Experts considered the main problems with budgetary relationships in the regions and ways to solve them at the “Budgetary Transfers to the Regions: In Search of Balance” session at the Russian Investment Forum. The speakers discussed whether assistance to the regions needs to be intensified or whether they need more independence, how specifically to alter the system of budgetary relationships, what problems exist in the financial distribution of funds and the level of financial awareness among regional management as well as how to transform the regional subsidy system. 

“Are budgetary relationships a tool for stimulation or dependency?” This was the main question posed to the discussion participants by moderator Andrei Makarov, Chairman of the Russian State Duma Committee on Budget and Taxes. 

Finance Minister of the Russian Federation Anton Siluanov listed the main points that are most relevant for budgetary relationships. He said regional leaders often do not grasp just how interconnected a region’s budget and its investment appeal are. The minister noted that the key issues in the inter-budgetary policy are currently as follows: how to include conditions for the independent development of regions in budgetary relationships, how tax innovations affect the budgets of the country’s regions and what needs to be done on a priority basis: increase dependence, pursue a unified policy or grant the regions more freedom.  

Budgetary relations are currently a very pertinent issue facing numerous regions, including Kaluga Region. Governor of Kaluga Region Anatoly Artamonov is confident that the existing inter-budgetary policy is discouraging and needs to be modified. “I am not inclined to take a position of negative criticism. I want to find the most optimal decisions using a calm dialogue”, the governor noted. “First of all, it is essential to take into account that our country differs vastly by territory and there may be different tools for supporting the interests of regions. The regions need to be encouraged based on the criteria used to evaluate their activities”.

Russian Deputy Prime Minister Dmitry Kozak agreed that Kaluga Region is a litmus test that reflects all the problems inherent to budgetary relationships. “The region is truly an example of how to increase potential; a heavily subsidized territory that has become a donor. And now the question has arisen of the level of co-financing when providing subsidies from the regional budget”, he said. Kozak said the Russian Government takes decisions that will stimulate donor regions, in particular it has revised the level of co-financing for state programme measures to increase the share of receipts from the federal budget to 70% and also increased the amount of grants used to support active regions. “Whereas Kaluga Region had a co-financing level of 48/52 (receipts from the regional and federal budgets, respectively) under the existing resolution, now it’s 30/70.  We have shifted the curve for federal budget funding to more prosperous regions even though Moscow remains at the level of 95/5”, Kozak said. The expert added that the five regions with the highest rate of budgetary security will be funded from the federal budget at a level of 5–15%. “Goals for reforming the inter-budgetary policy have been approved by the Russian President and a wide range of tools have been developed to encourage the regions to expand their own potential. Above all, this includes providing grants to the fastest growing territories”, the speaker said.

“Starting next year, the entire 3% increase in profit tax payable to the federal budget will remain at the regions’ disposal and will be distributed among the regions that provided this growth”, Kozak said. He explained that subsidies to equalize the level of budget security have always existed, still exist and will produce dependency since this is the easiest money to obtain. “Our goal is to reduce the amount of these subsidies so that territories can receive income for their budgets and meet social obligations using their own sources of income”, he said.

The need to grant regions greater additional freedoms was also highlighted by Chairman of the Board of the Center for Strategic Research Foundation Alexei Kudrin. “In order for the regions to understand their potential and for the country’s economic growth rates to increase, greater additional freedoms need to be provided to the regions of the Russian Federation”, he said. The speaker drew attention to the problem of control and oversight functions. “The activities of 80% of the oversight authorities prevent the regions from reaching their potential. The regions should be given part of the oversight and control powers, while some of the functions need to be curtailed at the federal level, and it is extremely important to alleviate pressure on business in the regions”, Kudrin said, noting that indicators should also be introduced for law enforcement authorities concerning their influence on the investment activities of the regions. Kudrin also continued the theme of subsidizing the regions: “I believe that the proportion of subsidies to increase budget security and industry subsidies has not been properly formed. Last year there were 100 such subsidies, while this year there are 65 as a number of subsidies have been consolidated. I think such subsidies should be significantly less – a maximum of 20 – and they should solve the primary problems facing the country, should not be spread around and should solve existing problems in each specific industry. Subsidies should target the most important objectives”.

Evgeny Bushmin, Deputy Chairperson of the Council of the Federation of the Federal Assembly of the Russian Federation, agreed with Alexei Kudrin that subsidies need to be reduced and consolidated. In addition, the speaker elaborated on the problem of the tax base: “The tax base in budgetary relationships needs to be improved. The more of their own income the regions have, the more balanced the tax system is. Greater freedom needs to be given to the regions”.

Anton Siluanov added that subsidies need to be reduced, but that it would be impossible to do away with them entirely. Dmitry Kozak agreed and said he was confident that subsidies need to be streamlined, but that it would be impossible to abolish them. He added that getting rid of the federal influence on the exercising of powers would not work in the near future. “Of the RUB 11.5 trillion in total expenditures by the regions (along with the regional health insurance funds), RUB 10.7 trillion is regulated, i.e. the level of overregulation is 97%. We have spelled out to the regions how much they should spend on healthcare, education, etc.”, the speaker said. “We must decide whether to give greater freedom to the regions or if we believe that the entire country should comply with unified regulation standards, then these powers should be raised to the federal level and income should be withdrawn from the regional budget and distributed based on the needs of the regions”, Kozak said.  

Discussion moderator Andrei Makarov confirmed that today the authorities – both federal and regional – are at a fork in the road: consolidate all the money at the federal level and distribute it honestly and fairly or, on the contrary, strengthen the independence of the regions. 

Russian Accounts Chamber Chairwoman Tatyana Golikova spoke about the main problems with the allocation of funds. “The professionalism of the financial managers working in the regions leaves much to be desired. A lot of the issues today in the regional budgets take place due to ignorance of the relevant legislation and the inability to properly plan budget priorities”, she said. Golikova stressed that the powers assigned to the public regional authorities are not always observed. “In 2016, the regions planned their income in the amount of RUB 8.8 trillion, but by the end of the year they had revised it to RUB 9.7 trillion and exceeded this amount by 2.5%. Meanwhile, expenditures were planned at RUB 9.4 trillion, then revised to RUB 10.5 trillion, while 5.6% of this amount was not spent – this is RUB 590 billion worth of unfulfilled powers”, Golikova confirmed citing figures to support her point. She believes the low level of budget execution over the course of the year is one of the key problems in budgetary relationships.

Maksim Reshetnikov, acting Governor of Perm Territory, emphasized that the conditions stipulated in subsidy allocation agreements are quite stringent, the consequences for failing to meet obligations are substantial and they have turned into a tool that has finally begun to function properly. “This year all the subsidies are coming through an open budget, which very rigidly requires the co-financing sources to be identified. Unfortunately, I suspect that we are not allocating funds for the exact things that are the most relevant for the regions. The attempt to cast a rigid unified sectoral policy on all the regions continues to reduce the overall effectiveness”, the expert said.  

Dmitry Kozak expressed concerns that the new tools for inter-budgetary funding that are being introduced starting this year will not fully resolve all of the problems. “The agreements oblige the regional executive authorities to increase their own income in 2017. Forty-one regions have started discussing that they are unable to fully meet these obligations”, he said. 

The discussion moderator also raised the problem of municipalities. Veliky Novgorod Mayor Yuri Borbyshev said that Novgorod Region would lose approximately RUB 2 billion in 2017 as a result of inter-budgetary changes and, accordingly, this will impact municipalities. “The powers between the regions and the Russian Federation have changed, and the municipalities have been left with no sources to replenish their budgets other than the personal income tax”, the mayor said. 

Moscow Region Deputy Governor Ildar Gabdrakhmanov noted that Moscow Region managed to implement a large number of programmes as a result of support from the federal budget. Commenting on existing problems, the expert mentioned the shortcomings of the tax system: “There is enormous tax debt throughout the country – RUB 60 billion alone for the region. All the federal structures are involved in the chain of collection and administration. Obviously, there is a long-standing need to optimize all structures and the situation needs to change since there is currently a very long procedure”.

In summarizing the discussion, the experts once again concluded that the municipalities and the regions must be encouraged to boost their own potential. In conclusion, Dmitry Kozak noted that the method used to distribute budget funds must be transparent and approved by the regions themselves so that there is no doubt about the fair distribution of these transfers.