Corresponding author: Gabriel Di Bella ( gdibella@imf.org ) © 2019 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Di Bella G, Dynnikova O, Grigoli F (2018) Fiscal federalism and regional performance in Russia. Russian Journal of Economics 4(2): 108-132. https://doi.org/10.3897/j.ruje.4.27741
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Sound regional policies are essential for balanced and sustained economic growth. The interaction of federal and regional policies with cross-regional structural differences affects human and physical capital formation, the business climate, private investment, market depth, and competition. This paper summarizes the main elements of Russia’s fiscal federalism, describes the channels through which it operates, and assesses the effectiveness of regional transfers in reducing regional disparities. The results suggest that federal transfers to regions contributed to reducing disparities arising from heterogeneous regional tax bases and fiscal revenues. This allowed regions with initially lower per capita income to increase human and physical capital at higher rates. There is little evidence for transfers contributing to increased cross-regional growth synchronization. The results also suggest that federal transfers did not significantly improve regional fiscal sustainability, a conclusion that is supported by the lack of convergence in per capita real income across Russian regions in the last 15 years.
convergence, federalism, regional policies, Russia, transfers
Sound regional policies are essential for balanced and sustained economic growth. The interaction of federal and regional policies with cross-regional structural differences (e.g., natural resources, market size, distance to markets, historical events) affects human and physical capital formation, the business climate, private investment, market depth, and competition. Policy pitfalls can be costly as they can result in persistent differences in regional per capita income, dependence on federal transfers, and excessive geographic concentration. Balanced regional development is a challenge that is particularly important in geographically large and heterogeneous countries (for a discussion of factors leading to uneven regional development, see
Russia is a federal state in which regions have the legal responsibility — either exclusively or shared with the federal government — for education, health, and infrastructure spending. At the same time, Russia’s fiscal constitution is more centralized than that in other federal countries. Its main building blocks are a relatively centralized tax authority and a complex system of federal transfers. Thus, the federal government plays a significant role in shaping regional outcomes. Federal transfers represented the economic lifeline of lower per capita income regions, which unsurprisingly have the weakest tax bases, for the last 15 years. Consolidated federal transfers, either from the federal budget or from federal extra budgetary funds (EBFs) to the regions (including territorial medical EBFs) amounted to 3.5 percent of GDP in 2016, or about 65 percent of federal oil and gas revenues. These transfers financed a large share of regional fiscal spending (e.g. almost 70 percent in the North Caucasus Federal Region, or about 40 percent in the Far Eastern Federal Region).
From a policy perspective, the large sub-federal share in general government spending — about 40 percent if territorial medical EBFs are considered — suggests that the fiscal stance is determined simultaneously by policies at the regional and federal level.
There is a large Russia-focused literature analyzing fiscal federalism and regional development. Some authors discuss the appropriate institutional design of fiscal federalism in Russia:
This paper attempts to empirically evaluate the relation between fiscal federalism and regional development in Russia. To that end, it compares Russia’s fiscal federalism to that of other federal countries (Section 2), describes the channels through which fiscal federalism operates in Russia, assesses the effectiveness of regional transfers in reducing regional disparities in the provision of public services, analyzes the impact of transfers in synchronizing cross-regional growth, and evaluates the extent to which they have contributed to strengthen the regions’ fiscal sustainability (Section 3). The paper concludes with a discussion of the results, some policy implications and issues for further analysis (Section 4). The results suggest that federal transfers to regions contributed to reducing disparities arising from heterogeneous regional tax bases and fiscal revenues. This allowed regions with initially lower per capita income to increase human and physical capital at higher rates. There is little evidence for transfers contributing to increased cross-regional growth synchronization. The results also suggest that federal transfers did not significantly improve regional fiscal sustainability, a conclusion that is supported by the lack of convergence in per capita real income across Russian regions in the last two decades.
Fiscal federalism arrangements in Russia are involved. There are three levels of government in Russia — federal, regional, and local — with the local level further subdivided into a hierarchy of municipalities, which in total count more than 22,000. The Budget Code states that each of the three levels is autonomous and should be financially self-sustained. However, a complex system of intra-government transfers (mostly flowing from the federal government) ensures that spending of most regions, territorial EBFs, and federal EBFs remain broadly financed. A large network (counting more than 65,000) of budgetary, extra-budgetary, unitary enterprises, and joint stock companies (most of which operating at the regional level) adds to complexity.
Russia’s legal framework is consistent with an integrated fiscal constitution. The main conclusion in
In what follows, we rely on the data from
Russia’s SNGs have weaker tax autonomy than spending autonomy relative to other federal countries. The autonomy of SNGs (Fig.
A look at Russia’s SNGs responsibility (Fig.
Finally, Russia’s legal framework obtains higher marks than the average of advanced and other emerging market economies in co-determination of federal policies (Fig.
This section begins with some background information about Russia’s tax sharing arrangements, the types of federal transfers, and the fiscal situation of Russian regions. It then presents an empirical analysis of the effectiveness of federal transfers in equalizing the provision of public services, in increasing the correlation of cross-regional growth rates, and in delivering sustainable regional budgets.
The econometric analysis uses panel data for 79 regions covering a large variety of regional socio-economic variables, including economic activity, labor, fiscal, financial, and structural indicators. The data spans the period 2000–2016, although some variables are available for shorter time periods (i.e., regional fiscal data for 2005–2016, GRP for 2000–2015, and GRP composition for 2004–2015). A cross-sectional dataset is then constructed in which each observation represents some bilateral interaction between two regions (e.g., difference in growth rates, level differences, or correlation) for a given variable.
Regional revenues include own revenues and federal transfers. The share of federal transfers in regional revenue varies widely across regions, ranging from about 10 percent to 90 percent. Federal taxes (most importantly personal and corporate income tax) are the largest source of regional revenue, representing on average about 70 percent of own revenues. Tax sharing, or primary distribution, allocates tax revenues among different levels of government. Ideally, it should result in vertical fairness, i.e., in a balanced distribution of revenues among federal, regional, and local governments. It is performed directly in the regions where taxes are collected on a tax-by-tax basis at predetermined rates. Sharing arrangements and rates are governed by the Budget Code, and in the case of the corporate income tax by the Tax Code. Regional excises’ shares are determined by the Budget Code with horizontal (i.e., cross-regional) re-distribution. Rates tend to be adjusted frequently (see Appendix A for more details).
The primary distribution of taxes results in a large cross-regional dispersion of fiscal revenues (or horizontal disparity, i.e., differences in the revenues within a level of government), however some relationships hold steady. Specifically, regions with lower per capita real GRP have lower per capita real own revenues (Fig.
Own fiscal revenues, per capita income, and GRP composition.
Note: The black dashed lines represent the linear regression lines. Source: Authors’ calculations.
In broad terms, inter-governmental federal transfers aim at reducing horizontal fiscal inequality.
Federal transfers and per capita income.
Note: The black dashed lines represent the linear regression lines. Source: Authors’ calculations.
Regions and municipalities are largely responsible for social policies as well as for some regional infrastructure. In 2016, regional spending represented 95 percent of general government expenditure for housing and utilities, 80 percent for education and cultural activities, and around 85 percent for health including spending by territorial extra-budgetary medical funds.
In principle, a large portion of federal transfers to regions aim at reducing disparities arising from heterogeneous regional tax bases and unequal own revenues. A look at the data shows that indeed the distribution of cross-regional per capita real expenditure is situated to the right of the distribution of per capita real own revenues. This implies that lower income regions can afford higher public real per capita spending than warranted by their own regional revenues.
Moreover, higher average federal transfers to regions in 2005–2016 (in per capita real terms) are positively associated with larger increases in per capita real annual spending in health and education, helping lower income regions to partially close the gap with richer regions in per capita social spending (Figs
Federal transfers and accumulation of factors of production.
Note: The black dashed lines represent the linear regression lines. Source: Authors’ calculations.
In addition, investment-to-GRP ratios and physical capital accumulation are generally higher in regions receiving larger federal transfers. The construction of regional capital stocks by means of the perpetual inventory method shows that physical capital accumulation in regions with initially lower per capita income and that receive larger transfers is faster than in other regions (Fig.
Given the central role that the federal government plays in economic stabilization, a federal policy that smooths out aggregate economic cycles and strengthens cross-regional growth correlations should have positive spillovers for the effectiveness of monetary policy.
ρi, j (yi, yj) = α + β θi, j (f ti, f tj) + γ Xi, j + ϵi, j (1)
where ρi, j (yi, yj) is the correlation coefficient between the per capita real GRP growth rate, denoted by y, of region i and region j; θi, j (f ti , f tj) is the correlation coefficient between the growth rate of per capita real federal transfers (on aggregate and by type of transfer), denoted by f t, of region i and region j; Xi, j is a set of control variables (including proxies for distance, GRP structure, footprint of the state, and international trade) calculated as the pairwise difference between two regions of the variable being considered;
Estimation results for bilateral per capita GRP growth correlations.
Variable | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | |
Constant | α 1 | 0.514*** | 0.530*** | 0.524*** | 0.561*** | 0.566*** | 0.562*** | 0.559*** | 0.566*** | 0.374* | 0.149 | 0.149 |
Per capita real federal transfers growth corr. | β 2 | 0.065 | 0.051 | 0.047 | 0.034 | 0.021 | 0.023 | 0.025 | ||||
Per capita real grant growth corr. | β 3 | 0.013 | 0.005 | 0.002 | ||||||||
Per capita real subsidies growth corr. | β 4 | 0.264 | 0.209 | 0.209 | ||||||||
Per capita real subventions growth corr. | β 5 | 0.356* | 0.356* | |||||||||
Initial per capita real GRP | γ 6 | –0.071 | –0.069 | –0.142*** | –0.124** | –0.104 | –0.101 | –0.102 | –0.096 | –0.085 | –0.085 | |
Common border | γ 7 | 0.126 | 0.086 | 0.088 | 0.096 | 0.097 | 0.098 | 0.088 | 0.070 | 0.070 | ||
Share of public sector in GRP | γ 8 | –1.218*** | –0.784 | –0.814 | –0.853 | –0.854 | –0.807 | –0.813 | –0.812 | |||
Footprint of state | γ 9 | –0.090 | –0.097 | –0.095 | –0.096 | –0.096 | –0.083 | –0.083 | ||||
Urbanization rates | γ 10 | –0.155 | –0.132 | –0.132 | –0.148 | –0.189 | –0.189 | |||||
Foreign trade | γ 11 | –0.043 | –0.043 | –0.041 | –0.054 | –0.054 | ||||||
R2 | 0.003 | 0.030 | 0.038 | 0.136 | 0.160 | 0.164 | 0.166 | 0.166 | 0.177 | 0.209 | 0.209 | |
Adj. R2 | 0.003 | 0.029 | 0.037 | 0.135 | 0.159 | 0.163 | 0.164 | 0.164 | 0.175 | 0.207 | 0.207 | |
Observations | 3023 | 3023 | 3023 | 3023 | 3023 | 3023 | 3023 | 3023 | 3023 | 3023 | 3023 |
Federal transfers affect regional fiscal sustainability through different channels. To assess the effect of federal transfers on the regions’ fiscal sustainability, we estimate a system of equations allowing for feedback effects among endogenous variables:
Yi,tm = α + βYi,t–m + γ Zi,t + ϵi,t (2)
where Yi,t is a matrix of endogenous variables including the long-term change in the revenue-to-expenditure ratio (our proxy for fiscal sustainability), the cumulated per capita real GRP growth, the long-term percentage change in the share of public sector in GRP, and the long-term average of federal transfers in percent of GRP;
Specifications for federal transfers in a simultaneous equations system.
Endogenous Vector | Exogenous Vector | |||||||||||||||||||||
Rev. to exp. ratio | Per capita real GRP growth | Change in share of public sector in GRP | Federal transfers as a share of GRP | Const. | Initial per capita real GRP | Share of mining | Pop. | Pop. density | Common border | Footprint of state | Stoch. terms | |||||||||||
┌ | ┐ | = | ┌ | ┐ | + | ┌ | ┐ | + | ┌ | ┐ | ||||||||||||
│ | 1 | –β12 | β 13 = 0 | β 14 = 0 | │ | │ | α 1 | │ | │ | γ 12 = 0 | γ 13 = 0 | γ 14 = 0 | γ 15 = 0 | γ 16 = 0 | γ 17 = 0 | │ | │ | ε 1 | │ | |||
│ | β 21 = 0 | 1 | –β23 | –β24 | │ | │ | α 2 | │ | │ | γ 22 | γ 23 = 0 | γ 24 = 0 | γ 25 | γ 26 | γ 27 = 0 | │ | │ | ε 2 | │ | |||
│ | β 31 = 0 | –β32 | 1 | –β34 | │ | │ | α 3 | │ | │ | γ 32 = 0 | γ 33 | γ 34 = 0 | γ 35 = 0 | γ 36 = 0 | γ 37 = 0 | │ | │ | ε 3 | │ | |||
│ | β 41 = 0 | β 42 = 0 | β 43 = 0 | 1 | │ | │ | α 4 | │ | │ | γ 42 | γ 43 = 0 | γ 44 | γ 45 = 0 | γ 46 | γ 47 | │ | │ | ε 4 | │ | |||
└ | ┘ | └ | ┘ | └ | ┘ | └ | ┘ |
The identification of the model assumes that federal transfers affect fiscal sustainability through their impact on regional tax bases, which should expand faster in regions in which cumulated GRP growth is higher. Differences in GRP growth rates are assumed to be endogenously determined by differences in economic structure (i.e., whether the private or the public sector is expanding more rapidly), by differences in federal transfers (regions receiving larger transfers could accumulate factors of production faster), and to depend on a number of predetermined and exogenous variables (the level of initial real per capita GRP, population density, and geographic distance). Regional economic structure is assumed to depend endogenously on federal transfers and per capita real GRP growth, while federal transfers are assumed to be explained by exogenous and predetermined variables (including bilateral differences in the initial level of real per capita GRP).
The results in
Estimations for federal transfers in a simultaneous equations system.
Equation | Variable | Coefficient | SUR | 2SLS | 3SLS | FIML | GMM |
Endogenous | |||||||
1 | Per capita real GRP growth | β 12 | 0.280*** | 0.743*** | 0.717*** | 1.099*** | 0.754*** |
2 | Chg. in share of public sector in GRP | β 23 | –0.320*** | –0.504 | –0.431 | –0.236 | –0.373 |
2 | Federal transfers as a share of GRP | β 24 | 0.011 | 0.051 | 0.034 | 0.023 | 0.025 |
3 | Per capita real GRP growth | β 32 | –1.360*** | –0.628 | –0.573 | –0.502 | –0.683 |
4 | Federal transfers as a share of GRP | β 34 | 0.083** | 0.104** | 0.090* | 0.087 | 0.099* |
Exogenous | |||||||
1 | Constant | α 1 | 0.002 | 0.004* | 0.004* | 0.005* | 0.004* |
2 | Constant | α 2 | 0.001 | 0.001 | 0.001 | –0.001 | 0.000 |
2 | Initial per capita real GRP | γ 22 | –0.010*** | –0.007 | –0.011*** | –0.009** | –0.011*** |
2 | Population density | γ 25 | 0.001 | 0.002 | 0.001 | 0.000 | 0.001 |
2 | Common border | γ 26 | 0.000 | 0.003 | –0.002 | –0.002 | –0.002 |
3 | Constant | α 3 | 0.002 | 0.004 | 0.004 | 0.004 | 0.003 |
3 | Share of mining | γ 33 | –0.053** | –0.046 | –0.041 | –0.042 | –0.042* |
4 | Constant | α 4 | 0.022* | 0.024* | 0.023* | 0.024* | 0.021 |
4 | Initial per capita real GRP | γ 42 | –0.058*** | –0.068*** | –0.062*** | –0.067*** | –0.049*** |
4 | Population | γ 44 | –0.046*** | –0.048*** | –0.043*** | –0.043*** | –0.039*** |
4 | Common border | γ 46 | –0.025 | –0.032 | –0.024 | –0.025 | –0.024 |
4 | Footprint of state | γ 47 | 0.033 | 0.031 | 0.034 | 0.034 | 0.037* |
Accordingly, regions receiving larger federal transfers did not close (even partially) the gap between their expenditures and own revenues. This is the case as economic growth based on the expansion of government services did not result in an improvement in its own revenue-to-GRP ratios, which (in levels) are positively correlated with the size of the private sector (see Fig.
An alternative way to interpret the results is that, at least during the period analyzed, federal transfers were insufficient to jump-start self-sustaining, private-sector led growth in regions receiving relatively more transfers. Federal transfers should, in the short term, increase the size of the public sector as transfers push social and infrastructure spending upwards; however, they should not necessarily result, a priori, in a long-term increase in the share of the public sector in GRP. Indeed, it can be expected that the increased supply of public goods (e.g., in the form of higher human and physical capital) would result in positive spillovers for the private sector, but this is not observed. A possibility is that a by-product of federal transfers is to support a larger state footprint in regions; there is some evidence for this, as federal transfers flowed to regions not only with lower initial per capita real GRP, but also with a relatively larger footprint of the state (equation 4 in
We indirectly test the robustness of these results by means of complementary analysis. First, we find that for pairs of regions, total factor productivity (TFP) expanded at lower annual rates in regions receiving relatively higher levels of federal transfers. This means that the distance in productivity levels between low- and high-income regions increased in the last 15 years (Fig.
Federal transfers, public sector expansion, and TFP increases.
Note: The black dashed lines represent the linear regression lines. Source: Authors' calculations.
Second, we find no evidence of convergence in real per capita income across Russian federal regions in the period 1998–2015 (
GRP convergence across regions.
Countries | Im, Pesaran, and Shin (2003) |
|
|
Full sample | |||
(yit – ¯yt) ∀i | 84 | 0.105 | 195.050 |
Districts | |||
(yit – ¯yt) ∀i ∈ Central Federal District | 19 | 4.075 | 15.456 |
(yit – ¯yt) ∀i ∈ Northwestern Federal District | 11 | –0.049 | 21.417 |
(yit – ¯yt) ∀i ∈ Southern Federal District | 6 | 0.145 | 9.938 |
(yit – ¯yt) ∀i ∈ North-Caucasus Federal District | 6 | –1.274 | 18.264 |
(yit – ¯yt) ∀i ∈ Volga Federal District | 15 | 0.032 | 29.083 |
(yit – ¯yt) ∀i ∈ Ural Federal District | 5 | –0.536 | 16.871 |
(yit – ¯yt) ∀i ∈ Siberian Federal District | 12 | 0.813 | 23.932 |
(yit – ¯yt) ∀i ∈ Far-Eastern Federal District | 10 | –2.863* | 43.252* |
Third, population concentration in higher-income geographical areas increased in the last 15 years. For instance, the population of the city of Moscow increased by more than 30 percent since the year 2000, and by 10 percent in Saint Petersburg, against the backdrop of a broadly constant total population. This implies that other less densely populated (and generally lower-income) regions experienced population decreases of 15–20 percent. Although concentration has some advantages for recipient regions and cities (e.g., increases economies of scale, supports firm localization, improves job matching, among other), it has symmetrical drawbacks for regions losing population, and results in an increasing per capita cost for federal transfers. More broadly, it results in geographically unbalanced development, a critical issue for a continental-sized country like Russia. Federal transfers — and fiscal federalism in Russia more generally — appear not to have taken into consideration both the advantages or disadvantages related with increased concentration and the associated regional challenges that may arise as a consequence.
Russia’s fiscal federalism assigns a strong role to the federal government. The system evolved from a somewhat disorderly decentralization in the 1990s into a more centralized system in the last 15 years. Regions play an essential role in human and physical capital formation, but cross-country comparisons of fiscal constitutions suggest that they have less autonomy and exercise less control of their own fiscal policy than in other federal countries. The system is quite complex and the diversity of federal subjects along socio-economic dimensions is wide. Increased coordination between the federal and regional governments to tackle complexity and to address cross-regional infrastructure and human capital bottlenecks could result in a more integrated national market with positive spillovers for inter-regional and international trade and investment.
Given relatively rigid tax sharing arrangements, federal transfers constitute one of the main levers through which federal policy operates at the regional level. Federal transfers proved effective in supporting factor accumulation in lower per capita income regions. However, there is little evidence that transfers contributed to increased cross-regional growth synchronization, which is not necessarily a negative outcome given that fiscal policy has been somewhat pro-cyclical. Federal transfers were ineffective in supporting self-sustaining per capita real GRP growth and productivity increases. Transfers expanded government services but did not result in a long-term increase in the share of the private sector in GRP. Accordingly, large cross-sectional differences in own fiscal revenues (in per capita and GRP terms) persist, as well as the associated dependence on federal transfers. Importantly, federal transfers flow more heavily to regions where the footprint of the state is larger, which may suggest a self-sustaining pattern.
Enhanced strategic direction could help increase federal transfers’ growth effectiveness. Open-ended transfers may have had the unintended effect of weakening regional incentives to enlarge their tax bases, supporting a pattern of dependence. Thought should be given to include in the grant allocation formulas a stronger measure of sustainability together with the current objective of equalization. Establishing realistic transition periods to achieve sustainability is essential.
Appropriate federal macroeconomic and tax policies can contribute to the development of regional tax bases, supporting regional sustainability, and the accountability of regional authorities. An option in this regard could be to expand the use of personal property taxes (
Given that higher income regions have more space to strengthen their own tax bases (e.g., through taxation of property as indicated above, which is more abundant and of higher value in richer regions), there may be scope to increase the use of horizontal transfers in the margin. The large cross-regional dispersion of per capita own revenues may have contributed to economic and population concentration, which creates negative spillovers for regions with population outflows.
The sustained implementation of a credible fiscal rule should contribute to avoid stop-go cycles caused by terms of trade shocks, promote a more stable and more aligned-with-fundamentals real exchange rate with positive spillovers for lower per capita income regions, where agriculture (a tradable sector) represents a larger share of GRP. This should have beneficial effects for the expansion of regional tax bases. A fiscal rule would also contribute to smooth national and regional economic cycles, simplifying the implementation of stabilization policies (including monetary policy). The role of different types of federal transfers in the synchronization of regional economic cycles deserves further analysis. Rebalancing domestic taxes with a view to taxing labor less heavily should support decreases in informality, which is likely to be more prevalent in low per capita income regions as attested by weaker tax bases.
Finally, there may be room to simplify and increase the transparency of transfers. Streamlining the number of transfers (especially subsidies), in particular for agriculture development, housing and utilities, and education; allocating subsidies one-to-one to government programs (or subprograms), instead of to a multiplicity of them; transforming and further consolidating “other transfers’” into subsidies; and regulating budget loans, which are increasingly used because of their concessional interest rates, should all result in a simpler, more transparent, and easy-to-administer system.
We thank to, without implicating, Suman Basu, Vladimir Kolychev, Alexander Morozov, Aleksei Mozhin, Ernesto Ramirez Rigo, and the participants of the IMF seminars held in May 2017 at the Central Bank of Russia and the Ministry of Finance of the Russian Federation for their comments and suggestions. We also wish to thank Nina Chebotareva and Tatiana Chernisheva for excellent research assistance.
This appendix summarizes revenue sources (including sharing arrangements) and spending responsibilities by different government levels. Concretely,
The Budget and Tax Codes establish several fiscal restrictions for sub-federal governments. Monitoring, reporting, and transparency standards and requirements established by the federal government are high. Sanctions for rules violations might be imposed and include, among other, adjustments in the size of transfers (excluding subventions).
Budget balance requirements: the deficit or regions cannot exceed 15 percent of their own revenues (excluding grants). Rules are stricter if federal grants exceed 40 percent of the consolidated region budget revenues (excluding subventions).
Tax limits: Sub-federal governments can set tax rates and reliefs for regional and local taxes. For the CIT, regions can set rates for the regional part of the tax within the limits set by the Tax Code but not reliefs. Excise taxes on gasoline and alcohol are shared annually between regions and federal government. The Tax Code does not allow for regions to legislate on personal income tax (PIT), fees and charges, rates and reliefs, which constitute the remaining 40 percent of their revenues.
Expenditure limits: Regions with a share of federal grants exceeding 10 percent of consolidated region budget revenues (excluding subventions) cannot assume and execute expenditures assigned to regional governments by Constitution and federal laws, and cannot exceed federal norms for budgetary sector wages and regional government activity financing. Similar restrictions exist for municipalities getting equalization grants from regions.
Borrowing constraints: Domestic borrowing is not directly restricted; new foreign borrowing (for deficit financing or refinancing) is allowed only for regions that do not receive federal equalization transfers, do not have debt arrears, and have proper credit ratings from at least two international agencies. Regions receiving federal equalization transfers can borrow externally to refinance existing external debt if no debt arrears and credit rating requirements are satisfied. Total yearly borrowing of regions and municipalities is bound up by deficit financing and debt amortization.
Debt levels and service: Debt is not allowed to exceed own annual revenues (excluding grants). Rules are stricter if federal grants share exceed 40 percent of consolidated region budget revenues (excluding subventions). Debt service (interest payments) should not exceed 15 percent of total expenditures (excluding subventions). Escape clauses introduce flexibility for regional budget implementation (budget credit financing, privatization, use of regional precautionary saving funds). Debt ceilings are currently allowed to be exceeded for an amount equal to federal budget credits.
Russia: Tax and non-tax revenue sharing agreement.
Rates (percent) | Share accruing to (in percent of total) | |||
---|---|---|---|---|
Federal | Regional | Municipal | ||
Federal taxes | ||||
VAT | 18 (concessional rate 10 percent) | 100 | ||
PIT | 13 | 0 | 85 | 15 |
CIT 1) | 20 | 10 | 90 | |
MET (Oil and Gas) | Formula-based depending on oil price | 100 | ||
MET (Other subsoil resources, including diamonds) | Ad valorem and specific | 40 | 60 | |
MET (Commonly occurring subsoil resources) | Ad valorem and specific | 100 | ||
MET (Diamonds) | 8 | 100 | ||
Water tax | Specific | 100 | ||
Excise tax on ethanol from edible raw material 2) | Specific | 50 | 50 | |
Excise tax on ethanol from all material excluding edible 2) | Specific | 100 | ||
Excise tax on alcohol-containing products 2) | Specific | 50 | 50 | |
Excise tax on spirits 2) | Specific | 50 | 50 | |
Excise tax on wine, beer, other 2) 3) | Specific | 100 | ||
Excise tax on tobacco 2) | Specific | 100 | ||
Excise tax on cars and motocycles 2) | Specific | 100 | ||
Excise on gasoline and motor oil 2) 4) 5) | Specific | 12 | 88 | |
Excise tax on imported excisable goods 2) | Ad valorem and specific | 100 | ||
Fee (royalty) for exploitation of water biological resources | Specific | 20 | 80 | |
Fee (royalty) for exploitation of animal resources | Specific | 100 | ||
Stamp duty 6) | Specific | 100 | 100 | 100 |
Stamp duty via public multi-service centers | 50 | 50 | ||
Special Tax Regimes | ||||
Single agricultural tax | 6 | 100 | ||
Single imputed income tax | 15 (7.5–15) | 100 | ||
Patent | 6 | 100 | ||
Simplified taxation regime | 6 or 15 | 100 | ||
Taxes under Product sharing agreements | 25 | 75 | ||
Federal Non-Tax Revenues | ||||
Property income and earnings from paid services | 100 | 100 | 100 | |
License fees | 100 | |||
Customs duties and fees | 100 | |||
Forests | 100 | 100 | 100 | |
Water facilities | 100 | 100 | 100 | |
Environmental fee 7) | 5 | 40 | 55 | |
Consular fees | 100 | |||
Disposal fee | 100 | |||
Subsoil royalty | Formula-based | 40 | 60 | |
Proceeds from sale/lease of federal land ceded to region | 50 | 50 | ||
Fees for record extracts | 100 | 100 | 100 | |
Fees for record extracts via public multi-service center | 50 | 50 | ||
Fines and penalties 8) | ||||
Regional Taxes | ||||
Corporate property tax | Capped at 2.2 | 100 | ||
Gambling tax | Specific | 100 | ||
Transport tax | Specific | 100 | ||
Local Taxes | ||||
Land tax | Capped at 0.3 and 1.5 for diff. types of land | 100 | ||
Personal property tax | 0.1–2 | 100 | ||
Retail sales fee (so far implemented only in Moscow) | Specific, but no more than patent-based | 100 |
Russia: Spending responsibilities and jurisdiction by level of government.
Area | Federal | Joint Federal Regional | Regional / Local |
---|---|---|---|
General | Exclusive Federal Jurisdiction: Authority on federal property, regulation of social and economic development, federal energy systems, national defense and security, international relations, law enforcement; meteorology and statistics. | Areas of joint federal-regional jurisdiction: Public safety and law enforcement; administrative, labor, family, housing, land, subsoil, forest, water relations; environmental protection; emergencies and natural disasters; education, science, culture, sports; public health, social security. Responsibilities are usually divided based on jurisdictional attribution or relevance (e.g. regional roads or federal water facilities), but sometimes are shared between the two levels of government. | Exclusive Regional Jurisdiction: all other government responsibilities beyond those under the federal jurisdiction and joint federal-regional jurisdiction - as stipulated in regional constitutions and legislation. Local Governments’ jurisdiction: Urban, rural settlements; electricity, heating, water, gas, fuel supply; roads; municipal housing; public transport; emergencies, fire safety; public amenities, eateries, retail trade; culture (local cultural heritage, folk art and crafts); physical culture, sports, public entertainment, recreation; archives; cemeteries; local resorts; public safety, rescue operations; waste management; support to agriculture and SMEs; terrorism/extremism prevention; education (less vocational + vacations); public health. |
Delegated federal Responsibilities supported by federal subventions | National Census and Agricultural Census; Prevention of homelessness; Housing for disabled, veterans, retired servicemen, etc.; Subsidization of housing and utility payments for veterans, disabled, radiation-exposed, etc.; payouts to radiation-exposed; unemployment benefits; maternity and childcare benefits; monthly compensation payouts to various categories, e.g. exposed to radiation, blood donors, etc.; water and forest relations: management (partial) of federal water facilities and forests; animal world, hunting, fishing (partial); protection and oversight of cultural heritage; education: oversight, licencing, accreditation (all partial); public health: licensing; procurement of drugs, mandatory medical insurance. | ||
Delegated federal Responsibilities unsupported by federal subventions | Audit of construction plans and engineering surveys; environmental audit; land relations: provision of plots of land for construction, demolition of real estate, easement; R&D management. | ||
Education | Universities | Vocational, primary, and secondary schools. | |
Employment | Unemployment benefits (delegated — see above) | Employment facilitation. | |
Social security | Social support to war veterans, radiation victims (some responsibilities delegated — see above) | Social support to senior citizens, disabled, orphans, labor veterans, low income households; payment of medical insurance contributions on behalf of non-workers. | |
Industry support | For instance, Aviation | Support to agriculture (beyond that from federal programs) and to SMEs (since 2015). | |
Waste management | Radioactive waste | Solid waste. |
Variable definitions.
Variable | Definition |
Change in the share of public sector in GRP | Change in the share of public sector in GRP in 2004–2015 (percent) * |
Common border | Dummy identifying regions sharing a common border * |
Federal transfers as a share of GRP | Average federal transfers-to-GRP ratio in 2005–2015 (percent) * |
Footprint of state | Ln of number of per capita budgetary and non-budgetary state institutions * |
Foreign trade | Average Exports plus Imports over GRP for 2009–2015 (percent) * |
Initial per capita real GRP | Ln of real per capita GRP in 2003 * |
Per capita real federal transfer growth correlation | Bilateral regional corr. of real per capita federal transfer growth for 2005–2015 (excluding tansfers to territorial EBFs) |
Per capita real grant growth correlation | Bilateral regional correlation of real per capita federal grants growth for 2005–2015 |
Per capita real GRP growth | Annual average growth rate (Ln difference) of real per capita GRP in 2004–2015 * |
Per capita real GRP growth correlation | Bilateral regional corr. of real per capita GDP growth for 2005–2015 |
Per capita real subsidy growth correlation | Bilateral regional corr. of real per capita federal subsidies growth for 2005–2015 |
Per capita real subvention growth correlation | Bilateral regional corr. of real per capita federal subventions growth for 2005–2015 |
Population | Ln of population (millions) in 2005 * |
Population density | Ln of population density (people per square kilometer) in 2005 * |
Revenue-to-expenditure ratio | Annual average change of the revenue-to-expenditure ratio in 2005–2015 (percent) * |
Share of mining in GRP | Average share of mining in GRP in 2004–2015 (percent) * |
Share of public sector in GRP | Average share of public sector in GRP in 2004–2015 (percent) * |
Urbanization rates | Average urbanization rates for 2005–2015 (percent) * |
The share of regional spending to general government spending in Russia is lower than in Canada, the United States, and Mexico, but similar to that in a number of other OECD countries including Belgium, Germany, and Spain (
Appendix A provides further details about the distribution of revenue authority, sharing arrangements, intra-governmental transfers, spending jurisdictions among levels of government, and the limits imposed by the federal government on the regions’ budgets.
See Appendix A for further details.
For a more comprehensive discussion see
We use the prefix “inter” to denote transfers between different levels of government (e.g., from the federal government to the regional governments or vice-versa).
In the econometric analysis that follows we consider formula-based and discretionary equalization grants together. Discretionary equalization grants are important for some regions.
About 40 percent of these transfers are financed by contributions to the Federal Medical Fund from regional budgets on behalf of the non-working population.
Federal budget spending for national economy includes transfers and subsidies to support economic activity, which can benefit both private and state-owned firms. Although this category of spending has a regional dimension, this dimension is not legally codified.
Human capital indices are constructed assuming decreasing returns of additional years of education. In other words, the increase in human capital of finishing primary school (with respect to having no schooling at all) is higher than the increase in finishing secondary education (with respect to having finalized basic education only). We assign decreasing returns to the five different categories of education that are reported by the national statistics agency (Rosstat), namely basic, secondary, secondary technical, university, and post-graduate. These calculations are available upon request.
The link between regional investment and transfers is straightforward. The budget finances a relatively large share of regional investment in regions receiving larger transfers, in particular lower-income regions. A similar pattern is observed when looking at gross investment by ownership (private, public, and mixed): public sector investment is larger in regions receiving larger transfers.
This is a similar argument to that made in the optimal currency area literature (
The footprint of the state is defined as the number of per capita regional budget and non-budgetary entities, including state unitary enterprises and joint-stock companies.
Since bilateral observations for region pair (i, j) are not independent from the bilateral observations for the region pair, say, (i, k), the actual degrees of freedom are n – k – 1, where n is the number of the regions rather than the number of observations, and k is the number of the independent variables. Standard errors are corrected accordingly.
The public sector is defined as the sum of the share of public administration; military security; social insurance; education; health care and social services; and other communal, social, and personal services. Note that the private sector is defined as sum of the rest of economic activities, despite the fact that it comprises the operations of SOEs in these activities.
The common border dummy variable is time invariant.
Beginning in 2012, the continuing gap is also explained by wage increases for the education, health and social sectors that was decreed by the federal government.
The literature analyses internal migration trends in Russia (
Ongoing work to measure regional business climate with a view of strengthening institutions may promote higher private investment for a given level of federal transfers.
The complete elimination of regional dispersion is unlikely. Going forward, equalization grants will likely keep their leading role. Sudden decreases or reallocations could create disruptions especially in the most financially dependent regions.
In this regard, there may be room to gradually improve the primary distribution of corporate income tax (CIT). The ongoing redistribution (by the federal government) of one percentage point of CIT to finance equalization grants is an example of the use of horizontal transfers in the margin. Any changes should be implemented through well-designed and transparent distribution formulas, to avoid distortions in incentives for both donors and recipients