Three sources to balance regional budgets

The federal budget has recently been playing an essential role in total balance of regional budgets.

In 2007-2012, consolidated regional budgets were basically free of deficits, except at the height of the crisis in 2009 when total deficit was 0.8% of GDP, and 2012 (0.5% of GDP). In 2009-2011, federal transfers increased in volume to 3-4% from 2.6% of GDP, thus preventing aggravation of the problem. However, it is the federal budget that was hit most by deficit in the budget system. In 2012, transfers declined in volume to the pre-crisis level and regional budgets imbalance began to increase.

The year of 2013 was fairly hard both for the Russian economy and the budget system, especially at the regional level. In 2013, regional debt issues worsened drastically (30% growth), above all, business debt (50% growth). The number of deficit-plagued regions and total deficit volume exceeded the values observed at the height of the crisis in 2009 (0.8% of GDP in 2009 and 1% of GDP in 2013). Second, the regions had to cut investment. The share of investment spending in total spending gradually declined to 15% in 2013 from 17% in 2011 (or to 2% from 2.5% of GDP).

The data on the first eight months of 2014 show that budget execution at different levels has been slightly improving despite a projected slowdown to 0.5% in economic growth rates. Tax revenues may increase in 2014 owing to some recovery of profit tax revenues. However, tax revenues comparison not only with 2013, but also 2012 shows no recovery of tax revenues in real terms and their marked decline vs. the level observed in 2012.

Total volume of revenues at the regional level in 2014 may ultimately remain at the level observed in the preceding year (12.2% of GDP), with spending growing (with a 100% fulfillment of the spending budget) to 13.5% of GDP. In this case, total deficit of regional budgets would increase to 1.3% of GDP in 2014.

Overall, Russia's regional budgets (vertical imbalance adjustment) in the mid-run can be improved through three sources: by increasing federal budget transfers, by allowing the regions to retain more tax revenues (or introducing new regional taxes), by delegating certain spending powers from the regional level to the federal level (or simply by cutting spending powers of regional budgets).

Arseniy Mamedov, Head of the Budget Policy Department, Gaidar Institute

The comments are based on the article published in Forbes on 12.11.2014 by Sergei Sinelnikov-Murylev, Scientific Supervisor of the Gaidar Institute for Economic Policy, and Arseniy Mamedov, Head of the Budget Policy Department, Gaidar Institute.