11, shows that most expenditure categories behaved erratically between 1990 and 1992. Two exceptions stand out: (i) Current transfers to households rose from 0.06 percent of VRP to 0.27 percent in 1991 to 0.29 percent in 1992; and (ii) spending for other goods and services was stable in 1990 and 1991 (at 0.71 and 0.72 percent of VRP) and increased to 1.35 percent in 1992. 108. The region's wage bill increased from 1.78 percent in 1990 to 1.91 percent of VRP in 1991 but then fell abruptly to 1.35 percent in 1992. This trend, which is observed in Russia as a whole, reflects the significant decrease in the relative wages of civil servants since price liberalization. The trend in spending on subsidies to enterprises was analogous: huge growth (from 0.32 percent to 2.36 percent Page 27 Russia: The Transformation of the Regional Fiscal System of VRP) in 1991 and a rapid drop (to 1.60 percent of VRP) in 1992. By contrast, reflecting the decentralization of investment expenditure that took place in 1992, capital transfers to enterprises, which decreased from 1.43 percent to 1.34 percent of VRP in 1991, increased significantly to 2.98 percent in 1992. "Not Identified" expenditures constituted between 0.7 percent to 0.9 percent of VRP and in no way alter the overall picture. 109. Thus analysis of the expenditure side of the consolidated regional budget reveals that increases in capital transfers and other purchases of goods and services took place partially at the expense of salaries. More detailed analysis of spending across classifications shows that the change was the result of reductions in the share of the wage bill in the health and education sectors (from 0.73 percent of VRP in 1990 to 0.48 percent in 1992 in the former, and from 0.78 percent of VRP to 0.62 percent in the latter), and of increases in capital transfers in health care (from 0.25 percent of VRP in 1990 to 0.40 percent in 1992), in housing and city utilities (from 0.58 percent of VRP in 1990 to 1.38 percent in 1992), and in agriculture (from 0.00 percent of VRP in 1990 to 0.47 percent in 1992). 110. Together with investment spending, subsidies account for the largest part of national economy and housing expenditures. Several types of subsidies are used in local budget financing. The most common are: (a) pure producer subsidies, (b) "mixed" (i.e., producer and consumer) subsidies in price-controlled sectors, (c) consumer subsidies, and (d) unbudgeted subsidies: a. The most prevalent examples of this group are agricultural subsidies, which provide partial compensation for the prices of inputs used by farms. b. This is the largest group of subsidies. It includes subsidies for food-processing, public transport, and housing, among others. Such subsidies have traditionally been treated as consumer subsidies' because they are supposed to lower prices for consumer goods and services. However, part of these subsidies also cover losses due to producer inefficiencies. The problem is that it is impossible to separate the producer and consumer parts of these types of subsidies. c. This type of subsidy properly includes only subsidies targeted at certain groups of consumers (like the U.S. "food stamp" program). Although still rare in Russia, such subsidies can be found (e.g., subsidies for child food in kindergartens and schools, and for medicines for some social groups), but most are hidden within more general social expenditures lines, from which they are very difficult to extract. The same is true at the federal level. The Russian president's 1992 budget message presented several subsidies of this type under the "Social Expenditure" heading; for example, subsidies for student railway tickets, for children's summer vacations, for retirees' pharmaceuticals, and so on. Together these account for a relatively small portion of total subsidies. d. This group of subsidies is probably very large at the regional level. It includes various tax exemptions and benefits, as well as preferential budget credits, but their main source is preferential prices and tariffs on municipal services and resources granted by the regional authorities to certain enterprises and sectors. These subsidies include discounts on land and water payments; allowances See, for example, "Subsidies and directed credits to enterprises in Russia: Strategy for reform," World Bank Report No. 11782-RU, April 8, 1993, pp. 2, 22. Page 28 Russia: The Transformation of the Regional FIscal System on leasing municipal facilities, and discounted prices for electricity, among others. We cannot provide even a rough estimate of their scale or scope. Ill. All of the above-mentioned subsidies must be distinguished from transfers to households (pensions, cash grants to various groups), which the recipients may use for any purpose they choose. This important methodological difference is not yet clear to Russian budget officials, who typically do not distinguish them from (c), above. 112. Subsidies constitute a total of 20.3 percent of Yaroslavl's consolidated budget expenditures and about a half of total spending on national economy. Based on comparable information for several other Russian regions, the Yaroslavl levels appear to be rather typical. For example, in 1992 city budgets in Stavropol kray showed subsidies averaged 22.1 percent of total budget expenditure. Our calculations on data from the Nizny Novgorod oblast budget for the first half of 1992 showed a 22.4 percent subsidy share. 113. More than 80 percent of subsidies go to enterprises to compensate them for regulated consumer prices (table 10). Like most Russian regions, Yaroslavl regulates prices for many goods (including bread, vegetable oil, vodka, matches, medicines, household fuels, public transportation, and telephone service for individuals and businesses). The combination of regulated prices and producer subsidies is very inefficient. A system of direct consumer subsidies and cash transfers to households, coupled with price liberalization, would increase the efficiency of budget spending. 114. Consumer subsidies in the budget are probably somewhat more widespread than we have been able to account for, but as a rule they are not presented as separate budget items. We estimate, therefore, that consumer subsidies make up no less than 6.4 percent of total subsidies in the regional budget. In any event, our underestimation of consumer subsidies cannot be very significant because such subsidies are very not widely used in Russia.. Table 10: Consolidated budget subsidies in 1992 in millions of ruble as a percent of total (a) Subsidies to enterprises to cover operational costs and losses 574 12.1 (b). Subsidies to enterprises subject to price controls 3,874 81.5 (c) Subsidies to targeted social groups 304 6.4 TOTAL 4,752 100.0 20. A. Yavlinsky et al., "Nizhegorodsky proruv, Ekonomica i polica v Rosii" (Moscow: EPI-centr), 1992, pp. 217-218. Page 29 Russia: The Transformation of the Regional Fiscal System 115. No sound rationale underpins either the specific rates of consumer price subsidization in the region or the set of goods subsidized. No doubt, the Soviet tradition of price regulation still plays an important role in the decision making process. The influence of managers of the largest enterprises in the agricultural, transport, and food-processing sectors is very important. Managers at the regional level are very well organized and enjoy very close ties with local government. "Subsidy competition" among regions helps determine the levels of basic food prices in neighboring oblasts. When subsidies result in significant price differentials between neighboring areas, the regional administration will implement both explicit and implicit restrictions on "exports" of the subsidized goods. Table 11. Subsidies in the 1992 consolidated oblast budget by sector. millions of rubles as percer age of total 1. National economy 2,642 55.6 - fuel 183 3.9 - trade 160 3.4 - public transport 372 7.8 - agriculture 1,252 26.3 - food processing 524 11.0 - others 128 2.7 2. Housing 1,529 32.2 3. Social sphere 581 12.2 - culture 100 2.1 - public health 234 4.9 - education 247 5.2 TOTAL 4,752 100.0 116. The sectoral allocation of subsidies presented in table 11 shows that agriculture and housing received about 60 percent of all budget subsidies in 1992. It should be noted that the social expenditures shown above represent subsidies, which must be separated from regular budget spending on free public services in education, public health, social protection, and so on. Subsidies in the social sphere fall into two categories: The first covers losses of organizations such as theaters, pharmacies, and publishing houses, which, although they are part of the social sphere, nevertheless operate in principle as profit-making entities. The second type, which is relatively rare, is targeted at very specific groups of households (it is described above in table 10 as separate line (c)). Page 30 Russia: The tansformation of the Regional Fiscal System B. Investment Expenditure 117. As mentioned earlier, the Russian federal government is financing several investment projects in the region. Houses are being built for servicemen. A defense plant is being converted for civilian production under the federal conversion program. Houses are being built for those who have fled the area contaminated by the Chernobyl disaster. A complex is being constructed for the Russian Academy of Science. Overall, about three billion rubles (0.18 percent of anticipated 1993 VRP and 2.29 percent of the draft consolidated budget) have been allocated for such purposes in 1993. 118. Until 1992, almost all capital investments in agriculture (including agro-industry) were made under the federal "Non-Black Earth Zone" development program. Now, as mentioned above, the oblast finances most agricultural investment. 119. The role federal funds play in the structure of regional investments and the respective spending responsibilities of the federal and regional governments in the investment area are much less transparent than they are in the area of social spending. On the one hand even before the current fiscal reform a significant portion of regional investment-primarily for housing and social programs-was financed from the oblast budget (Annex 1, tables 9 and 10). On the other hand, since the reforms began federal authorities have retained partial responsibility for infrastructural development (highways, airports), restructuring (conversion), social investments (housing for servicemen and migrants), and other investment projects. 120. The regional government does not subject investment proposals to economic and financial analysis. Instead, investment planning follows traditional operating procedures and reflects traditional priorities. The results are inefficient planning, poor project evaluation, and decision making based on nontransparent criteria. Despite their scale and variety, regional development projects are not programmed in any formal sense. Investment decisions are made case by case, without apparent consideration of intersectoral links or long-term effects. No consolidation of all regional investment exists. 121. Nevertheless, investment decisions by the regional authorities are clearly guided by a number of priorities and factors. Housing-both new construction and repair-is priority number one. In some sense, all free resources are marshalled to increase housing construction. The regional authorities have accumulated substantial enterprise funds for this purpose; as noted above, housing is still heavily subsidized for nearly all citizens. Budget constraints will soon change this. 122. Decisions on community infrastructure (schools, shops, day care facilities) are made largely as a function of housing decisions using norms set forth by the former Gosplan/Gosstroi. The same norms continue to operate with regard to existing housing. A decision to build new stores may be made if the total commercial space in a community falls below a certain norm. 123. Decision makers compare their region with others when deciding whether to invest in certain social sectors. Direct lobbying by local groups may also influence an investment decision in the social sphere. As a rule, theaters, museums, libraries, and other cultural amenities receive less investment than health and education; in turn, the latter receive less investment than rural electricity and Page 31 Russia: The Transformation of the Regional Fiscal System other elements of industrial infrastructure. Regional capitals and large cities tend to receive more investment than less populous areas. 124. Table 12 presents a rough estimate of total investment financing in the Yaroslavl oblast in 1992. The data cover only new investment in fixed capital; thus they exclude a significant portion of actual investment (such as capital repair-see Table 13 below). 125. The amount of investment from the 1992 consolidated oblast budget was about 30 percent higher than investment from the federal budget. Total oblast investment financing, on the other hand, was 50 percent greater than federal budget investment due to regional investments financed through extrabudgetary funds. Investment funds received by the oblast via federal direct credit programs were about 7 percent of total investments. Table 12: 1992 Fiscal Invesents in the Yaroslavi Oblast by Source of FKn afg (excuding Social Investments by Enterprises) billions of as percent of total rubles TOTAL Investments 11.64 100.0 Federal sources: 5.45 46.8 - federal budget 3.96 34.0 - investment credit 0.45 3.9 - conversion credit 0.36 3.1 - investment fund in 0.60 5.2 fuel and energy sector (a) - conversion fund (a) 0.08 0.7 Oblast sources: 6.19 53.2 - oblast consolidated 5.13 44.0 budget - hard currency fund 1.06 9.1 (a) Amounts represent internal use by firms of resources earmarked to these extrabudgetary funds. Source: Authors' calculations based on tables in appendix Page 32 Russia: The Transformation of the Regional Fiscal System 126. Table 13 presents the functional structure of consolidated budget investments. Russian finance ministry statistics significantly underestimate the amount of investment made through any budget in Russia because they reflect only new investment in fixed capital. In the case of Yaroslavl's consolidated budget such investment was only about 60 percent of total 1992 budget investments and less than 50 percent of the corresponding 1990-91 figure. The true share of investment expenditure in the consolidated budget was 35.3 percent, rather than the 21.9 percent share reported by the MoF. The 1992 figure of 35.3 percent was much higher than the 28.8 percent recorded in 1990 or the 17.8 percent recorded in 1991. 127. Capital repair is one of the most significant expenditure items in the regional consolidated budget. From 7 to 9.5 percent of total funds were spent for such purposes in 1991-92, an amount comparable with new investment. Due to the shift in relative prices in 1992 the share of new constrution in total investments increased. Table 13: Capital lhnfers from Consolidated Yaroslavl Budget in 1990-92 1990 1991 1992 Millions Percent Millions Percent Millions Percent of rubles of rubles of rubles Investments in fixed 54.4 46.4 99.9 43.2 5126.5 61.9 capital Capital repair 39.0 33.3 90.1 39.0 2154.6 26.0 Purchases of equipment, 23.9 20.3 41.2 17.8 1005.3 12.1 furniture, etc. TOTAL Investments 117.3 100.0 231.3 100.0 8286.4 100.0 Note: Investments from regional extrabudgetary sources are not included in the table. These totalled 1.74 billion rubles in 1992, 21 percent of oblast budget investments. Source: authors' calculations from regional budgets 128. Table 14 presents consolidated oblast budget investments by sector. Housing, education, and public health are the largest recipients. A dramatic increase in agricultural investments in 1992 came at the expense of the social sphere. Nevertheless, about one-third of total 1992 investment was made in the social sphere. In 1990-91 this sector received about a half of total investment. Investment in housing continues to be the largest investment item; its share increased in 1992. Page 33 Russia: The Transformation of the Regional Fiscal System 129. Regional budget information typically does not break investment down by level of government. Only a small amount of information regarding capital repair and purchases of equipment is available (see table 16 below). Primary budget responsibility for education financing has already been transferred to local budgets. In public health and culture the same top-down shift has been taking place gradually. Investment in the social protection net continues to be financed primarily from the oblast budget. 130. Despite the lack of detailed data, it seems that city and rayon budgets finance. new investment chiefly in the areas of housing, utilities, infrastructure, and social programs, but not in industry. Interviews with Yaroslavl city officials reveal that about one-third of the city budget for new investment is spent for infrastructure projects (water supply, sewerage, heating, electrical power), 40 percent for housing, and most of the remainder for social programs (schools, kindergartens). Investments from the oblast budget are much less concentrated, as we have seen. Considered by sector, investment typically comes from a several sources. In Yaroslavl city, for example, housing construction is financed from the city budget (20 percent), the oblast budget (30 percent), and by enterprises (50 percent). Table 14: Sectoml breakdown of capital mnsfen from the Yarolavi oblast consolidated budget, 1990-92, in pecent of total Investnent 1990 1991 1992 National economy 2.6 5.8 20.7 - agriculture and forestry 0.3 0.1 15.8 - food processing 0.6 0.1 0.0 - fuel and energy 0.3 0.3 0.0 - transportation and communication 0.8 2.9 4.3 - construction 0.2 1.8 0.2 - other economic activities 0.4 0.6 0.4 Social sphere 51.1 49.3 29.2 - education 24.3 21.3 11.6 - public health 17.8 19.9 13.5 - social protection 2.2 5.7 2.7 - recreation and culture 6.8 2.4 1.4 Administration 3.0 3.1 2.5 - justice 0.0 0.2 0.1 - general services 3.0 2.9 2.4 Housing and utilities 40.6 39.5 45.9 Not identified 2.7 2.8 1.7 Total 100.0 100.0 100.0 Note: 1992 investments from the oblast hard currency fund were mainly spent on agriculture, boosting total investment in this sector by about 80 percent. Source: Annev 1, tables 9-11 Page 34 Russia: The Transformation of the Regional Fiscal System C. Social Spending 131. Regional budget responsibility for social programs includes responsibility for the operations of various sectors in the social sphere (capital improvements and maintenance; and operating expenses, including wages) as well as new investments in sectoral development, including purchases of equipment. The oblast budget also covers education (up to university level), public health, social security, sport, recreation, and culture. Although certainly a central item in any scheme of social spending, pensions are financed through the extrabudgetary federal pension fund, but not from regional funds. 132. Per capita social expenditure, including housing, remained stable in real terms during 1990-92. Social spending totalled 4.14 percent of VRP in 1990, 4.81 percent in 1991, and 5.70 percent in 1992. This nominal increase is compensated by the decline in real per capita VRP which fell by 8 percent in 1991 and 20 percent in 1992. 133. However, excluding housing, social expenditure (i.e., outlays for education, health and culture) declined by about 25 percent over the period. Conversely, housing expenditures increased by 80 percent. 134. Available information is not adequate to permit comparisons of actual federal spending and regional budget expenditure for social programs in the Yaroslavl oblast. Table 15 covers only regional sources of social financing, including the consolidated oblast budget, local extrabudgetary funds, and spending by enterprises. Since the reform began, social spending by enterprises has remained more than half of all social spending from the oblast budget. Table IS: Social spending in Yaroslavl oblast in 1992 by source of financing, exdludingfedemwl expenditUrs Billions of rubles Percent of total TOTAL, 19.93 100.0 of which: Oblast consolidated budget 10.32 51.8 Local branches of federal extrabudgetary funds 1.25 6.3 Local extrabudgetary funds 0.49 2.4 Social spending of enterprises 7.87 39.5 Sources: Annex 1, tables 11, 13; authors' calculations; Russian federal Goskomstat 135. As noted earlier, the conventional Russian budget classification differs greatly from the international standard with regard to social spending. For example, Yaroslavl's consolidated budget expenditure on public health includes-in addition to operating, maintaining, and supplying hospitals-other Page 35 Russia The Transformaton of the Regional Rscal System items that ought to be treated as subsidies to households, such as free food for children under three and medicine vouchers for World War I veterans and certain other groups. Such subsidies can also found in social protection spending (again in the form of grants to veterans) and in education (subsidies for student tickets, subsidies for children's summer vacations). 136. Table 16 breaks down social spending between the oblast and local budgets. Although no sector is the sole responsibility of a single level of govirnme-t, a larger part of spending on education, health, and culture is financed from local budgets, whereas social security and sports are covered primarily by the oblast. On average, local budgets cover about 70 percent of total social spending. Table 16. Distrlbaon of socal expenditures (except new Investments in fixed capital) between oblast and local budgets in 1992-93, as percent of total 1992, 1993 preliminary budget draft estimation oblast local oblast local Public health, 27 73 23 77 of which: - Salaries 18 82 20 80 - Equipment 74 26 53 47 - Capital improvement 28 72 26 74 Education, 10 90 23 77 of which: - Salaries 7 93 26 74 - Equipment 17 83 13 87 - Capital improvement 6 94 15 85 Social protection 79 21 88 12 of which: - Salaries 65 35 64 36 - Eiipment 99 1 94 6 - Capital improvement 78 22 98 2 Additional measures for social protection 100 0 89 11 Culture, recreation 35 65 47 53 of which: - Salaries 21 79 34 66 - Equipment 73 27 32 68 - Capital imprnvement 86 14 60 40 Sport 72 28 91 9 TOTAL 28 72 30 70 Source. Regional finance department; audsors' caladations Page 36 Russia. The Transformation of the Regional Fiscal System 137. Table 17 indicates the significant decrease in the salary share of total social budget expenditures in 1992. The decrease is caused by a major decrease in public servants' real wages. Table 17: Sactur of Social Expendture in the YasfaWl consolidated budget, In pement 1990 1991 1992 Total social expenditure 100.0 100.0 100.0 of which: Current expenditure 70.7 73.9 60.0 of which: salary 47.7 44.7 32.1 Capital transfers 21.4 17.0 23.4 Not identified 7.9 9.1 16.1 Source. Ausors' caladations 138. One of the most serious problems of industrial restructuring in the region involves the transfer to local authorities of social assets and expenditures of enterprises. The region's 1993 social policy program aims to transfer several social properties to local soviets. Although the enterprises that formerly owned the properties are supposed to continue to cover from 30 to 70 percent of the costs necessary to maintain them, the 1993 oblast budget calls for spending 1.18 billion rubles to meet operating costs. (11.2 percent of total social expenditures in the consolidated budget). The transferred properties include kindergartens (which account for 95 percent of the total costs), libraries, and sports facilities. V. CONCLUSION 139. The region of Yaroslavl, located in central Russia, accounts for approximately 1 percent of Russia's toal population. It is one of the most advanced parts of the country in several important ways. It is highly industrialized, and its industrial mix is a favorable one. Agriculture is of minor importance. The Yaroslavl oblast is home to many of Russia's largest enterprises. The structure of the oblast's economy accounts for the relatively positive financial situation of the region in 1991-1992. Among Russian regions, the oblast of Yaroslavl was one of the highest per capita contributors to federal government funds in 1992 (in per capita terms). Unfortunately, that result is due at least as much to inefficient federal fiscal mechanisms (such as bargaining over tax sharing and transfers, a nontransparent, multichanneled system of federal transfers, and the absence of sound rules of federal grant allocation) as it is to the absolute prosperity of the region. 140. etween 1990 and 1993 the manner in which the oblast's budget was prepared, approved, and implemented changed considerably, as did the nature of the relationship between the oblast and the Page 37 Russia: The Transformation of the Regional Fiscal System federal authorities. The practice of preparing detailed budgets and plans in Moscow is giving way to relatively independent budget preparation and execution. Many vestiges of the former system remain, however. The central government still exerts control over some aspects of the regional budget, and oblast, city, and rayon budgets are not fully separated. "Provision norms" set by the central government- -sometimes years ago and under very different economic conditions-are still used to justify requests for federal transfers and various regional budgetary allocations. The rate of inflation is not accurately or consistently reflected in budget planning. 141. The revenue and expenditure sides of the consolidated oblast budget are both increasing. The trend is fueled by tax reforms that widened the tax base of the regional budget and mandated clearer rules for allocating tax receipts among the federal, oblast, city, and rayon budgets. The top-down shift in taxing authority and allocational responsibility is proceeding at a brisk pace, faster, in fact, than the federal authorities can codify the rules of the game. The resulting uncertainty sets the stage for bargaining with the central government and rent-seeking regional behavior. 142. Recent tax reforms have provided more uniform and stable rules for regional budget formation and gave local administration wider rights to impose local taxes. Nevertheless, although several new taxes have been introduced, local taxes continue to account for a very small portion of total budget revenue. The growth in regional budget independence is traceable not to new taxes but to the establishment within the regions of new extrabudgetary funds. Such funds account for a significant share of fiscal revenue. 143. The allocation of expenditures between federal and regional governments continues to be a very murky process, particularly with respect to so-called national economy expenditures, which include expenditures on industry, agriculture, transport, and other infrastructure. In Russian practice, such expenditures are contrasted with the "social sphere," which includes culture, public health, education, and social protection. The federal-to-region shift is notable in the area of social spending. At present, approximately 90 percent of the regional consolidated budget is devoted to up by expenditures on "national economy" sectors, housing, and the social sphere. 144. Most of the increase in regional revenue has been spent on housing, community facilities, and basic sectors such as agriculture, food processing, and transport, with overall cuts in spending on cultural programs, health care, and education. As the relative wages of civil servants have been decreased, more of the consolidated regional budget has been used for capital transfers and purchases of goods and services. Per capita social expenditure in the 1992 budget, together with spending on housing, did not drop in comparison with 1991; such expenditures were higher than they were in 1990. 145. Tax reforms have helped provide a clearer picture of financial flows within the region. Although the revenue base is adequate in cities, it is very inadequate in rayons. The oblast budget is a powerful tool for reallocating revenues from cities to rayons. All rayon-level projects are subsidized from the oblast budget. The consolidated regional budget continues to be very centralized; within it, a growing share of revenue is captured by the oblast budget. 146. So-called extrabudgetary funds--both federal and local-account for at least 8.63 percent of VRP or 91.8 percent of consolidated budget revenue. Such funds are too independent of the regular Page 38 Russia: The Transformation of the Regional FIscal System budget process, making it difficult to plan the budget or evaluate, with any accuracy, the fiscal situation of the region. 147. Several parallel channels for financial interaction between federal and local governments continue to exist. The federal government distributes funds among the regions in a murky process that is fraught with political interventions. It is nearly impossible to estimate total federal grants to regions. Yaroslavl's regional government does not control the region's consolidated fiscal balance. Nor does it have a very clear picture of that balance. 148. As a first step to improve its fiscal policy, the regional government must develop its ability to assess the consolidated regional fiscal balance, including all financial transfers between the region and federal government. Initial efforts should concentrate on developing a clear picture of overall public investment and social support programs. The picture must include financing from federal extrabudgetary funds and local firms. 149. Significant new capabilities for budget preparation, planning, and evaluation must be developed with a view to improve expenditure allocation and efficiency. In particular, investment expenditure should be submitted to systematic project evaluation procedures. The authorities should implement the new budget classification being developed by the Russian Ministry of Finance. The new classification will provide a much better analytical tool for decision-making. 150. Spending responsibilities and resource sharing within the oblast should be clarified. Municipalities should play a larger role in managing social spending. Each type of expenditure should be financed from a single budget (whether regional or local), to delineate clearly the responsibilities of different levels of government. Transfers from regional to local budgets must be more convincingly and consistently justified in terms of actual shortages in certain areas. Transfers may be justified to meet the basic social needs of local households, but not as these have been defined and justified in past. Tax- sharing arrangements within the oblast should be clarified and rationalized. A single sharing rate should be set for each tax. In parallel, a transparent system of intra-regional grants should be established. 151. On the expenditure side it will be necessary to concentrate on a limited number of sectors requiring local government intervention and budget support. In 1992-93 the government spread its efforts too thin, intervening in too many economic and social sectors. Given existing budget constraints, regional budget policy must concentrate on: o Social security: provide support for the poorest groups; support to unemployed (retraining); redesign the existing system of subsidies (away from producer subsidies and toward consumer subsidies); o Regional infrastructure development; o Housing and other "social assets": transfer the social assets of firms (broadly, worker housing and other assets not directly related to firms' productive activities) to local governments; maintain housing stock during the transition period; gradually reducing subsidies to the sector; Page 39 Russia: The ransformation of the Regional Fiscal System o Social and cultural activity: halt the slide in spending in this sector; bring the relative wages of civil servants back to their pre-crisis level; distinguish clearly and consistently between free and paid social services; o Targeted industrial investment: offer selective, limited support for industrial activity through investment credits, not grants. 152. The best way to cut expenditures is to reduce budget subsidies. Subsidies that compensate for regulated prices should be replaced with targeted consumer subsidies and cash transfers to particular social groups. Doing so will help make the social protection system more efficient thereby reducing the drain on public resources. Such measures should be undertaken simultaneously with consumer price deregulation. Finally, the scale of budget support for agriculture must be reduced overall and concentrated on a few subsectors. 153. In the near future, the regional government's opportunities to expand its revenue base seem limited. Among the few revenue-enhancement prospects are: o Increasing the price of land and rent payments for land in cities; o Using auctions to increase revenues from the privatization of state property o Increasing assessments on polluters. In the longer term, municipal bonds should be issued. 154. The primary source of additional revenues will not be new taxes, however, but better collection of existing ones. The strengthening of tax assessment and inspection capabilities, including additional staffing and training, should be among first priorities. Several "nuisance" taxes, including mandatory contributions to local extrabudgetary funds, should be eliminated and the regional tax authorities should concentrate their efforts on improving tax administration. Improving tax efficiency will also depend on improving general economic statistics in the region and on more rational government regulation of the regional economy, for example, in the registration of new business, business promotion, and budget support for selected sectors. m:\philipp*Uev1fina15 Page 40 ANEM Annex 1. Statistical Appendix Annex 2. Types of Local and Federal Taxes Under Current Russian Legislation Annex 3. Assignment of Expenditure Responsibilities in the Russian Federation Annex 4. Yaroslavl Budgets: Definitions and Reclassification Annex 1 Statistical Apendix Table 1. The Share of the Yaroslavl Oblast in Russia: Economic indicator in 1991 Table 2. Yaroslavl Oblast: Structure of the Population, 1991 Table 3. Yaroslavl Oblast: Structure of Employment, 1991 Table 4. Yaroslavl Oblast: Structure of the Industry in 1991 Table 5. Macroeconomic Indicators in Yaroslavl Oblast, 1992, 1993 Table 6. Institutional Changes in Yaroslavl Oblast, 1993 Table 7. Yaroslavl Oblast: Structure of Output, 1990-92 Table 8. Consolidated Budget of the Yaroslavl Oblast in 1990-1993 * Table 9. Economic and Functional Cross-classification of the Yaroslavl Oblast * Consolidated Budget Expenditure in 1990 Table 10. Economic and Functional Cross-classification of the Yaroslavl Oblast * Consolidated Budget Expenditures in 1990 Table 11. Economic and Functional Cross-classification of the Yaroslavl Oblast * Consolidated Budget Expenditures in 1992 Table 12. Structure of the Yaroslavl Consolidated Regional Budget by Levels of * Government Table 13. Extra-budgetary Funds on the Territory of Yaroslavl Oblast * * For definitions and methodology used in the budget tables, see Annex 4 Table 1. The share of the Yaroslav1 oblast in Russia: Economic indicators in 1991, current prices. SHARE IN AMONG ALL RUSSTA,% RUSSIAN REGIONS 1. Population 1,471,700.0 0.99 36 2. Territory, sq. 1am 36,400.0 0.21 56 3. NMP, 1990, mln.rbl. 4,554.0 1.03 n.a. NMP per capita, thous.rbl. 3.1 16 4. Capital asset value, 1990, mln.rbs. - Total Industrial 12.6 0.98 n.a. Non-industrial 6.3 0.98 n.a. - Per Capita Industrial 8.6 33 Non-industrial 4.3 24 5. Number of employees 744,200.0 1.01 n.a. 6. Industrial production, mln.rbs. 15,909.0 1.34 n.a. per capita, thous.rbs. 10.8 7 7. Agriculture production, mln.rbs. 759.0 0.76 n.a. per capita, rbs. 515.0 54 8. Capital investments, mln.rbs. 1,754.2 0.83 n.a. per capita, rbs. 1,191.0 52 9. Retail trade sales, mln.rbs. 4,277.0 0.91 n.a. per capita,rbs. 2,902.0 32 10. Services, mln.rbs. (*) 527.5 0.92 27 11. Money income (per capita), rbs. 5,588.0 38 12. Housing, mln.sq.m 26.6 1.09 14 13. Foreign econ. activities, mln.hard curr.rbs. 1,205.0 Export 338.0 1.22 n.a. Import 867.0 1.37 n.a. 14. Students at institutes and tech.colleges 45,900 0.92 n.a. (*) Only services paid by households Source: Some indicators of the economic and social state of krais and oblasts of the Russian Federation, Moscow, Goskomstat Vol.1, 1992, p. 19. Table 2. Yaroslavl oblast. Structure of the population, 1991, % Yaroslavl Central oblast region Russia 1. Younger than employment age 21.2 20.8 24.3 2. Employment age 55.9 56.5 56.7 3. Older than employment age 22.9 22.7 19.0 Source: Social development of republics, krais and oblasts of the RF, p. 9-13, M., Goskomstat, 1992 Table 3. Yaroslavl oblast. Structure of employment, 1991, % Yaroslavl Russia oblast 1. Sphere of material production 75.5 70.8 - industry 42.1 30.4 (a) - agriculture and forestry 9.9 13.5 - transport and communication 6.4 7.8 - trade 7.6 7.6 - construction 7.4 11.5 (a) 2. Non-material sphere 24.5 29.2 - other services 4.8 6.0 - health care 5.4 - education, science, culture 12.1 19.9 - state management 2.3 3.3 (a) estimate Source: Social development of republics, krais and oblasts of the RF, M., Goskomstat, 1992; Statistical department of Yaroslavl oblast; Russian Narkhoz, 1991, p.121 Table 4. Yaroslavl oblast. Structure of the industry in 1991, percent Production Profit Number of volume Employees Energy 3.3 2.2 3.5 Petrochemical 12.1 5.7 3.0 Chemical 19.7 23.5 14.1 Machine-building 23.7 24.4 48.7 Wood-processing and paper industry 2.8 4.0 4.2 Construction materials 2.3 1.7 3.8 Light industry 22.8 25.6 14.6 Foodstuffs industry 9.4 8.7 5.7 Others 4.5 3.2 2.4 Total 1/ 100 100 100 1/ Totals do not add up to exactly 100% because of rounding. Source: Estimate based on Russian Goskomstat's database (excludes military enterprises) Table 5. Macroeconomic indicators in Yaroslavl oblast, 1992, 1993. Yaroslavi oblast Central region Russia of Russia 1992 1993 1992 1993 1992 1993 Jan.-Jun. Jan.-Jiun. Jan.- Jun. Increase in money incomes per cap.,(DeclDec),times 12.4 12.7 10.3 11.7 12.3 Retail trade turnover in comparable prices, % 74.1 124.0 64.4 115.0 60.9 110.0 Industrial production in comparable prices, % 79.8 81.8 77.0 79.4 81.2 82.0 Cap.investments in curr.prices (preliminary), times 8.4 9.2 9.7 Profit in current prices, times 17.9 (*) 7.4 11.1 (*) 6.6 13.6 (*) 8.0 Retail price index (Jan.93/Jan.92) 695.8 n.a. 754.4 (*) 11 months of 1992 Source: Goskomstat Stadstical bulletin, 1993, NI, pp. 5, 13,57,64,86; Economic Reform Development in RF. Additional data, M., Goskomstat, 1993, January - June, pp. 3, 14, 38, 48 Table 6. Institutional changes in Yaroslavl oblast. 1/1/93. Yaroslavl Russia oblast Share of "commercialized" retail trade enterprises, % 35.80 25.30 Share of "commercialized" public catering enterprises, % 35.60 41.50 1992 growth in number of private farmers, times 2.83 3.75 Share of privatized apartments, % 6.90 7.90 Source: Russian Goskomstat Table 7. Yaroslavl oblast. Structure of output, 1990-92, bln. rbl., current prices. 1990 % 1991 % 1992(*) % 1. Industrial production 7.101 86.6 15.909 92.5 268.7 96.7 2. Gross agriculture production 0.684 8.3 0.759 4.4 6.3 2.2 3. Services (**) 0.416 5.1 0.528 33.1 3.0 1.1 4. TOTAL Value of Regional Production (VRP) 8.200 100.0 17.196 100.0 278.0 100.0 (*) Preliminary data (**) Only services paid by households Source: Regional Goskomstat office Table 8. Consolidated Budget of the Yaroslavl Oblast in 1990-1993 (thousand rubles, current prices & %) 1990 1991 1992 1993 draft I. Total Revenue (II + V) 418,771.00 1,237,085.00 26,124,184.00 129,353,667.00 % of Value of Regional Production (VRP) 5.08 7.18 9.40 7.76 II. Current Revenue (111+IV) 418,132.00 1,234,556.00 26,106,485.00 129,353,667.00 % of VRP 5.07 7.17 9.39 7.76 Ill. Tax Revenue 390,369.00 1,167,383.00 24,877,618.00 126,897,595.00 % of VRP 4.74 6.79 8.95 7.61 1. Taxes on income, profits and capital gains 274,801.00 681,650.00 16,035,610.00 85,977,384.00 % of VRP 3.34 3.96 5.77 5.16 1.1 Individual 94,777.00 353,180.00 3,927,187.00 24,943,000.00 % of VRP 1.15 2.05 1.41 1.50 1.1.1 Personal income tax 86,216.00 344,576.00 3,926,745.00 24,943,000.00 % of VRP 1.05 2.00 1.41 1.50 1.1.2 Tax on unmarried persons 8,561.00 8,604.00 442.00 % of VRP 0.10 0.05 0.00 1.2 Corporate 180,024.00 328,470.00 12,108,423.00 61,034,384.00 % of VRP 2.19 1.91 4.36 3.66 2. Taxes on payroll and workforce 52,187.00 5,675.00 5,378.00 n.a % of VRP 0.63 0.03 0.00 3. Taxes on property 32,369.00 2,440.00 405,041.00 2,082,913.00 % of VRP 0.39 0.01 0.15 0.12 4. Domestic taxes on goods and services 31,012.00 476,991.00 8,414,909.00 38,837,298.00 % of VRP 0.38 2.77 3.03 2.33 4.1 Value added tax 4,883,836.00 22,671,208.00 % of VRP 1.76 1.36 4.2 Turnover tax 28,078.00 340,023.00 10,679.00 - % of VRP 0.34 1.98 0.00 - 4.3 Sales tax 122,814.00 47,508.00 - % of VRP 0.71 0.02 - 4.4 Excises 3,401,499.00 16,022,938.00 % of VRP 1.22 0.96 4.5 Other domestic taxes on goods and services 2,934.00 14,154.00 71,387.00 143,152.00 % of VRP 0.04 0.08 0.03 0.01 5 Other taxes 627.00 16,680.00 n.a % of VRP 0.00 0.01 IV. Nontax Revenue 27,763.00 67,173.00 1,228,867.00 2,456,072.00 % of VRP 0.33 0.38 0.44 0.15 1. Enterpreneurial and Property Income 10,473.00 31,695.00 1,117,853.00 n.a % of VRP 0.12 0.18 0.40_ 1990 1991 1992 1993 draft 2. Administrative fees and charges, fines 17,290.00 35,478.00 111,014.00 n.a and forfeits, incidental sales % of VRP 0.21 0.20 0.04 V. Capital Revenue 639.00 2,529.00 17,699.00 n.a % of VRP 0.01 0.01 0.01 VI. Total expenditure and lending minus repayments ( 405,843.00 1,294,301.00 23,454,987.00 130,190,112.00 % of VRP 4.95 7.53 8.44 7.81 VII. Total expenditure 407,076.00 1,296,642.00 23,436,092.00 130,881,043.00 % of VRP 4.96 7.54 8.43 7.85 1.General Services 16,143.00 37,990.00 721,169.00 1,562,364.00 % of VRP 0.20 0.22 0.26 0.09 2.Defence n.a n.a 20,500.00 n.a % of VRP 0.01 3.Public order and safety 5,290.00 13,596.00 244,601.00 686,943.00 % of VRP 0.06 0.08 0.09 0.04 4.Education 119,161.00 257,454.00 3,967,081.00 16,505,830.00 % of VRP 1.45 1.50 1.43 0.99 5.Health 121,400.00 281,163.00 3,757,439.00 14,480,689.00 % of VRP 1.48 1.64 1.35 0.87 6.Social security and Welfare 15,786.00 83,933.00 1,959,156.00 12,908,201.00 % of VRP 0.19 0.49 0.70 0.77 7. Housing and Utilities, Construction 59,726.00 159,740.00 5,534,042.00 22,371,267.00 % of VRP 0.73 0.93 1.99 1.34 8.Recreation, Culture, Religion 23,863.00 43,323.00 635,411.00 2,083,369.00 % of VRP 0.29 0.25 0.23 0.12 9.Fuel and Energy 1,374.00 4,619.00 211,022.00 478,896.00 % of VRP 0.02 0.03 0.08 0.03 10.Agriculture and Forestry 5,054.00 31,005.00 3,247,657.00 30,567,804.00 % of VRP 0.06 0.18 1.17 1.21 1I.Foodprocessing 10,542.00 311,150.00 525,092.00 628,000.00 % of VRP 0.12 1.81 0.19 0.04 12.Transportation and Communication 8,663.00 29,942.00 1,736,973.00 6,033,086.00 % of VRP 0.11 0.17 0.62 0.36 13.Other Economic Services 2,581.00 14,620.00 555,048.00 28,600.00 % of VRP 0.03 0.09 0.20 0.00 14.Not Identified 17,493.00 28,107.00 320,901.00 31,541,874.00 % of VRP 0.21 0.16 0.12 1.89 VIII. Total Lending minus Repayments (a) (1,233.00) (2,341.00) 18,895.00 (690,931.00) % of VRP 0.01 0.01 0.01 0.04 1990 1991 1992 1993 draft I.Total Lending - - 896,687.00 - % of VRP 0.32 2.Total Repayments 1,233.00 2,341.00 877,792.00 690,931.00 % of VRP 0.01 0.01 0.32 0.04 IX. Overall Deficit(-)/Surplus(+) (I-VI) 10,462.00 (61,898.00) 2,669,179.00 (836,445.00) % of VRP 0.13 0.36 0.96 0.05 X.Total Financing (b) (10,462.00) 61,898.00 (2,669,179.00) n.a % of VRP 0.13 0.36 0.96 1. Funds transferred from/to federal budget (7,867.00) 119,749.00 343,200.00 % of VRP 0.10 0.70 0.12 2. Loans got from/payed to federal budget - - 431,581.00 % of VRP 0.16 3. Revenues/payments according to state debt 1,222.00 1,020.00 (1,143.00) % of VRP 0.01 0.00 0.00 4. Return of funds by the enterprises 1,834.00 2,512.00 3,675.00 % of VRP 0.02 0.01 0.00 5. Increase of balance on budget accounts (8,117.00) (246,560.00) (3,446,510.00) % of VRP 0.02 1.43 1.24 6.Errors., Omissions 2,466.00 185,177.00 12,018.00 % of VRP 0.03 1.08 0.00 XI. Memorandum Items 1.Volume of Regional Production (VRP), mln.rubles 8,201.00 17,196.00 278,000.00 1,668,000.00 2.Volume of interregional subsidies in oblast, thour. 143,736.00 512,278.00 4,641,502.00 63,626,862.00 % of VRP L.I5 2.98 1.67 3.81 Percentages to VRP may not add to total due to rounding Source: Yaroslavl Oblast Finance Department, Auhors' own calculations (a) Category lending covers budget loans to local budgets and enterprises. Category repayments Includes paying off loans by local budgets and enterprises, receipts from privatization of state and municipal property. (b) This section covers: the change of the money balance at the budget banking account (with minus sign); receipts from and expenses on state bonds; loans borrowed from the federal government (plus sign) and paying off the loans (minus sign); transfers from federal govemment to oblast authorities (plus sign) and transfers from oblast to federal authorities (rhinus sign). Table 9: Economic and Functional Cross-classification of the Yaroslavl Oblast Consolidated Budget Expenditure in 1990 (thousand rubles, current prices) Economic Classification Total Current Expenditure Capital Expenditure Not Expenditure Identified Functional Wages Other Subsidies to Current Capital Capital Classification and Purchases nonfinancial Transfers to Transfers to Transfers to Salaries of goods public Households nonfinancial Households and services enterprises public enterprises I.General Services 16143 10230 1465 3534 914 % of VRP 0.2 0.13 0.02 0.04 0.01 2.Defense n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. % of VRP n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.Public order and safety 5290 5290 % of VRP 0.06 0.06 4.Education 119161 64286 14851 1379 28549 10096 % of VRP 1.45 0.78 0.18 0.02 0.35 0.12 5.Health 121400 60084 36556 1028 20855 2877 % of VRP 1.48 0.73 0.45 0.01 0.25 0.04 6.Social security and Welfare 15786 3261 3537 3297 2517 12 3162 %6 of VRP 0.19 0.04 0.04 0.04 0.03 0 0.04 7. Housing and Utilities 59726 2110 47917 9699 Construction % of VRP 0.73 0.03 0.58 0.12 8.Recreation, Culture, Religio 23863 6123 1725 2054 7939 6022 % of VRP 0.29 0.07 0.02 0.03 0.1 0.07 9.Fuel and Energy 1374 1040 323 11 % of VRP 0.02 0.01 0 0 10.Agriculture and Forestry 5054 1702 427 1331 302 1292 % of VRP 0.06 0.02 0 0.02 0 0.02 11 .Foodprocessing 10542 9406 665 471 % of VRP 0.12 0.11 0.01 0 12.Transportation 8663 7673 987 3 and Communication % of VRP 0.11 0.09 0.01 0 13.Other Economic Services 2581 257 122 1480 523 199 % of VRP 0.03 0 0 0.02 0.01 0 14.Not Identified 17493 3178 14315 % of VRP 0.21 0.04 0.17 15.Total 407076 145943 58683 26122 4676 117289 12 54351 % of VRP 4.96 1.78 0.71 0.32 0.06 1.43 0 0.66 Memorandum: VRP = 8.2 bin. rubles Percentages of VRP may not add to total due to rounding Source: Yaroslav] Oblast Finance Department, Authors' own calculations Table 10: Economic and Functional Cross-classification of the Yaroslavl Oblast Consolidated Budget Expenditures in 1991 (thousand rubles, current prices) Economic Classification_____ Total current Expenditure capital Expenditure Not Expenditure __________ Identified Functional Wages Other Subsidies to Current capital capital Classification and Purchases nonfinancial Transfers to Transfers to Transfers to Salaries of goods public Households nonfinancial Households and services enterprises public _________ _________enterprises_____ I .General Services 37990 25811 5052 6600 527 % of VRP 0.22 0.15 0.03 0.04 0 2.Defimse n.a. n.a. n.a. n.a. n.a. n. n. n.a. % Of VRP n. n.a. n.a. un. n. n. n. n.a. 3. Public order and safety 13596 1295 55 398 11848 % of VRP 0.08 0.01 0 0 0.07 4.Education 257454 138549 34323 4072 49260 31250 % of VRP 1.5 0.81 0.2 0.02 0.29 0.18 S.Health 281163 137269 69359 23227 45990 6318 % of VRP 1.64 0.8 0.4 0.14 0.27 0.04 6.Social security and Welfare 83933 8723 7829 42945 11999 15 12422 % of VRP 0.49 0.05 0.05 0.25 0.07 0 0.07 7. Housing and Utilities, 159740 35655 95426 28659 Construction % of VRP 0.93 0.21 0.55 0.17 &.Recreation, Culture, Religion 43323 13339 8617 5056 5609 10702 % of VRP 0.25 0.08 0.05 0.03 0.03 0.06 9.Fuel and Energy 4619 3749 730 140 % of VRP 0.03 0.02 0 0 10.Agriculture and Forestry 31005 2919 657 341 2708 71 of VR? 0.18 0.02 0 0 0.16 11.PFoodprocessing 311150 310916 200 34 % of VRP 1.81 1.81 0 0 12.Transportation and Communication 29942 15626 6817 7499 71 of VRP 0.17 0.09 0.04 0.04 13.0ther Economic Services 14620 11802 1420 1398 % of VRP 0.09 0.07 0.01 0.01 14.Not Identified 28107 6483 21624 % of VRP 0.16 0.04 0.12 I5.Total 1296642 327905 124892 406031 47017 231273 15 159509 % of VRP 17.541 1.91 10.72 , 2.361 0.271 1.34 1 0 109 Memorandum: VRP = 17.196 bln. rubles Percentages of VRP may not add to total due to rounding Source., Varoslavi Oblast Fihance Depantwet, Audzors' own calcidations Table 11: Economic and Functional Cross-classification of the Yaroslavl Oblast Consolidated Budget Expenditures in 1992 (thousand rubles, current prices) Economic Classification Total Current Expenditure Capital Expenditure Not Expenditure Identified Wages Other Subsidies to Current Capital Capital Functional and Purchases nonfinancial Transfers to Transfers to Transfers to Classification Salaries of goods public Households nonfinancial Households and services enterprises public 1.General Services 721169 394524 90563 202197 33885 % of VRP 0.26 0.14 0.03 0.07 0.01 2.Defense 20500 20500 % of VRP 0.01 0.01 3.Public order and safety 244601 25207 2527 4990 211877 % of VRP 0.09 0.01 0 0 0.08 4.Education 3967081 1725866 647467 28284 963332 602132 % of VRP 1.43 0.62 0.23 0.01 0.35 0.22 S.Health 3757439 1347503 984387 177218 1122264 126067 % of VRP 1.35 0.48 0.35 0.06 0.4 0.05 6.Social security and Welfare 1959156 106009 142641 778105 220470 23 711908 % of VRP 0.7 0.04 0.05 0.28 0.12 0 0.26 7. Housing and Utilities 5534042 476033 1203534 3821543 32932 Construction % of VRP 1.99 0.17 0.43 1.38 0.01 8.Recreation, Culture, Religion 635411 134513 53638 -61306 77 114420 271457 % of VRP 0.23 0.05 0.02 0.02 0 0.04 0.1 9.Fuel and Energy 211022 208192 2830 % of VRP 0.08 0.08 0 10.Agriculture and Forestry 3247657 32164 10685 1252425 1308242 644141 % of VRP 1.17 0.01 0 0.45 0.47 0.23 I1.Foodprocessing 525092 524325 767 % of VRP 0.19 0.19 0 12.Transportation and Communication 1736973 372100 356937 1007936 % of VRP 0.62 0.13 0.13 0.36 13.Other Economic Services 555048 523666 30393 989 % of VRP 0.2 0.19 0.01 0 14.Not Identified 320901 123335 138017 59549 % of VRP 0. !2 0.04 0.05 0.02 15.Total 23436092 3765786 3687334 4446101 306466 8286402 23 2443980 % of VRP 8.43 1.35 1.33 1.6 0.29 2.98 0 0.88 Memorandum: VRP = 278 bln. rubles Percentages of VRP may not add to total due to rounding Source: Yaroslavl Oblast Finance Department, Auhors' own calculations Table 12. Structure of the Yaroslavl Consolidated Regional Budget by levels of government, % 1990 1991 1992 Oblast Budgets Budgets Oblast Budgets Budgets Oblast Budgets Budgets Budget of of Budget of of Budget of of Cities Cities Rayons Cities Rayons 1. Total Revenue (ll+V) 11.9 54.2 33.9 48.9 40.3 10.8 36.2 56.0 7.8 11. Current Revenue (III+IV) 11.9 54.3 33.8 48.9 40.4 10.7 36.2 56.0 7.8 III. Tax Revenue 11.6 54.5 33.9 49.2 40.6 10.2 35.3 56.9 7.8 1. Taxes on income, profits and capital gain 13.2 47.9 38.9 23.6 62.0 14.4 23.9 67.4 8.7 1.1 Individual 15.9 46.9 37.2 39.2 45.9 14.9 18.9 65.3 15.8 1.1.1 Personal income tax 17.5 43.7 38.8 40.1 45.0 14.9 18.9 65.3 15.8 1.1.2 Tax on unmarried persons - 79.3 20.7 - 81.6 18.4 - 81.6 18.4 1.2 Corporate 11.8 48.5 39.7 6.8 79.4 13.8 25.5 68.2 6.3 2. Taxes on payroll and workforce 6.0 74.3 19.7 4.1 86.1 9.8 3. Taxes on property 7.8 82.3 9.9 22.9 77.1 55.8 39.5 4.7 4. Domestic taxes on goods and services 11.2 50.4 38.4 86.7 9.6 3.7 56.2 37.6 6.2 4.1 Value added tax 30.2 60.6 9.2 4.2 Turnover tax 12.3 46.4 41.3 86.6 9.7 3.7 86.6 9.7 3.7 4.3 Sales tax 96.7 3.3 0.0 96.7 3.3 0.0 4.4 Excises 95.0 3.3 1.7 4.5 Other domestic taxes on goods and serv 0.3 89.3 10.4 2.7 60.1 37.2 0.3 79.6 20.1 5 Other taxes - 86.1 13.9 - 88.4 11.6 IV. Nontax Revenue . 15.8 50.9 33.3 44.7 35.5 19.8 51.3 40.5 8.2 1. Enterpreneurial and Property Income 2.9 46.4 50.7 43.9 30.2 25.9 55.5 37.0 7.5 2. Administrative fees and charges, fines and forfeits, incidental sales 23.6 53.6 22.8 45.5 40.2 14.3 9.5 75.3 17.2 V. Capital Revenue 10.3 33.5 56.2 1.8 33.7 64.5 8.1 50.5 41.4 VI. Total expenditure and lending minus Repayments (VII+VIII) (estimate)* 34.2 46.3 19.5 42.3 41.3 16.4 23.1 56.2 20.7 VII. Total expenditure (estimate)* 34.2 46.3 19.5 42.3 41.3 16.4 23.4 65.3 21.3 1.General Services 24.2 30.6 45.2 38.0 27.7 34.3 29.8 36.6 33.6 2.Defence n.a n.a n.a n.a n.a n.a n.a n.a n.a 3.Public order and safety n.a n.a n.a 3.7 93.0 3.3 4.5 65.0 30.5 4.Education 17.2 47.2 35.6 12.6 53.7 33.7 10.6 60.3 29.1 5.Health 28.3 53.0 18.7 16.7 48.9 16.7 29.5 54.1 16.4 6.Social security and Welfare 51.8 34.1 14.1 36.4 42.9 20.7 51.8 34.1 14.1 7. Housing and Utilities, Construction 12.4 74.0 13.6 11.1 77.2 11.7 5.5 86.8 7.7 S.Recreation, Culture, Religion n.a n.a n.a 42.8 20.8 36.4 29.2 43.1 27.7 9.Fuel and Energy 12.2 63.2 24.6 18.3 41.2 40.5 59.4 - 40.6 10.Agriculture and Forestry 36.8 12.2 51.0 85.0 2.6 12.4 42.3 8.7 49.0 1990 1991 1992 Oblast Budgets Budgets Oblast Budgets Budgets Oblast Budgets Budgets Budget of of Budget of of Budget of of Cities Rayons Cities Rayons Cities Rayoos I I.Foodprocessing 87.8 10.8 1.4 88.0 11.9 0.1 40.5 21.5 38.0 12.Transportation and Communication 80.8 19.2 - 38.2 59.3 2.5 12.1 82.9 5.0 13.Other Economic Services n.a n.a n.a n.a n.a n.a n.a n.a n.a 14.Not Identified n.a n.a * n.a n.a n.a n.a n.a n.a n.a VIII. Total Lending minus Repayment (a) 97.2 - 2.8 58.4 37.2 4.4 n.a n.a n.a 1.Total Lending 13.8 81.4 4.8 2.Total Repayment 97.2 - 2.8 58.4 37.2 4.4 49.4 43.9 6.7 IX. Overall Deficit(-)/Surplus(+) (I-VI) n.a n.a n.a n.a n.a n.a n.a n.a n.a X.Total Financing (b) 1.Funds transferred from/to federal budget 100.0 100.0 100.0 2.Loans got from/payed to federal budget - 100.0 3.Revenues/payments according to state deb. 70.9 29.1 n.a n.a n.a 100.0 4.Return of funds by the enterprises 38.2 17.7 44.1 39.8 22.6 37.6 20.8 58.1 21.1 5.Increase of balance on budget accounts n.a n.a n.a n.a n.a n.a n.a n.a n.a 6. Errors, Omissions n.a n.a n.a n.a n.a n.a n.a n.a n.a 7.Inter-budget subsides n.a n.a n.a n.a n.a n.a n.a n.a n.a (*) Rough estimates Sum with the previous column Source: Yaroslavl Oblast Finance Department, Authors' own calculations (a) Category lending" covers budget loans to local budgets and enterprises. Category *repayments' includes paying off loans by local budgets and enterprises, receipts from privatization of state and municipal property. (b) This section covers: the change of the money balance at the budget banking account (with minus sign); return of cash given by budget but not used by the recipients (with plus sign); receipts from and expenses on state bonds; loans borrowed from the federal government (plus sign) and paying off the loans (minus sign); transfers from federal government to oblast authorities (plus sign) and transfers from oblast to federal authorities (minus sign). Table 13. Extra-budgetary funds on the territory of Yaroslavl oblast. Received Used for own transferred needs to centralized funds I. Extrabudgetary Funds, total (I + II) 23.98 3.54 13.76 % VRP 8.63 1.27 4.95 II. Federal Extrabudgetary Funds (1-15) 21.93 1.99 13.76 % VRP 7.89 0.71 4.95 1. Pension Fund 11.56 0.27 9.17 % VRP 4.16 0.1 3.3 2. Social Insurance Fund 1.98 0.89 0.56 % VRP 0.71 0.32 0.2 3. Employment Fund 0.35 0.01 0.27 % VRP 0.13 0.06 0.12 4. Social Security Fund" 0.16 0.07 0.01 % VRP 0.01 0.00 0.00 5. Medical Insurance Fund 0.65 0.02 0.27 % VRP 0.23 0.00 0.5 6. Federal Road Fund 1.79 0.00 1.38 % VRP 0.64 0.00 0.5 7. Regional Road Fund 1.28 0.00 1.01 % VRP 0.46 0.00 0.36 8. Research & Development Fund 1.93 0.14 0.67 % VRP 0.69 0.05 0.24 9. Fuel and Energy Funds 1.09 0.60 0.18 % VRP 0.39 0.22 0.06 9.1. Investment 1.01 0.60 0.16 % VRP 0.36 0.22 0.06 9.2. Insurance 0.07 - 0.02 % VRP 0.03 - 0.01 10. Conversion Fund 0.55 0.08 0.03 % VRP 0.2 0.03 0.01 11. Mineral Resources Reproduction Fund 0.55 0.00 0.01 % VRP 0.20 0.00 0.00 12. Ecological Funds 0.01 - 0.01 % VRP 0.00 - 0.00 13. Technological Development Fund % VRP 0.00 - 0.00 14. Russian Fund for Industrial Investments 0.20 - 0.20 % VRP 0.07 - 0.07 Received Used for own transferred needs to centralized flunds III. Regional, Rayon and Municipal Funds (1-4) 2.06 1.55 % VRP 0.74 0.56 1. Regional Hard Currency Fund2' 1.18 1.06 % VRP 0.42 0.38 2. United Extrabudgetary Funds' 0.48 0.37 % VRP 0.17 0.13 2.1. Oblast United Extrabudgetary Fund 0.05 0.03 % VRP 0.02 0.01 2.2. Municipal United Extra-Budgetary Funds' 0.40 0.32 % VRP 0.14 0.12 2.3. Rayon United Extrabudgetary Funds 0.03 0.02 % VRP 0.01 0.01 3. Regional Fund for Social Stabilization 0.25 0.01 % VRP 0.09 0.00 4. Social Security Fund' 0.15 0.11 % VRP 0.05 0.04 4.1. Municipal Social Security Funds 0.12 0.10 % VRP 0.04 0.03 4.2. Rayon Social Security Funds 0.02 0.01 % VRP 0.01 0.01 Including the remainder for the beginning of the reviewed period 2/ Evaluation is made, taking into account that USD = 228 Rbl.; revenues = 5163 US$ thous., expenditures = 4654 US$ thous. Rough estimation Note: VRP in 1992 = 278 bln.rbl. The total amount of VRP shares isn't precisely equal to the sum of two next items - the figures are round. Source: Yaroslavl Oblast Deparnen on statistics, authors' own calculations Annex 2 Types of local and federal taxes under current Russian losislation. 1. Federal tAxes. 1.1. VAT 1.2. Excises for certain groups of commodities 1.3. Bank revenue taxes 1.4. Insurance activity revenue taxes 1.5. Exchange activity tax 1.6. Security operation tax 1.7. Custom duty 1.8. Payments for mineral resources 1.9. Enterprise profit tax 1.10. Household income tax 1.11. Taxes to extrabudgetary Road fund 1.12. Payments for mineral resource reproduction collected in special extrabudgetary fund 1.13. State duties and levies for administrative acts 1.14. Gift and Inheritance tax 1.15. Tax on users of names "Russia", "Russian", etc. Comments: 1. Tax assignment regarding taxes 1.1., 1.2., 1.9. are determined by annual Budget Law. 2. Taxes 1.13.-1.15. are collected to local budgets. 3. All federal taxes are introduced by federal bodies and are effective in the same way (rates, payers, etc.) round the country. 2. Regional taxes (oblasts. kras. autonomic republics. etc.). 2.1. Enterprise property tax 2.2. Forestry revenue 2.3. Water payments 2.4. Payments for education sector support 1. Taxes 2.1.-2.3. are introduced by federal regulations and are effective round the country, but their particular rates are determined by local authorities. 2. Tax 2.4. is introduced by local legislative bodies, but the rate can not be above 1% of enterprise wage bill. 3. Tax 2.1. is shared between regional and local budgets. 3. Local taxes 3.1. Individual property tax 3.2. Land tax 3.3. Registration duty on individuals involved in commercial activity 3.4. Tax on industrial construction in health resort zones 3.5. Health resort duty 3.6. Duty cn trade license 3.7. Targeted payments from individuals and legal entities for local police, land improvement, and education needs 3.8. Advertising tax 3.9. Tax on resales of cars and computers 3.10. Dog owners duty 3.11. Duty on alcohol trade license 3.12. Duty on local auction and lottery license 3.13. New apartment duty 3.14. Parking duty 3.15. Duty on the use of local symbols 3.16. Tax on participation in races 3.17. Tax on racing prizes 3.18. Lottery tax 3.19. Exchange transaction duty 3.20. Duty on film shooting 3.21. Sales tax earmarked for street cleaning 3.22. Duty on gambling business license 3.23. Enterprise tax on housing maintenance Comments: 1. Taxes 3.1.-3.3. are introduced by federal legislation and are effective round the country. But their rates are adopted by regional or local authorities. 2. Taxes 3.4.-3.6. and 3.8.-3.21. may be introduced by local authorities. 3. Taxes 3.7., 3.8., 3.14., 3.20., 3.21. are accounting as a part of financial results of an enterprise, tax 3.2. is accounted as a part of enterprise total costs, other local taxes are paid from net profit (profit after profit tax). 4. For tax 3.7. there is a ceiling rate introduced by federal regulation. Annex 3 Assignment of Expenditure Responsibilities in the Russian Federation (Findings from Yaroslavl case study) Expenditure Federal Oblasts Rayons Village Soviets Defense Almost 100 percent incl. Part "Military Housing" Part of civil defense federal program "Military affairs, part of pre. Housing" conscript units Justice/Internal Almost 100 percent Notarial offices, part of Part of law courts and Security law courts and prosecuting magistracy prosecuting magistracy Foreign economic Less than 100 percent Special oblast hard - affairs currency extrabudgetary funds Education - All university and Several special vocational Wages, operation. Costs - research institute schools construction, and expenditures maintenance of almost all Part construction of primary and secondary - All technical and primary and secondary schools vocational schools schools in the regions of expenditures Military Housing and housing for military - Part construction of police servicemen primary and secondary schools in the regions of Military Housing and housing for military police servicemen Culture and parks National museums Some museums and Some museums National theaters theaters of oblast Almost all recurrent Part of national sport significance expenditures of almost all facilities Part of sport facilities sport and park facilities and all other cultural facilities Health Medical research institutes, Tertiary hospitals, All hospitals and centers, Paramedics part of sanatoriums and psychiatric hospitals, clinics of city significance national health centers and veteran hospitals, Primary clinics hospitals diagnostic centers and Medicines special service hospital of oblast significance Roads Construction of all roads Maintenance of oblast Maintenance of rayon and Maintenance Maintenance of federal roads city roads of roads commercial roads Public Interjurisdictional highways, Some part of air and river Some transportation Transportation air, rail, sea and river transport facilities, including subway transport systems Fire protection Most fire protection Part of fire protection Part fire protection services (including most services services, voluntary, wages, investment) enterprise services Special fire protection services Expenditure Federal Oblasts Rayons Village Soviets Libraries, archives Special libraries (for Libraries and archives of Most local library services Village example, the Lenin library) oblast significance libraries Special archives Police services National militia, military Part of road (traffic) Part of road (traffic) Part of police units police, part of national police, part of national national militia, part of housing militia, part of maintaining militia for military police administratively arrested servicemen persons; maintaining of special medical anti- alcohol centers and corresponding police units; special (inspectorate on teenagers; part of special semi-prison distributive centers) Sanitation (garbage Part of investment into Part of investment iDt, Garbage collection Part of collection) garbage collection garbage collection garbage collection Sewage - Most of infrastructure Most operating costs, part Some capital investment of investments operating costs Public utilities (gas, - Part subsidies to Subsidies to enterprises - electricity and enterprises water) Housing Part of housing construction Part of housing Part of housing - eonstruction construction and maintenance Price subsidies Part of food and medicines - Most transport, most of - subsidies food; part of medicines subsidies Welfare Part central government Part oblast government Managing programs funded - compensation responsibility responsibility by upper level governments Environment National environmental Local environmental Environmental problems of - problems problems rayons Public enterprises Federal investment Subsidies to particular Various explicit and - (productive sector) programs subsidized credits, sectors (agriculture) implicit subsidies and subsidies to particular investments, grants, tax benefits. sectors (mining, agriculture, benefits. tax benefits). *'ource: World Bank Report No. 11302RU: Intergovernmental Fiscal Relations in the Russian Federation, authors own estimates. Annex 4 Yaroslavl budgets: Definitions and Reclassification 1. The following presents the definitions underlying the budget tables in Annex 1. It also reconciles the Russian budget classification with western public finance concepts, using the IMF's "Manual on Government Finance Statistics" (Washington, DC: International Monetary Fund, 1986). Revenue Side 2. "Personal income taxes" (line III. 1.1.1 in tables 8 and 12 of Annex 1) include personal income tax withheld by enterprises and organizations; personal income tax collected by tax authorities (in 1990 and 1991 it also included a very small share of fees for business licenses for individuals based on their estimated future income). 3. The category of "Corporate income taxes" (line 111.1.2) covers income taxes paid by enterprises and joint ventures; tax on income of casinos; tax on bank income; tax on profits of cooperatives; tax on profits of social organizations; tax on income from securities; income tax paid by kolkhozes (in 1992 only: tax on kolkhoz profits and payroll); withholding from enterprise profits (1990 only); tax on cinema revenues; withholding of profits from sport lotteries (1990 only). 4. "Taxes on payroll and work force" (line 111.2) include the tax on labor, based on the number of employees (in 1990), and the tax on "enterprise consumption" (on enterprise payrolls above a certain limit). 5. "Taxes on property" (line 111.3) include personal property tax (in 1992); tax on individual owners of houses, garages, and certain other structures (in 1990 and 1991); business property tax (in 1992); tax on the production funds of firms (a part of enterprise assets) in 1990; inheritance and gift tax (in 1992); land tax (in 1991); and agricultural tax (in 1990). 6. "Other domestic taxes on goods and services" (line 111.4.5) include the tax on advertising; tax on the resale of automobiles, hardware, and computers; transport tax; tax on the owners of motor vehicles; commodity exchange transactions fee; tax on use of mineral resources; forest use tax; water use tax; other natural resource use taxes; fee for a license to produce and sell alcoholic beverages and beer; trade license fee, including Ienses for individual traders (the latter only in 1992); TV and video license fee; individual business registration fee; enterprLe registration fee; registration fee for social organizations and mass media; land recordation tax. 7. "Other taxes" (line 111.5) include special fees assessed on individuals and enterprises for purposes of maintaining local police forces, for street cleaning, and for city land development and other purposes. 8. Nontax revenue includes mainly "entrepreneurial and property income" (line IV. 1), which covers: a. land rent and land tax (this item fell into category IV. 1 in 1992 because we believe that land rent makes up much more than 50 percent of this item); forestry income (royalty); -2- b. receipts from the revaluation of state trading inventories (includes revaluation of commoditie inventories, glass packaging, oil products, deductions from wholesale industrial prices, deductions from new temporary prices on high quality goods); c. income from leases on state property; d. other entrepreneurial and property income (income from foreign trade, exports, and barter operations with foreign partners; tuition for children trained and boarded in special primary and secondary schools; payments for goods and services rendered by local governments to firms; fees collected by the technical inspectorate (a unit of local administration responsible for ensuring compliance with the safety regulations) and receipts from lotteries, cooperative construction, commercial sales of goods, and auctions). 9. "Administrative fees and charges, fines and forfeits, incidental sales" (line IV.2) include court fees; passport issuance fees; receipts from the sale and registration of rifles; apartment authorization fees; payments from individuals treated in special alcoholism treatment facilities; fines and forfeits; and "other" (not identified) receipts. 10. "Capital revenue" (line V) covers receipts from the sale of apartments to individuals, sales of land, and sales of property to cooperatives (the latter only in 1990-91). In 1992 the corresponding Russian statistical category, "Receipts from privatization," comprises: 0 receipts from privatization of state and municipal property, o receipts from sale of land, and o receipts from sale of apartments to individuals. 11. According to existing IMF practice only the second and the third cases should be considered as capital revenue, while the first item "receipts from privatization of state and municipal property" should be placed under heading "Lending minus repayments." 12. In the 1992 regional budget report revenue items such as turnover tax, sales tax, and the tax on unmarried persons were included in the consolidated budget as "Other Receipts" without being broken down among lower levels of administration. Because these taxes were abolished at the beginning of 1992 and were collected only as receivables from the previous year, we did not use actual amounts for these taxes for 1992. Instead, we extrapolated the 1992 amounts from 1991 receipts. 13. A final comment on the first heading in tables 8 and 12 of Annex 1, "Total Revenue." After summing all 1991 initial revenue items and comparing this figure with the initial total revenue figure, we came up about 200 million rubles short. We believe there may have been an error or omission in the finance department's budget report. Expenditure Side 14. The information available did not permit the separate local and oblast budgets to be translated into the IMF's classifications, but we did manage to produce a functional and economic cross- classification of the consolidated budget of the Yaroslavl oblast from 1990 to 1992. (See tables 9-11 of Annex 1.) -3- Economic Classification 15. The column headed "Wages and salaries" in the tables covers gross expenditures on wages and salaries including payroll tax, as well as casN reimbursements for business trips. 16. The category, "Other purchases of goods and services," includes: office supplies; operating expenses (including maintenance) of budgeted organizations; food service in public hospitals, schools, and other organizations; and medicines for public hospitals. Operating expenses also included some business travel expenses, as well as the costs of the region's policies in the areas of migration and ecology. 17. "Subsidies to nonfinancial public enterprises" covers food price subsidies (compensation of price differences) as well as the so-called state subsidy to various sectors. Both were paid directly to agricultural producers, food processing enterprises, and building construction firms. They were not paid directly to consumers, although they have the effect of keeping consumer prices low and therefore operate as consumer subsidies. Such indirect consumer subsidies-indirect because they are paid to producers-- have been far more common in Russia than conventional consumer subsidies (as defined by the IMF), which, because they represent small amounts of funds, remain hidden within larger line items. Because the quasi-consumer subsidies were aimed at consumers they could well be grouped under the heading, "Current transfers to households", but in this analysis we have kept them as "Subsidies to nonfinancial enterprises." 18. "Current transfers to households" include pensions, allowances, scholarships, and cash compensations to various groups. 19. The category of "Capital transfers to nonfinancial public enterprises" covers state investments, capital repairs, acquisition of equipment and durable goods, and acquisition of uniforms. 20. "Capital transfers to households" include capital improvements on houses owned by disabled WWII veterans. 21. One of the most difficult problems is the classification of expenditures included under "Not identified." Here we lack detailed information about the following budget items: nonallocable expenses, other expenditure, other costs, project design, and expenditure on maintenance of some urban infrastructure units. The probi . is that according to the current "Classification of budget revenue and expenditure in the Russian Federation" (Moscow: Ministry of Finance, 1992), pp. 39-42, the single subheading, "Other expenditure," includes dozens of functionally very different types of expenditure such as free baby food, research grants, bonuses for public servants, training of public servants, books for public libraries, festival expenses, etc. Therefore unless the regional financial department begins to provide breakdowns of such expenditures, it will remain impossible to classify this category precisely. 22. That said, we believe that "Non-identified expenditure" refers mainly to operating expenses (which are formally covered by another heading: "Other purchases of goods and services"). "Non-identified expenditure" also contains a small amount of expenditures properly classified as "Current transfers to households" (so called "material help"), "Capital transfers to nonfinancial public enterprises" (acquisition of equipment and automobiles), "Subsidies to nonfinancial public enterprises," and "Wages and Salaries". Detailed (but partial) data concerning "Other expenditure" in the consolidated agriculture budget for 1992 explains 177.5 million rubles (100 percent): -4- a. capital transfer--37.9 million rubles (21.3 percent): potato seeds for state farms, collective farms, and farmers (30.3 million rubles); acquisition of farm machinery for state and collective farms (2.9 million rubles), peas and flax seeds (2.4 million rubles), plant and equipment for farmers (2.6 million rubles); b. subsidies--0.9 million rubles (5.5 percent): financial help for forestry cooperatives; C. current transfers to households-1.0 million rubles (0.6 percent): compensations to workers on state and collective farms for December 1991; d. other purchases of goods and services-137.9 million rubles (77.6 percent): maintenance of rural infrastructure, hot-water plants, and heating (136.8 million rubles); herbicides and pesticides for state and collective farms (0.9 million rubles). Functional Classification 23. "General services" (line 1 of the tables 3-11, Annex 1) includes expenditure on executive and legislative bodies, archives, elections and referendums, receiving foreign missions and sending local delegations abroad, and distribution of privatization vouchers. "Defense" (line 2) covers civil defense and units responsible for military conscription. "Public order and safety" (line 3) covers the expenses of the police force, courts, and prosecuting magistracy (data for the year 1990 are not available); fire protection services; notarial offices (in 1992); the budget program, "Law and Order-1995"; special alcoholism treatment centers and the corresponding police units; the adolescent unit; controlled residential treatment centers for teenagers; residential pretrial holding centers; and special road patrol and traffic control units. "Education" (line 4) covers all expenses of kindergarten, primary, secondary, and vocational education and retraining. "Health" (line 5) covers hospitals and polyclinics, sanatoriums, various public h- ith services, pharmacies, dental clinics and dentists, and public health centers. "Social security and welfare" (line 6) covers allowances; pensions; compensations in cash for children; compensations to liquidators of the Chernobyl disaster; grants; compensations to rehabilitated persons; capital improvement of houses owned by WWII veterans; the social protection and employment fund (in 1991); special boarding houses for disabled persons; training for disabled persons; and regional social security centers. "Housing, community affairs, and construction" (line 7) covers planning, engineering, and building state housing; maintaining housing; electric and heating utilities in cities, towns and villages; compensation for fuel price differentials (a subsidy on fuel used for residential heating); water supply and sewerage; city development; construction; and a special construction unit. The amount of construction under this heading is very small. .5- "Recreational, cultural, and religious affairs" (line 8) includes spending for theaters, libraries, museums, exhibitions, culture houses, and clubs; musical collectives; papers and magazines; publishing houses; TV and radio; movies; physical culture and sports; the special youth program; holiday festivals; special rescue stations on lakes and rivers; support for social groups; and reconstruction of cloisters. "Fuel and energy" (line 9) covers expenditures on gas distribution companies and of the regional committee on the fuel industry. "Agriculture and forestry" (line 10) includes expenditures on state and collective farms, farmers, the Russian Academy of Agriculture, forestry enterprises, livestock subsidies, and the nature conservation committee. "Food processing industry" (line 11) covers subsidies to meat, bread, and dairy producers (to compensate them for low controlled prices), and bakery expenses. "Transportation and communication" (line 12) includes spending on passenger transport (buses, trolleys, and trams); maintaining roads; telephone and radio communications. "Other economic services" (line 13) primarily covers service sector spending benefitting households, including repair shops, dressmaking and tailoring establishments, bath-houses and laundries, hairdressers and barbers, hotels, the address bureau, retail trade enterprises, and public catering. We also included here expenses on applied research (in 1990-1991). "Not identified" (line 14) covers items of expenditure that could not be identified. In particular, for 1993 we included here a program on conversion of former military enterprises and nonallocable expenses of local soviets. Functional Classification by Level of Administration 24. The integrity of the functional expenditure classification by level of authority is vitiated by the fact that the consolidated oblast budget does not break data down by level of administration. To compensate for this problem, in preparing table 12, Annex 1, we occasionally had to move data from one section that lacked a detailed breakdown by level of admini.ration into another section that was more detailed. The donor and recipient sections of the regional classification both suffered from this exercise. For example more than a half of total expenditures on "Public order and safety" (line VII.3) were initially hidden under "Other expenditure" (fire protection services, special road patrols and control units, special medical police units, various special centers and services, and the "Law and Order-1995" program), and this latter heading is not detailed. Aggregate expenses for trolleys and trams were hidden under "Housing and communal services" along with expenses for hotels, laundries, repair services, etc. Data on 1990 expenditures for culture and mass media were hidden under "Education." In reclassifying such a transferred item, we retained the regional proportions of the receiving category. Where that method might produce unacceptably high distortions we simply noted that information was not available.