The RF President’s Budget Message to the RF Federal Assembly

At the same time, a number of relevant challenges have by no means lost their importance. These are: a dramatic drop of budget revenues as a result of the world economic crisis; an inevitable reduction of the share of oil revenues in the state budget in the long-term perspective; the as yet unresolved issue of proper organization of pension provision; low efficiency of budget spending; and some others. In this connection, our subsequent analysis of the Budget Message is set against the currently existing challenges and the altered economic conditions.

Just as a year earlier, the 2010 Budget Message was published at a time that differed from the timelines established by the RF Budget Code, which can to a certain extent be justified by the necessity to specify the basic budget parameters. However, one should not forget that the Budget Message is one of the fundamental documents of strategic planning designed to ensure proper coordination, at the stage of drawing-up a budget for a forthcoming year, of the goals of the country’s socio-economic development with the financial resources available for their implementation. It is important that the basic provisions stipulated in the Message can also be reflected in the main targets of the medium-term budget and tax policies being developed by RF subjects. So, the timely issue of the Message can actually determine its incorporation in a current budget cycle and thus create adequate preconditions for reforming the Russian budgetary system in the future.

Our analysis of the 2010 Budget Message and the previous two Messages makes it possible to speak of these documents’ continuity both in content and structure. In particular, the key directions of providing budget support remain investments in human capital and removal of the infrastructural constraints on the development of the Russian economy. Tax policy is oriented to lowering budget deficit, support of innovative activity, promotion of energy saving and rational use of natural resources. In the sphere of interbudgetary relations the main goal, as before, is the expansion of financial independence of subjects of the Russian Federation and municipalities.

The traditional component of the Budget Message in recent years has been an emphasis on the necessity to improve the efficiency of budget expenditures. However, in contrast to the previous Messages, the 2010 Budget Message demonstrates a more constructive approach to this issue because it relies on the program for improving the efficiency of budget expenditures that has recently been developed with the active participation of the RF Ministry of Finance. The improved effect of the use of state resources is expected to be derived, first of all, from the drawing-up of departmental budgets on the basis of target programs, which implies that target programs will now have a markedly increased share in the state budget, and so there will occur a switchover to a program-based classification of budget expenditures. It should be well understood that the effect of applying comprehensive administrative procedures and processes, including targeted programming and performance-based budgeting, depends on the successful functioning of the basic components of the budget system (the budget network, state procurement, financial control, etc.) and the overall quality of the institutional environment, otherwise the quality of administration of budget funds will be able to improve only slightly in the medium term.

At the same time, this year’s Budget Message has put forth a number of decisions of fundamental importance. Firstly, the primary goal as stipulated in the Message will be to ensure macroeconomic and financial stability, which makes it necessary to bring down the level of budget deficit through limiting government expenditures. Thereby the RF President brings to a conclusion the dispute as to what is most important: to fulfill in full the previously assumed obligations – which will result in budget deficit remaining at the level of 6-7% of GDP in the next two or three years – or to try to bring it down by canceling in part some of the already adopted decisions. This decision is of especial importance for drawing up the draft federal budget for the years 2011–2013.

Besides, the President in his Message, quite reasonably, speaks of the necessity to restrict the spending covered by the unpredictable oil and gas revenues, although he does not disclose the actual mechanisms to be applied in the practical implementation of this idea. It is true that at the present moment the oil and gas transfer – whose size is pegged to the country’s GDP – does not really provide an adequate solution to the problem associated with the need to keep the expenditure level at a level that would be ‘safe’ in terms of a properly balanced budget. In this connection we believe that it would be feasible, in order to improve the efficiency of the existing procedure of using situation-linked revenues to finance budget obligations, to supplement this procedure by a rule envisaging that the price of oil should not be taken into account when revenues from the tax on mineral resources extraction and the export duty on crude oil are allocated – so that this rule would serve as a factor restricting the growth of federal budget expenditure items at the stage of their planning. In other words, the size of the oil and gas transfer, instead of the perpetually changing share in GDP, should be pegged to a certain threshold established for the price of oil, say within the limits of 30 – 35 USD per barrel, which would then remain constant over the whole budget planning period (i. e., three years). All oil revenues in excess of the established threshold level, in accordance with the existing procedure, must be transferred to the ‘oil and gas’ funds (the Reserve Fund and the National Welfare Fund). The financing of budget deficit must be covered by the savings kept at the Reserve Fund only in an event of insufficient budget revenue receipts resulting from a drop of oil prices below the level determined in the macroeconomic forecast which has served as a base for estimating the main parameters of the federal budget. This approach. which builds on the idea that ‘spending should not exceed earnings’, can indeed ensure budget stability by stabilizing the level of state expenditures at the stage of budget planning.

The second distinctive feature of the Budget Message in the part relating to the 2011–2013 period is its marked orientation towards innovations. To ensure innovative development, the President proposes, in addition to creating at Skolkovo a Russian replica of the Silicone Valley, to switch over to some specific implementation mechanisms and to support innovative technologies by means of direct financing allocated within the framework of projects, tax policy, by applying mechanisms of public-private partnership, etc. However, a comprehensive approach to innovative development cannot be limited to the implementation of one-time projects. Instead, bodies of state authority are charged with the task of creating an innovation-friendly environment, including the development of human capital, formation of state demand for innovative products, and improvement of the investment climate. Among the measures mapped in the Message there is the allocation of budget grants for supporting Russian innovative projects oriented to achieving national priorities. In this connection, businesses must derive their funding primarily from sales of their own goods and services, while budget support should be applied only as a promotional measure, by no means serving as a main source of financing. Privatization of federal property should be conducted in a more intensive manner including, among other things, large-scale investments in more attractive companies. The goal here is not only to increase budget revenues but also to ensure support to competition and to promote a favorable investment climate – without which no big improvements can be expected in terms of modernization and innovation-oriented development of the national economy.

In order to improve the competitive capacity of Russian products on foreign markets it is necessary to be proactive when using the potential of commercial representative offices and to further improve the system of granting export credits, export insurance and government guarantees. First of all, this applies to export of products of hi-tech industries, the nuclear industry, power engineering and machine-building, as well as to military technologies.

In accordance with the goals and main directions of the RF tax policy in 2011–2013, budget revenue should be managed through better administration of the already existing taxes and implementation of mechanisms designed to boost an innovative development of the economy. However, if in the previous Message it was suggested that the tax regime should be relaxed at the national level, in 2010 tax exemptions can only be granted as a measure aimed at promoting and expanding the innovation-oriented activity of enterprises.

First, support should be provided to those companies whose core activity is generation of intellectual product. The bulk of tax load in such businesses is imposed on the wages fund. So, in order to support them, it is necessary to lower the aggregate rate of insurance contributions, within the lim it of insured annual earnings, to 14% for the period until 2015 (and with regard to certain specific categories of organizations – until 2020).

Secondly, it is necessary to create some additional incentives for innovation-oriented activities. In particular, when determining the tax base for tax on profit of organizations, the expenditures of taxpayers on the acquisition of the user rights to software and databases under sublicensing agreements must be taken into account, as well as the lumpsum payments for the use of the rights to intellectual products and customization.  

There is also some potential for the support of innovations in the depreciation policy. Depreciation should take into account not only the physical periods of service of capital assets but also some other factors, for example technological progress that necessitates upgrading of capital assets, with their removal from exploitation prior to the expiry of their service period.

Thirdly, in order to promote innovative activity at Skolkovo, the following exemptions must be envisaged for participants in that project: mandatory insurance contributions – to be paid at the rate of 14%, tax on profit, tax on property of organizations, and land tax – at the rate of 0%. As for value added tax, exemption should be granted depending on a taxpayer’s own choice.  

These exemptions should be applied to participants in the project for a period of 10 years from the moment of their registration, or until the moment when the size of profit received by an organization exceeds the threshold of 300 mln Rb since the beginning of the year following the year during which the size of proceeds received by that organization exceeded 1 bn Rb.

On the whole, the tax policy envisaged in the President’s Message is comparable with the goal of cutting budget deficit and encouraging companies to implement innovations, upgrade technologies and equipment, conserve energy and to use rationally natural resources. The changes envisaged with regard to tax policy as applied to the mineral resources sector and to attracting private investments for the Development of the social sphere are also timely.  

In our opinion, the improvement of tax policy in order to increase the degree of predictability of budget revenues must be geared towards higher neutrality (tax is more neutral when it causes less distortion of taxpayers’ decisions) and efficiency (tax collection at a minimum cost) of the tax system.

The current government policy in the sphere of interbudgetary relations is quite consistent and is aimed at preserving permanence of the legislatively consolidated spending powers, the principles of generating the sources of budget revenues and the mechanisms of granting interbudgetary transfers. 

One of the most important policy directions aimed at providing the financially insecure municipalities and subjects of the Russian Federation with their own tax bases involves a switchover to an independent regulation and collection of tax on immovable property (to replace land and property taxes). It is necessary to consider the possibility of the participation of bodies of local self-government in exercising certain specific powers with regard to administration of local taxes in accordance with agreements concluded with tax agencies.

In order to create better incentives for bodies of local self-government to encourage the operation of small- and medium-sized businesses and thus to increase local budget revenue it appears feasible to consolidate to the budgets of municipal and urban districts a fixed rate of deduction from the tax levied under a simplified taxation system. In this connection, it is necessary to consider the possibility of endowing bodies of local self-government with the right to determine some components of that tax.  

Some serious adjustments will have to be made with regard to the principle of granting interbudgetary transfers. It would be feasible to switch over to the procedure of granting interbudgetary transfers mostly in the form of dotations allocated to the budgets of subjects of the Russian Federation, which is necessitated by the need to make the bodies of authority of subjects of the Russian Federation more independent and to increase their responsibility for ensuring better performance.

It is also necessary to envisage possibilities for providing some additional financial support to those subjects of the Russian Federation that are actively promoting the development of the innovative sector of the economy.

At the same time, both prior to the crisis and throughout the years 2009-2010 there existed some considerable disproportions in the size of revenue and expenditure in the budgets of RF subjects and municipal formations, which point to a necessity of developing a new financial policy with regard to regions, and in particular municipal formations.

On the whole, the government’s policy in the sphere of interbudgetary relations is quite reasonable and corresponds to the goals stipulated in the Budget Message; however, the problem presented by the existence of a large number of small targeted interbudgetary transfers remains unresolved. It seems that after 2010 it would be feasible to gradually replace much of the financing allocated within the framework of national projects and the bulk of separate subsidies currently being allocated to the regions by interbudgetary block transfers. The need for pooling financial resources is quite obvious – it will help to improve the quality of managing state and municipal finances by taking into account the population’s actual preferences when establishing national priorities. It is suggested that block transfers should be allocated in proportion to the extent to which a given region falls behind the ‘richest’ region in terms of budget sufficiency. The tier of authority to which a block transfer is allocated will then be able to independently establish the proportion of funding allocated to each of the directions included in the block transfer.

Thus it can be concluded that the Budget Message demonstrates a clear vision of the main directions of budget and tax policy in 2011–2013, while the measures envisaged for the phase of transition from a situation of crisis into that of an unstable equilibrium can be assessed as being efficient. However, the Budget Message per se is not an administrative document, and so the actual results of the implementation of its main provisions will depend on the quality of drawing up and executing the derivative documents of strategic and budget planning – for example, the Program for Improving the Efficiency of Budget Expenditures.

T.V. Tishchenko – Senior Researcher, Department of Budget Policy