Реферат: Russian Federation Country Study. A Public Finance Perspective

Decree No 1212 of August 18, 1996 is designed to improve tax collection by preventing tax evasion and streamlining cash and non cash turnover. Among other measures, the decree orders enterprises in arrears of payments to the government to open settlement accounts in banks or credit institution within the Russian Federation. Those accounts are referred to as accounts of enterprise in arrears. When requested by the appropriate tax authorities, banks and other credit organizations are required to provide data about the transaction of enterprises holding these accounts. Taxation organ may refuse to register the account of an enterprise in arrears in case there are no funds available on the correspondent account of the bank or other credit organizations. An interesting aspect of this decree is that the government finally began to crack down on misrepresentation "in case of noncompliance with this requirement or intentional provision of false information in the notice submitted to taxation organ enterprise in arrears that had performed the transactions in question will be fined by the taxation organ in the amount of the transaction value". It has proposed to improve the tax system by scrutinizing financial transactions through banks. If an enterprise opens a bank account, the bank or other type of credit institution must immediately inform the tax organs about the accounts for tax purposes. Such tax policy will let the tax agencies observe tax payments more efficiently as everything will be recorded.

Presidential Decree No 1212 of August 18, 1996 also introduced policies concerning cases containing the circumstances stipulated in the Law of the Russian Federation on Insolvency (Bankruptcy) of Enterprises, the Federal Department on Insolvency (Bankruptcy) at the State Property Management Committee of the Russia Federation shall file with arbitration court request to institute proceedings on insolvency (bankruptcy) against enterprises that have repeatedly violated this Decree during one calendar year. As it was with collective farms and state farms, enterprises can just change their names and continue to evade taxes. An important issue related to insolvency is loss of massive amounts of jobs and what will workers and one enterprise" towns do for a living and revenue.

On the bases of the decree, the government has widened its crackdown on tax evaders--adding several leading oil companies to a list of tax delinquents that might be forced into bankruptcy court unless they pay their arrears. The move was the latest in a series of desperate measures the government is taking to boost tax collection and mend its thread bare budget. The government hopes that by threatening major tax evaders with bankruptcy, they will scare the country's errant tax payers into filling empty coffers. Major companies targeted for bankruptcy can avoid insolvency proceedings, if their accounts showed the government owes them an amounts equal to their tax debts for fuel supplied to state organizations.

The most recent step in fighting tax evaders was Russian presidential decree No 1428, (dated (October 11, 1996, which created a Processional Emergency Commission (the Commission) on strengthening fiscal discipline. The major principals and objectives are:

. Control over the timely and full payment of taxes and customs and other compulsory payments; . The elaboration of measures to secure a full-scale collection of taxes and other compulsory payments; . Securing the legality and efficiency of the work of tax and customs, as well as tax police agencies; . Control over the timely and special-purpose use of the resources of the federal budget and state extra budgetary funds. . Take decisions to carry out checks of the financial and economic activity of legal entities and compliance by individuals and entities with the tax, customs and banking legislation of the Russian Federation; . Check the operations of tax and customs bodies;

. Organize check of the timely and special-purpose use of the resources of the federal budget and state extra budgetary funds.

In addition, the President granted broad powers to the Commission to meet the objectives of the decree and secure its accountability.

Monetary Policy

Interest rates, much to the chagrin of reformers, in the past barely reacted to currency stabilization and the ensuing drop in inflation. Little confidence existed in the sustainability of reforms while inflation expectations remained high. In 1996, interest rates finally started to come down--albeit slowly. Real interest rates, however, are still very high. As recently agreed by the Russian government and the IMF, the ruble is due to become convertible by 1997. Better access to the ruble market could thus lead to a rapid increase in international interest in the currency. Nevertheless, the ruble is trying to join the club of respectable currencies. Due to the establishment of a crawling peg, the currency's downslide is almost under control. A generally more stable economic environment and high interest rates could make the ruble more attractive. The ruble's recent past has been eventful to say the least. Between January 1992--effectively the start of economic reform under Yeltsin--and March 1995,the currency depreciated by a massive 2,130 percent. In the second quarter of 1995, an over-restrictive monetary policy led to a severe shortage of the currency which then duly appreciated by 15 percent within three months. As concerns rose that too rapid currency appreciation would further destabilize the economy, the free-floating ruble program was abandoned and a 'ruble corridor', which envisaged further depreciation but within predetermined limits, was introduced. The ruble corridor program has proven to be quite successful. The Central Bank, which has been intervening repeatedly in the market, has managed to keep its foreign exchange reserves at a satisfactory level, and the business community has been able to rely on a more predictable exchange rate trend. In July 1996, the 'fixed' ruble corridor (the upper and lower limits of which only had to be redefined every few months) was transformed into a 'variable' ruble corridor, with the band shifting on a daily basis. Under this program, monthly depreciation now stands at around 1.5 percent. By the end of December 1996, the exchange rate against the dollar should have reached Rb 5,700/US $.

Russia's monetary environment started showing promising signs of stabilizing in 1996. During 1995, inflation reached 200 percent by December. 1996 is drawing to a close and the inflation rate seems set to fall to 19 percent. The central bank has been pursuing a very consistent policy lately, so its goal of maintaining monetary stability looks credible. Moreover, low inflation is one of the conditions imposed by the IMF in return for its monthly credit and it is therefore hardly in the government's interest to start emission based means of financing the budget deficit. The main risk for inflation could come from a high budget deficit due to low tax revenues. Financing the deficit has become easier than in the past due to good international credit ratings--for example, IBCA: BB+, Moody's: Ba2.--are making it cheaper for Russia to borrow on the foreign capital markets.

A key element of Russia's macroeconomic stabilization program has been a tight monetary policy to soak up excess rubles floating around the Russian economy and fueling inflation. That policy's success is among the factors that drove T-bill yields up by 26.6 percent Monday to an annualized 121.4 percent on the secondary market. Just a month ago, yields stood at 53.33 percent, according to Skate-to Press Consulting Agency.

The reason for the jump, analysts say, is simple supply and demand - little ruble supply in the market at a time when government spending demands revenue. The banks do not have the money to invest in GKO (treasury bills) at 3 percent per month--but they will find the money to invest for 10 percent per month. Russia's monetary expansion under the IMF agreement is not to exceed 3 percent, compared with 9 percent in December. Combined with promises by Yeltsin to repay wage arrears and ease the impact of reforms on the social sphere, that tight policy has forced the government to raise yields as a lure to banks to loan the government money.

Intergovernmental Finance

The decentralization of the Russian Federation's intergovernmental financial relationships began with a series of successive tax sharing arrangements along with the regions expenditure responsibilities increasing. This sharing and reassignment strategy continued up to and on through the adoption of a new constitution in December 1993. In Russia, the tax formula sharing rates vary by region and are often negotiated by each locality with the center. This makes any assessment about the equity impact of transfers or their effects on local revenue effort difficult. A general disadvantage of tax sharing is that it does little to enhance local accountability or efficiency. Localities receive revenue regardless of their tax effort and have no discretion to set the tax rate or base. If they view these revenues as costless, their incentive to spend efficiently is lessened. The result may be undue expansion of subnational spending. In Russia shared taxes are retained by (or accrue to) the jurisdiction in which they are collected. This differs from most market industrial and developing economies where shared taxes (like the VAT in Germany) may be shared through a formula based on factors such as population, per capita income, urbanization or other factors. Derivation-based sharing as a rule channels resources to high income areas where the tax base and, therefore, revenue collections are largest. It is thus inherently counter-equalizing. This may be a problem in countries where regional inequities are serious and where the intergovernmental system lacks other instruments (such as transfers) to address such imbalances.

The intergovernmental fiscal relations of the Russian Federation continues to be highly opaque due to the bargain-based system which presently is being utilized. The bargain-based system is making accountability in fiscal policy even worse than is necessary--therefore further reducing the transparency. The size and structure of the Russian Federation contributes to the problems occurring in its fiscal relationships. It is made up of 89 regions consisting of 29 republics, 50 oblasts, 6 krais, and 10 autonomous okrugs, plus 2 metropolitan cities (Moscow and St. Petersburg) which are referred to as the 89 "subjects of the federation" in the constitution. The regions are even further subdivided into more than 2000 districts, where all the local governments within a region report to the regional governments and are subject to regional regulations, although each local government has independent" (emphasis added) budgetary and administrative status.

Effects of Decentralization

Economic decentralization has led to the transfer of a number of services with major benefit spillovers (education, health, and social welfare) to the regional and local levels. While the administration of these programs by local governments may be appropriate because they are closer to the people, the many small local governments that have been created as a result of the strong political push for decentralization cannot likely provide these services at an adequate level from their own resources. In some regions, enterprises' "public" spending exceeds budgetary social spending and, in a few "one-company towns" there is no public spending by the budget at all on non-administrative functions. Enterprises did not provide these services once privatized, and responsibility fell onto regional and local governments to finance them. But local governments will need revenue sources to finance the additional burden.

Decentralization, which led to ownership assignment and financial responsibility, has caused the regions to become more involved in the commercial sector through producer subsidies, capital transfers, and privatization. It has also led to the budgetary expenditures by the regional governments to increase from 13 percent of the GDP in 1992 to around 18 percent in 1994. Recent policy changes have suggested that this trend of more subnational spending is likely to continue.

The Federal government has approved legislation which led to the previously discussed changes in expenditure assignment and also gave local governments the power to formulate budgets and raise revenues without worrying that their surpluses were going to be extracted by the central government. These new assignments of expenditures are not efficient, in part because the federal government has passed down" many of the expenditure assignments which were formerly the responsibility of the Soviet state. Revenue autonomy has not been reached partially due to the yearly changes in tax sharing rates. Disparities between the rich and poor regions has also contributed to a problem budgetary concern. Along with these disparities, the high rate of inflation has significantly contributed to revenue unpredictability of the rayons and oblasts. Revenue predictability and the subnational area's economic state due is of the utmost importance when one is considering expenditure assignment of the federation.

Social Welfare and Russia

The significance and necessity of an efficient social safety net in the Russian Federation can only be understood within the context of the Soviet experience of social security and how today the ideological inclination toward a welfare state is affecting Russian society. The state's pervasive role in Soviet society affected both economic and social conditions. Economically, a state-caused inverse relationship existed between GDP and the state's commitment to social safety during the Brezhnev regime. Economic and political stagnation characterized the latter years of the Brezhnev era. Economically, GNP growth declined precipitously between 1961 and 1985 (see A1 and A2). Prior to 1960, the USSR utilized extensive rather than intensive factors of production--specifically labor, capital (stock), and natural resources. In essence, Soviet authorities were able to take advantage of Imperial Russia's lack of a strong industrial base by transferring much of the population from agriculture to industrial production during Stalin rapid industrialization drive of the 1930s and 1940s. The emphasis placed on heavy industry produced a correspondingly high rate of consumer saving which allowed for increased capital growth, that when combined with the natural resource abundance and intensive use of existing capital helped sustain economic growth The USSR's ability to sustain economic growth in the 1970s was fostered by its large reserve of oil that helped finance imports of western technology.

The exhaustion of labor surplus, declining birth rates, inefficient use of natural resources and other factors of production, the growing expenditures needed to maintain military parity with the United States, and the sudden drop in oil prices, and the mis-development of the economy all were factors that contributed to the USSR's economic stagnation in the late 1970s and early 1980s. While economic efficiency decreased during the Brezhnev period, the USSR's leadership demonstrated increased commitment to the Soviet version of the social safety net. The party-state's pervasive role in society had the effect of slowing economic growth through poor re-allocation of resources and the social effect of retarding the development of a civic society. As a result, Soviet society developed an enduring attachment to the idea of an omnipotent state which provided for their basic needs regardless of the economic costs.

From a Western perspective, the Soviet Union was ideologically a hyper" welfare state in the sense that prior to the Gorbachev era, the state attempted to provide a high level of social security for every citizen, often to the point of harming economic efficiency. Additionally, it heavily restricted the development of private sector in order to prevent wide wage disparity. As mentioned above, the CPSU's monopoly on power extended to every aspect of society and in exchange for party dominance the working population received implicit social guarantees in the form of a social contract." Linda J. Cook succinctly identifies each sides' basic commitments and responsibilities:

Basically, the regime provided broad guarantees of full and secure employment, state controlled and heavily subsidized prices for essential goods, fully socialized human services, and egalitarian wage policies. In exchange for such comprehensive state provision of economic and social security, Soviet workers consented to the party's extensive and monopolistic power, accepted state domination of the economy, and compiled with authoritarian political norms. Maintenance of labor peace in this political system thus required relatively little use of overt coercion.

The weakening of the party and other unintended consequences of glasnost and perestroika such as the emergence of the Russian Republic, the decision to release Eastern Europe from Soviet domination, and the attempt to make state owned enterprises more efficient all had a direct impact on lowering the standard living for the USSR's population. Gorbachev tried and failed to cut the guarantees of the social contract. In contrast to earlier in the Soviet period, the perestroika reforms had the effect of giving significance to money" in the sense that inputs had developed value through the economic decisions which constituted perestroika. From the center's perspective, the problems caused by the inability to cut expenditures through revision of the social guarantees were compounded by revenue loss in three key areas: vodka sales, turnover tax, and republic contribution to the center--especially from the Russian Republic.

Gorbachev began perestroika with an attack on worker efficiency. One measure adopted to combat this perceived evil was restriction on the sale of alcohol. The consequence was a loss in revenue which was further compounded by expenditures related to the Chernoybl disaster and the massive Armernian earthquake in 1987. In 1990, the center granted state owned enterprise (SOEs) greater leeway in the setting of prices--between 50 percent and 100 percent of state mandated prices. Since retail prices were unaltered, the state lost a huge amount of revenue from the turnover tax. In addition, Russia offered to lower the profit tax for those enterprises willing to pledge" allegiance to the Russian Republic. Finally, the dissolution of the Soviet Union was hastened by the rise of Russian nationalism and populism both of which had economic implications. The Russian Republic provided 80 percent of the revenue to the USSR's budget. Yeltsin, using his powerful position within the Russian parliament, declared in October of 1989 that the Republic would halt all payment to Union institutions. He followed this devastating maneuver by nationalizing" the USSR Ministry of Finance and seizing its mints. In October of that year, Russia seized her share of the USSR'S precious metals. Faced with such tremendous loss of revenue which created a budget deficit that equaled 10 percent of GNP, the Soviet government elected to increase the amount of money in circulation without a corresponding increase in the production of consumer goods and services. The decision to increase money circulation, through wage increases, had a jarring effect on Soviet society. The first impact, characterized by the indelible image of long bread lines and the stereotype that a large profit could be made on a pair of Levis familiar to many Westerner was the result of the disruption of goods and services to the general population.

Price stability began to go by the wayside in the fall of 1988 with an estimated inflation rate of 7 percent which mushroomed to 10 percent in 1990. As Table A3 and A4 indicate, the state increased both the level of wages and subsidies in the other which constituted the component parts of the Soviet safety net. Real wages, however did not compensate for inflation. The decline in social welfare from a monetary angle was compounded by quality decline in social consumption areas. Although the state increase subsides to social consumption areas, the collapse of the Council on Mutual Economic Assistance (CMEA) which provided much of the USSR's medicine and medical supplies and a growing environmental movement which forced the closure of many chemical plant that supplied the limited domestic market. Gorbachev's attempts at reforms destroyed not only the social contract which existed between the state and its citizens but the USSR as well. The late Soviet period thus provides the starting point for examining poverty and the Russian Federations response to it in the form of the social safety net.

The Soviet social welfare system was effective in that absolute poverty, i. e. wide spread hunger or inadequate diet, was avoided in the latter years of the Soviet period since the state could supply the basic needs of the population through its control of USSR's resources and society as a whole. Research into question of poverty and therefore poverty alleviation policy (specifically the question of income inequality and distribution) was hindered by the imposition of political rather than economic explanations. In 1965, the Soviet Labor Research Institute adopted a social minimum income norm which was derived from the estimated costs of human consumption. Goskomstat revised the income level based on the prices reported by state-owned stores. The price consumers were faced with, however, due to their shopping habits, the existence of a black market," and inflationary pressures dramatically reduced their purchasing power. The Russian Federation revised the poverty line in 1992 to encompass the age and gender of individual households. The six categories are: children under six years of age children between the ages of 6 and 17, men between the ages of 18 and 59, women between the ages of 18 and 54, men age 60 and above, and women age 55 and older

Closer to the U.S poverty line definition, the Russian poverty level is established by first collecting low-cost cost food baskets for each demographic group... [and] after pricing each market food basket at national prices, age, and gender-specific multipliers yield individual poverty line for each demographic group. The definition of poverty is critically important to social welfare of Russia because, in theory, it sets pension, minimum wage level, and welfare payments. The USSR's dissolution has altered the scope, source and method of financing of social welfare programs. The Soviet state provided a broad range of social services, through state owned enterprise. From a public finance perspective, the transition to a more market oriented system has meant the diversification of social spending responsibility through the creation of off-budgetary funds (OBF) and passing down the bulk of public social spending mandates to sub-national governments. The following are the major OBFs: Pension Fund, Social Insurance Fund, Employment Fund, and the Fund for Social Support.

Created in 1991, the Pension Fund was designed to take pressure of federal budget and is authorized to collect a mandatory payment from employers in the form of a mandatory 28 percent contribution while from agricultural enterprises the mandatory contribution is 20. 6 percent and 5 percent of the total income of self-employed individuals. Employees make a 1 percent contribution to the Fund. Labor pensions, financed from these contribution, and social pension which are financed from the federal budget are administered by an independent government agency. The former constitute the majority (80 percent) of Russian pensioners and thus the level of labor pensions affect the lives 19. 5 percent of the Russian population. To be eligible for labor pensions, men must have made 25 years worth of contributions while women must have made 20 years of contribution. Eligibility for labor pensions can be lower depending on occupation--hazardous occupations such as coal mining and military service are two examples. Social pensions are for individual with less than 5 years of work experience and is equal two-thirds of the minimum old-age pension or in the case of disability the amount varies but does not exceed the minimum labor pension.

Payroll contributions are the also the main source of funding for the Social Insurance Fund (SIF) and the Employment Fund. Created in August 1992, the SIF is funded by a 5.4 percent payroll deduction from every worker. The SIF is intended to fund child care, maternal care benefits, and sick care. Generally, 74 percent of revenue collected from the SIF contributions remains with the enterprise while the remainder is sent to the center to finance federal responsibilities. Workers who have accrued eight or more years of experience receive their entire salary as do Chernobyl victims, parents with three or more children, and war victims. Workers with less that five years experience receive 60 percent of their salaries while those with between five and eight years experience receive 80 percent of their salaries. It is accepted practice that benefits are paid until the worker recovers or is granted a disability pension.

Mothers receive support through a maternity grant which equals five times the amount of the present minimum wage. Additionally, working mothers receive a maternity allowance, over the span of 126 days, which is equivalent to her entire salary. When this time has elapsed, the mother can receive a payments that equals the minimum wage for up to a year and half.

The expenditure responsibility for family benefits, which generally are divided into the following broad categories: payment made to all families with children without regard to income or prerequisites, cash transfers to disadvantaged families, and payments made to working mothers, is unequally shared among all three levels of government. Although the national level contributes, it mandates the levels of benefits while often leaving it to the sub-national governments to finance the increase.