The Model of Local Budgetary Process in Belarus

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1 JEL- classification: H72 - State and Local Budget and Expenditures The Model of Local Budgetary Process in Belarus Keywords: budgetary process, local self-governments, fiscal decentralization, local taxes, tax sharing, intergovernmental transfer, local finance management, financial flows. In the beginning of 90-s local authorities (Councils) in Eastern Europe, as well as in Belarus, were transformed into local self-governments (communities). The reason for the change of the title and status was the complete dependence of local authorities on the central government. It was expected that new legal status of the local budgets with a number of local income sources will bring changes to economic situation of communities and make their budgets a reliable financial base of local government. However, the new legal status of local authorities hadn t yet brought real financial and economic transformation. The local budgets are still subsidized by the center, and the principle of fiscal decentralization is generally declarative. We intend to estimate a degree of local budgets independence, results and prospects of fiscal decentralization reform in Belarus. Is there a potential in the development of the local budgetary process model in Belarus? This paper prepared for the Conference: Tax Policy in EU Candidate Countries on the Eve of Enlargement. Riga, Latvia, September 12-14, 2003 PhD Dzmitry Sokal, Associate Professor, The High School of Business Administration, Belarusian State Economic University, BELARUS disok@tut.by Minsk, June 2003

2 The Model of Local Budgetary Process in Belarus D.Sokal 2 JEL- classification: H72 - State and Local Budget and Expenditures Keywords: budgetary process, local self-governments, fiscal decentralization, local taxes, tax sharing, intergovernmental transfer, local finance management, financial flows. Introduction In the beginning of 90-s local authorities (Councils) in Eastern Europe, as well as in Belarus, were transformed into local self-governments (communities). The reason for the change of the title and status was the complete dependence of local authorities on the central government. Revenues and expenditures of their budgets were defined and affirmed by the center. So they were not politically accountable on the local level. The estimated financing has caused indifference of the local authorities to the economic and financial activities. There was no incentive to optimize expenditures. At the end it led to dependency of local authorities. It was expected that new legal status of the local budgets with a number of local income sources will bring changes to economic situation of communities and make their budgets a reliable financial base of local government. However, the new legal status of local authorities hadn t yet brought real financial and economic transformation. The local budgets are still subsidized by the center, and the principle of fiscal decentralization is generally declarative. The budgetary system of the Republic of Belarus consists of the republican and local budgets. The local budget level refers to the regional, district, and urban authorities. The budgetary model of Belarus broadly uses such definition as consolidated budget. It means the set of appropriate budgets of the administrative and territorial units. For example, the budgets of the village communities, townships, cities of district subordination, and district budget constitute the consolidated budget of an area. Accordingly budgets of areas, cities of regional subordination and the regional budgets constitute the consolidated budget of a region. This concept of the consolidated budget completely contradicts the theory of fiscal decentralization and principles of the local finance management. We intend to estimate a degree of local budgets independence, results and prospects of fiscal decentralization reform in Belarus. Is there a potential in the development of the local budgetary process model in Belarus? The contents of local budgets According to the legislation the principle of budget system integrity is declared in Belarus, i.e. any of this system levels cannot be considered more important than the other. Every budget level is challenged by the role in the economic status, and any of them may not be substituted in the mechanism of financial security. At the same time all preferences go to the consolidated budget of the Republic of Belarus which presents the main political and scientific interest. Minor attention is paid to the problem of local budgets. By the end of 2002 there were 1664 local budgets in Belarus. According to the territorial level of local Council budgets are divided as follows: Budgets of the initial level (rural, cities of areas subordination); Budgets of the base level (regional and cities of regional subordination); Budgets of the regional level.

3 The system of drawing, consideration and approval of local budgets The local budgets of all levels are legally separate. The budget independence is guaranteed by the right of appropriate state bodies to draw, consider, adopt the budget autonomously. However, if we try to formalize all ministerial procedures of this budget process we will see that independence is not so obvious (see fig. 1). Government of the Republic of Belarus 3 Ministry of Finance The Calculation of Revenues and Expenditures Working group Directives Official representatives On Approval Regional and Minsk City Authorities Stage 1 The Expected Outturn of the Budget The Priorities of Economic Development The Concept of the Drafting of Regional and Minsk City Budgets The Forecast of Macroeconomic Parameters The Minimum of Local Budgets is Defined on the Basis of the Given Parameters (also applied are specifications of inhabitant budget security and other social standards) Stage 2 The Forecast of Revenues and Expenditures in Regions The Rates for Republican Taxes Allocations and the Obligatory Payments to the Regional and Minsk City Budgets The Project of the Republican Budget The Forecast of Revenues and Expenditures in Areas and Cities Local Governments The Rates for Republican Taxes Allocations and the Obligatory Payments, Grants, Subventions to the Areas and Cities Budgets Fig. 1. The Model of Local Budgetary Process in Belarus The Project of the Regional Budget The Projects of... The Areas Budgets The Cities Budgets Regional Level Base Level Initial Level The Local Budgets We can locate two stages: the first stage is connected with policy-making on the conceptual bases of the budget for the forthcoming year, and the second one is devoted directly to the drawing of the estimates.

4 At the first stage regional and Minsk urban financial administrations calculate preliminary parameters of revenues and expenditures of the budgets of areas and the city of Minsk for the next fiscal year. It should be presented to the Ministry of Finance in the date set by the law. The preliminary parameters are calculated according to the instructions of the Ministry of Finance and The Concept of Regional and Minsk City Budget Drafting for the next fiscal year. The Concept is annually developed by the working group on the delegation of the Ministry of Finance and the official representatives of regions, cities and areas and should be approved by the Government of the Republic of Belarus. The vicious circle appears: the initiator is the Ministry of Finance, the executor (working group) is basically the Ministry of Finance and the receiver of the preliminary calculations is the Ministry of Finance also. The participation of the executive committees of regions and Minsk city authorities in the process of planning may be regarded as extremely nominal; their task is reduced to keeping up on the plans. Thus, such procedural conditions of the budget as conformity to the Concept and the instructions of the Ministry of Finance considerably reduce the role of the executive authorities of regions in budgeting. At the second stage, the Ministry of Finance (!) makes the forecast calculations of revenues and expenditures of regions and the city of Minsk for definition of the rates of republican tax allocations, the other obligatory payments, grants, subvention and bounties of the republican budget. This forecast should take into account the calculations made by regional and Minsk city authorities. The designed rates of republican tax allocations and the other obligatory payments in regions and Minsk city budgets are included in the Budget of Belarus for the next fiscal year. The competence of local authorities is limited to legislative function. The local budgets are accepted by local Councils of deputies. The local executive bodies govern the order and terms of local budgeting. The local finance bodies draft the local budgets on the basis of forecast of the revenue and expenditures of local budgets which they receive from the Ministry of Finance or higher executive bodies. As we see, budgetary independence has declarative character. The drafting of regional budgets begins only after the approval of the republican budget and the rates of republican tax allocations and the other obligatory payments in regions and Minsk city budgets. Accordingly, drafting of cities and areas budgets begins only after the approval of the regional budget. The forecast calculations of revenues and expenditures of the areas and cities budgets are made in parallel with drafting of regional budgets. On the basis of this forecast the Ministry of Finance defined the rates of republican tax allocations and obligatory payments, grants, subventions to the areas and cities budgets. Budgetary planning goes top-down. All this result in the lack of initiative in budgetary process and, moreover, provokes dependant moods of local administrations. The forecast calculations of revenues and expenditures of regions and Minsk city budgets are based on evaluation of the expected outturn of regions budget for a current year and analysis of accounting data. The budget analysis is inverted. The budgetary process totally refers to the past. It has retrospective character. It is important to mention that for the purpose of budget drafting systematized are the legislative enactments and state bodies acts setting priorities of industrial and social sphere development in planned year. The final calculation is based on the use of the macroeconomic parameters forecast of republic development in the next year. But it does not mean that our thesis about retrospective character of budget system is incorrect. All systematized legislative enactments and the program of economic development are annually reviewed documents and as a matter of fact are also focused on the past. It is not used by the government as an additional strategic economic instrument. In the essence the adoption of the budget concept is not a creative process. It is just a technical question connected with a necessity of interbudgetary relations settlement for the forthcoming period; it also should coordinate interests of various state bodies. The drafts of local budgets are introduced to local executive bodies together with proposals on the rates of republican tax allocations and other obligatory payments into inferior budgets. According to Article 34 of the Law "On budget system of Belarus and state funds" executive bodies consider drafts of local budgets (the regional and city budgets, the budget of areas and villages) and the rates of 4

5 5 republican tax allocations and other obligatory payments into inferior budgets and after that bring to the Local Deputies Councils the following documents: The draft of the local budget with allocation of revenues and expenditures according to budgetary classification of Belarus; The offers on the rates of republican tax allocations and other obligatory payments into inferior budgets and on the size of budget circulating cash balances; The draft of the formal decision of Local Deputies Council on the budget for the next fiscal year; The forecast of the consolidated budget of an administrative and territorial unit. The presented drafts of local budgets are considered by standing committees of Local Deputies Council which prepare the conclusion about the drafts. According to Article 19 of the Law "On budget system of Belarus and state funds" Local Deputies Council approve the local budgets. Local budgets approved by Local Deputies Council go to press (see Article 11 of the Law "On budget system of Belarus and state funds"). It is necessary to emphasize that only approved budgets are published. Of course the public discussions on budget issues could be useful even if it is postfactum, at the same time it limits an openness of budgetary process. The comparative characteristics of budgetary process can be presented as follows. Table 1. The Characteristics of budgetary process model in Belarus Negative 1. The existing model has retrospective character and consequently is inert 2. Public discussions on budget drafting are untimely to influence the process 3. The budget is not used by the state as the tool of strategic administration 4. The expenditures of local budgets are opaque: interbudgetary relations are fixed only with a higher level of the budget 5. Local interests and needs are leveled that lead to the absence of initiative and dependant moods 6. Absence of budgetary independence (it has declarative character) that materially results in system of estimate financing, instead of budgetary planning Positive 1. Transparent, manageable model of settlements (that gives an opportunity of unilateral reforming) 2. Social and regional contradictions smooth out in such system (everything is solved by the center) 3. The principle of budgetary independence is fixed formally (it is observed only at offset of mutual debts between budgets) 4. The cash stopgap measures are bridged technically within the interbudgetary framework (only with the budget of higher level) 5. The budgetary system is not overloaded with onelevel interbudgetary relations Not all of the characteristics are related to the system of drafting, considering and approving of local budgets, some concern the procedure of its implementation. The implementation of the local budgets The regional budget allocations include only mutual transfers with the republican budget. All other regional budget allocations with lower budgets are not stated in the regional budget. The areas budgets are organized in the same way but they fix transfers with a regional budget. Thus, interbudgetary relations are fixed in the local budget only if they go from higher level budgets. So the expenditures of local budgets are opaque. The grants and loans from regional and areas budgets are used as a stopgap measure by local budgets during fiscal year. On the one hand this technically simple decision makes the budget system more controllable and predictable. On the other it provokes dependant moods in localities since all same-level budgets relations are forbidden and all problems are decided by the "Center".

6 6 In practice the principle of budgetary independence is embodied only in separate offset of the mutual indebtedness between budgets. Payments to the budget can be made by companies under each level of budget separately for the mutual indebtedness offset. All payments to local budgets and state funds are transmitted by banks to the corresponding accounts of local budgets: "Resources of regional budgets", "Resources regional, city, areas and rural budgets". The powers of local authorities are strictly limited by budget expenditures frameworks. Executive bodies of cities with regional division can delegate the right of areas budget execution in accordance with estimates to local authorities (see Article 35 of the Law "On budget system of Belarus and state funds"). Budget modifications can be made in expenditure items of corresponding budgets within the limits of the authorized annual allocations. All modifications are allowed within one sub-section. Local authorities have no possibilities to change allocation of budget resources except of intersection shifts. Actually this just allows resolving technical problems of financial flows shifts. It could not influence the fixed range of budget appropriation. Accordingly there is no real power for budgeting on local level. The specifications of budgetary security stabilize the model of budgetary process in Belarus. They allow to smooth regional and social discrepancies. The minimum of consolidated budget is not self-supporting; it is defined on the basis of specification of inhabitant budget security. The minimum sizes of local budgets are defined on the basis of revenues and expenditures calculations that are annually planned by the higher finance body, and specifications of inhabitant budget security and other social specifications. The specifications of budget security are established annually in the law On budget of Belarus for the next fiscal year. The principle of the given specification consists in guaranteeing average budget security in non-productive sphere for one inhabitant in every region and area of Belarus. Conclusion In essence we can characterize budgetary process in Belarus as strongly centralized and mostly peculiar to the economy of command type. Certainly it has advantages that help to manage the social and economic stabilization during transitional period. However such model of budgetary process is unpromising for policy of economic growth due to the fact of its retrospective character and oppression of initiative in regions. On the other hand, the reform of the budgetary process can put budgetary sector of economy in uncontrollable condition that will inevitably cause social tension in the country with significant share of this sector. It is unacceptable for the state pursuing socially focused policy. Therefore, notwithstanding the gloomy prospects of the current model of budgetary process, it is not possible to predict budgeting reform in the nearest future without carrying out the reform of the local government system. References 1. Korbut, N. Implementation of the Budgetary Policy of the State in the Transition Period. Belarus Economic Magazine 4 (1999): Krivorot ko Y. Belarussian Model of Local Government: Reality and Criticism. Municipal Economy 1(9) 2002: Sokal D. The System of local Finance and Fiscal Decentralization in Belarus. Municipal Economy 1(9) 2002: Fateyev, V S. Regional Economic Development, Local Government and Self-government in Belarus. Minsk: 2000.