The Influence of Inter-Budgetary Transfers on Regional Economic Growth

Russia’s territories are highly differentiated, which requires redistributing significant amount of resources both as taxes and as inter-budgetary transfers.

Now as amidst the economic stagnation both the government and experts are looking for ways to resume economic growth, the issue of identifying factors that have positive or negative influence on it becomes topical. One of such factors is the system of organizing inter- budgetary relations, in particular special aspects of providing financial assistance to lower-level budgets, including additional tax revenues and inter-budgetary transfers. Within the current federal budgetary policy, this influence is almost neglected, but the question of undoubted interest is to which extent federal and regional inter-budgetary transfers as well as the distribution of tax revenues and expenditure powers among tiers of authority affect the indicators of economic development of Russian regions.

Analyzing inter-budgetary relations in the Russian Federation and identifying the main trends in the development of inter-budgetary relations at the regional level (between a subject of the Russian Federation and municipalities) allowed the Gaidar Institute and RANEPA experts to develop methods for assessing the influence of inter-budgetary transfer structure parameters as well as other major characteristics of inter-budgetary relations, including budgetary decentralization, on regional economic development indicators. Besides that, possible approaches to assessing fiscal incentives in Russia and the United States were explored.

A comparison was made in the degree of fiscal decentralization and the strength of fiscal incentives between Russia and the United States in accordance with standard estimation methods used in the scientific literature. Although the share of regional and municipal revenues and expenditures in the total volume of revenues and expenditures in the consolidated budget in Russia is lower than that in the USA, the estimates of fiscal (tax) incentives turned out to be similar in these two countries, both at the regional and municipal levels. These results contradict the estimates received for Russia in works based on the data for earlier periods. This leads to the conclusion that the reforms of the budgetary federalism system carried out in Russia during the 2000s improved financial incentives of subnational authorities. However, these results do not necessarily mean that fiscal incentives of Russian regions are just as strong as those of the US states. The methods for assessing fiscal incentives used in this study and in similar ones generally are far from perfect. In particular, they do not take into account the degree of political centralization in a country and other institutional details that could be very important for assessing the degree of fiscal decentralization and the strength of fiscal incentives.

The analysis of the method of distribution of equalizing grants allocated from the federal budget for the period of 2006–2015, as well as the results of calculations that show changes in the size of these grants due to growing or decreasing revenue potential of a specific region show that the reduction in these grants is substantially less than the increase in tax and non-tax revenues of the consolidated budget of the region. This, in turn, shows that regions have enough incentives to develop the economy and the income basis. These incentives are significantly higher for the regions whose level of fiscal capacity before receiving equalizing grants was more than 0.6 (that is, the level of the first criterion for equalizing the estimated regional fiscal capacity). Another assertion is also true: a steady decline in a region’s revenue potential will not fully compensate for its decline due to the growth of equalizing grants. At the same time, the overall net financial effect for a regional consolidated budget as a result of its growing economy may be slightly lower than the one shown in the calculations that only deal with changes in tax and non-tax revenues of a regional consolidated budget, as well as the size of equalizing grants from the federal budget. Nevertheless, if we talk only about whether there are incentives for economic development laid down in the formula of equalizing grants distribution, the result remains unchanged: the incentives are sufficient for any region to be interested in the economic development. It is important to note that this result obtained without using econometric methods is generally consistent with the abovementioned estimates of Russian regions’ fiscal incentives.

The study also revealed a statistically significant effect of inter-budgetary relations at the national and regional levels on the economic development of the region. In particular, it was shown that the influence of transfers may change in the years of crisis, which may be due to changed transfer allocation rules in this period. Another significant result of the study is the evaluation of grants indicator. An increase in the share of grants as a whole in the total amount of transfers does not have a significant impact on economic growth, but separately, grants for ensuring budget balance have a negative impact, which may be due to the rules of distribution of these transfers. The level of intraregional expenditure decentralization was positively associated with economic growth, although the quantitative assessment of this influence is rather small (within tenths of 1 pp of GRP growth rate).

As a result, we can say that the reforms of budgetary federalism carried out in the 2000s generally had a positive impact on the fiscal incentives of subnational authorities. The method of allocating grants to equalize the fiscal capacity includes a sufficient number of elements that neutralize possible discouraging effects. At the same time, this type of grants does not have a negative impact on the rates of economic growth in the subjects of the Russian Federation. So, the federal center should abandon the practice of constantly changing the method and should pay more attention to the stability of the “rules of the game”, at least in this part of inter-budgetary relations.

At the same time, the obtained results show a negative impact of grants for ensuring Russian regions’ budget balance on regional economic growth. So, first, it is necessary to increase not only the share, but also the real volumes of grants for equalization distributed among the regions using a transparent enough method. Second, one should reduce the volumes of grants for budget balance and introduce clear and, most importantly, statutory criteria for their distribution. Those grants for ensuring the balance which are essentially purpose-oriented should be changed into subsidies – among other things, in order not to distort so much the budget statistics and target indicators stated in the corresponding national program.

Michael Alekseev – leading researcher at the Center for Regional Reform Studies, RANEPA Institute of Applied Economic Studies,
Arseny Mamedov – senior researcher at the Gaidar Institute Budget Policy Department,
Alexander Deryugin – researcher at the Gaidar Institute Budget Policy Department,
Irina Filippova – junior researcher at the Gaidar Institute Budget Policy Department