Russian Fiscal Federalism: Impact of Political and Fiscal (De)centralization

The extent of political and fiscal centralization in Russia has experienced dramatic changes since the end of the Soviet era. The heavily centralized, both politically and economically, federal structures became dysfunctional and unstable until the introduction of the Budget and Tax Codes over the last decade induced a relative clarity to revenue assignments and expenditure and management responsibilities of different levels of government. While the creation of federal districts and the elimination of elections of regional governors in 2005 have brought a substantial rise of political centralization, the reforms had an ambiguous effect on fiscal centralization and fiscal independence of the regions, the estimation of which is addressed in this paper. We use an updated and extensive dataset and apply a novel estimation technique by evaluating the response of regional government’s expenditures to changes in the size of the GRP (gross regional product) and to changes in the region’s tax collections. While the results related to regional shares of tax revenues and expenditures are somewhat ambiguous, the examination of marginal fiscal incentives suggests an increase in fiscal centralization in Russia over the last decade. Our investigation also indicates that, contrary to Treisman’s (2000) conjecture, no decline in the variability of tax revenues had taken place in the last decade. We also show that the recent variability of GRP has been smaller than for tax revenues but greater than for budget expenditures, which stresses the effectiveness of budget equalization policies of the central government. Finally, we briefly addressed the issue of intra-regional fiscal relations, which is of crucial importance for political and economic progress of the country.