International Studies Program Working Paper 99-2 March 1999 Intergovernmental Fiscal Relations in Leningrad Region IGR Team Roy Bahl Andre Timofeev Galina Kourliandskaia Alexander Derugin John Mikesell Yelena Nikolayenko Sally Wallace Inna Verbina Natalia Golovanova Natasha Minkova Dmitry Shiskin INTERGOVERNMENTAL FISCAL RELATIONS IN LENINGRAD REGION TABLE OF CONTENTS TABLE OF CONTENTS..........................................................................................................................i EXECUTIVE SUMMARY......................................................................................................................iv INTRODUCTION ............................................................................................................................1 PUBLIC FINANCES OF THE REGION AND THE REGIONAL GOVERNMENT ..............................................2 Leningrad Regional Economy .......................................................................................................2 Governance ........................................................................................................................4 Economic Structure.............................................................................................................4 Growth Potential of the Economy ........................................................................................5 Intra-Regional Disparities ....................................................................................................7 Budgetary Position in The Region.................................................................................................9 Revenue Structure...............................................................................................................9 Revenue Performance .......................................................................................................14 Federal Grants to the Region.............................................................................................15 FFSR Grants ...........................................................................................................15 Earmarked Grants....................................................................................................16 Mutual Settlements...................................................................................................18 Leningrad Distributions.............................................................................................18 Expenditure Autonomy......................................................................................................19 Expenditure Structure........................................................................................................23 Expenditure Disparities and Determinants...........................................................................24 Budgetary Position............................................................................................................25 Budgetary Position of the Oblast Government .............................................................................27 Expenditure Structure........................................................................................................28 Revenue Structure ............................................................................................................29 Budget Revisions and Execution During the Year ...............................................................32 Oblast-Local Fiscal Relations: Expenditures................................................................................38 Minimum Budgets .............................................................................................................40 Evaluation of the Minimum Budget Approach.....................................................................42 Equalization Features................................................................................................42 Are Minimum Expenditure Levels Honored?.............................................................43 Expenditure and Budget Policy: Evaluation.........................................................................44 Oblast-Local Fiscal Relations: Revenues.....................................................................................45 Local Revenue ..................................................................................................................46 Tax Sharing.......................................................................................................................47 Grants...............................................................................................................................50 Tax Effort .........................................................................................................................52 Deficits and Deficit Financing.............................................................................................56 Evaluation: Expenditure Equalization...........................................................................................58 i TABLE OF CONTENTS (continued) THE FINANCES OF KIROVSK RAYON.................................................................................................61 Population and Economy............................................................................................................61 Budgetary Position.....................................................................................................................62 Revenue Structure......................................................................................................................63 Local Revenues.................................................................................................................63 Taxes Assigned by the Federation.....................................................................................65 Shared Regional Taxes......................................................................................................67 Shared Federal Taxes .......................................................................................................68 Subventions ......................................................................................................................70 Borrowing and Loan Finance.............................................................................................71 Extra Budgetary Revenues and Accounts...........................................................................72 Expenditure Assignment….. .......................................................................................................72 Expenditure Structure……….....................................................................................................73 Expenditure Autonomy...............................................................................................................76 Expenditure Reform……… .......................................................................................................77 Region - Municipal Fiscal Relations ............................................................................................78 POLICY ISSUES AND REFORM OPTIONS.............................................................................................80 Federal - Regional Issues ...........................................................................................................81 Oblast -Local Relations: Recommendations ................................................................................84 REFORMING INTERGOVERNMENTAL FINANCE WITHIN REGIONS: A PROPOSAL..................................86 Instruments of Revenue Sharing..................................................................................................88 Determining the Budget Expenditure Share of Local Governments...............................................89 A Hard Budget Constraint ........................................................................................................90 Estimation of Expenditure Needs................................................................................................91 The Determinants of Expenditure Needs............................................................................91 Estimating Total Local Government Expenditure Needs......................................................93 Determining Expenditure Needs of Individual Municipalities................................................95 Estimating the Revenue Potential of Municipalities ..............................................................95 Comparing Expenditure Needs and Assigned Local Revenues............................................97 Covering the Financing Gap with Shared Taxes and Grants.........................................................98 Evaluation of the Proposed Method..........................................................................................102 Equalization.....................................................................................................................103 Transparency..................................................................................................................105 Local Autonomy .............................................................................................................106 Fiscal Discipline ..............................................................................................................106 Administrative Costs ......................................................................................................107