The effect of grants for fiscal capacity equalization in the Russian Federation

Grants for fiscal capacity equalization are becoming one of the priorities of inter-budget transfers in the Russian Federation. Raising independence of bodies of state power of the Russian Federation in terms of expenditure of funds transferred from the federal budget occurs due to the increasing proportion of general purpose inter-budget transfers. Accordingly, when drafting budgets, public authorities of the Russian Federation should also increase the share of general purpose inter-budget transfers to local budgets, that is, grants for fiscal capacity equalization. Upon the adoption of the Federal Law of May 27, 2014, N 136-FZ "On the Amendments to Article 26.3 of the Federal Law "On the General Principles of Organization of Legislative (Representative) and Executive Bodies of State Power of the Subjects of the Russian Federation" and the Federal Law "On the General Principles of Local Self-government in the Russian Federation" of January 1, 2015, a significant amount of local matters of rural settlements fall under the scope of competence of municipal areas. Therefore, as the number of rural settlements in the subjects of the Russian Federation is predominant, the importance of grants for settlements' fiscal capacity equalization in 2015 will be substantially reduced and in future, they may be even completely replaced by unitary guidelines for allocations from regulatory taxes. Grants for fiscal capacity equalization of municipal areas and urban districts are one of the most problematic and debated inter-budget transfers, both at the subject level and the level of the Russian Federation in general. The presence of only general requirements for procedures of grants allocation in the Budget Code of the Russian Federation, a wide differentiation of municipalities, together with certain historical and partly political peculiarities prevent from developing and implementing a methodology for allocation of these grants, which could suit perfectly all participants in the budgeting process. Notably, the federal legislation does not specify the criteria for evaluating the efficiency of methodology for grant allocation that act at the subject level. The existing methods for grant allocation for subjects' fiscal capacity equalization change constantly, almost every year, while there is no monitoring of their performance at the level of the Russian Federation.

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