Fiscal Decentralization, Budget Discipline, and Local Finance Reform in Russia’s Regions

Russia has been in the news lately… A forthcoming article in Public Finance Review should help us all to cut through the noise and better understand public finances in that country. Alexeev et al. (2018) evaluate the relationship between fiscal decentralization and fiscal discipline in the Russian Federation using a panel for 2005-2013, especially in the context of 2009 public finance reforms. Alexeev et al. (page 3) write that:

“The main goal of this article is to use the data from Russian regions to estimate the link between intraregional fiscal decentralization and regional budget deficits. The important advantage of using Russian regional data is that the country has a relatively large number of regions and most (although not all) of the relevant fiscal data are publicly available. Also, as we show below (the first section and table 1), there is a large variation within the relevant fiscal variables, both across regions and over time.”

With respect to fiscal centralization, the authors also note that (page 10): “Fiscally, Russia is also one of the more centralized federal countries in the world, particularly on the revenue side. All taxes are collected by the federal tax service, which then channels tax revenues into the budgets of the appropriate level of government. By law, taxes in Russia are classified into federal, regional, and municipal depending on what level of government determines the base and the rates, although it is important to note that federal legislation imposes limits on the ability of lower levels of government to modify the base and the rates of “their” taxes. All revenue from regional taxes goes into regional or municipal budgets, but some of the revenue from federal taxes accrues to the budgets of the lower levels of government. The classification of taxes, the rules with respect to rate and base determination by various levels of government, and expenditure responsibilities are contained in Russia’s Tax Code, Budget Code, and certain other federal laws.”

Three major findings stand out in particular. First, expenditure decentralization is positively related to consolidated regional budget balances. Second, those regions with relatively greater levels of transfer dependence for municipalities tend to have greater levels of budget deficits. Finally, the 2009 public finance reform has limited the ability of regional governments to assign tax revenues to their municipalities, which appears to have had a negative impact on consolidated regional budget balances.

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