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Baltic Journal of Economic Studies tt. . „ , -J--Vol. 5, No. 4, 2019
DOI: https://doi.org/10.30525/2256-0742/2019-5-4-182-196
DECENTRALIZATION OF INTER-BUDGET RELATIONS: THEORY, PRACTICE, AND INTERNATIONAL EXPERIENCE
Liudmyla Pidchosa1, Igor Lyutyy2, Oleksandr Pidchosa3
Abstract. The purpose of the article is to justify the methods of budget policy for the redistribution of cash flows in terms of differentiating powers at different levels of government and to analyse intergovernmental regulation improvement. The subject of the study is the methods of budget policy and intergovernmental regulation improvement. Research methodology. The research is based on analysis, comparison, and generalization of statistical data concerning territorial development, distribution of production capacities, migration of population and its determinants, statistical data on the state of macro-financial turbulence. The hypothesis is based on the above data. Practical implication. The budget policy is directed to reaching a certain socio-economic effect at a certain stage of social development, is implemented by the authorities with appropriate powers in a certain territory. In the administrative and budgetary reform, intergovernmental relations are multidimensional and their research needs to be conducted from the point of their categorization in terms of scale and long-term achievement of the set goals and objectives, as well as depending on priorities in the budget process management. Achievement of the effective system of intergovernmental relations is possible only if there is the unity of all subjects of the budget system. In this context, the most pressing issues of intergovernmental interactions and regulation of cash flows are highlighted. Value/originality. The proposed model of principles, tools, and mechanism of distribution and regulation of intergovernmental fiscal flows will provide an opportunity to ensure the unity of all levels of the budget system and their interaction, which, in turn, will ensure macro-financial stability of the state, efficient allocation of budget expenditure, development of society's democratization and uniform socio-economic development of some regions.
Key words: budget, intergovernmental fiscal regulation, fiscal decentralization, local authorities, territorial justice, editing coefficient, negative transfers, governmental grants, subsidies, local communities, local budgets.
JEL Classification: H61, H68, H72
1. Introduction
In the conditions of permanent changes, escalation of the military situation in Eastern Ukraine, national currency depreciation, population migration and other factors of macro-financial instability, one of the main tasks facing the Ukrainian economy is the construction of an innovative socio-economic mechanism enabling to balance the financial system of the country while implementing economic reforms.
Increasing efficiency of the budget system functioning and equal systematic inter-budgetary relations are especially important in the context of strengthening processes of democratization, decentralization, and the growing role of local communities. Such an approach predetermines the priority of theoretical and practical problems requiring scientific reflection, legislative and, consequently, practical solutions at various levels of
implementation of the budget process in Ukraine. First of all, the range of such issues includes the provision of the revenue part of the budgets of cities and regions and the formation of effective budget interaction at different levels. These issues can be solved with purposeful Government policy; meaningful and effective financial control; budget fund audit; introduction of a system of incentives and penalties. They also need conditions of implementation of stimulating fiscal policy at regional levels and direct interaction of all subjects of financial relations and local government bodies.
2. Analysis of recent research and publications
According to the general theory of social welfare in economic science, the main criterion of effectiveness is the satisfaction of personal needs on the basis of
Corresponding author:
1 Kyiv City State Administration, Ukraine. E-mail: l.pidchosa@ukr.net
2 Taras Shevchenko National University of Kyiv, Ukraine. E-mail: igorlut@gmail.com
3 Institute of International Relations of Taras Shevchenko National University of Kyiv, Ukraine. E-mail: oleksandr.p@ukr.net
the Pareto optimality criterion. The essence of public goods is the commonality and equality of consumption. The effective allocation of resources is based on the rational and optimal placement of factors of production, such as scientific potential, land, labour, and capital. Thus, the efficiency of the country's economic system is an estimated category.
The theory of decentralization became the further development of the theory of public goods. This theory is based on the assertion that decentralization of power is the key to the rational allocation of resources. The treatment of this statement is interconnected with the concept of external effects and is manifested in the following interconnections: negative phenomena at the local level can lead to an appropriate response at the regional and state levels in the public and private sectors. A similar situation occurs with positive phenomena. According to this concept, territorial associations are the basic unit of the public sector and public finance economy.
Following the classics A. Pigou, P. Samuelson and R. Musgrave, the world-leading economists consider decentralization of power from the point of view of the most effective provision of public goods with a diverse range of use and the most efficient allocation of budgetary funds. As a result, this mechanism will promote efficient division of powers and jurisdiction between government levels.
Richard Musgrave states in his works that the provision of public services and goods is spatially limited. Thus, public goods can be distributed depending on the range of their provision. For example, state defence can accordingly be attributed to a large range of provisions; as well as pre-school education for children is respectively referred to a small range. Also, the higher is solvent demand from some consumers, the lower is the spending of individual consumers of public goods. As a result, the need for a spatial association of consumers with relatively similar needs can be argued. That in turn will lead to the fact that each consumer automatically becomes a member of a certain defined financial community whose main purpose is to provide him/her with certain public goods. According to the above, it is necessary to balance the cash flows of the territories, achieve equal distribution of social services and benefits throughout the country and create financial support funds. Services of adjacent local territorial associations may be duplicated; therefore, the principle of allocation requires their interaction in order to avoid double costs.
3. Formulating the goals of the article
The main obj ective ofrestructuring intergovernmental fiscal relations is closely connected with the general objectives of state policy. These objectives include economic growth, improving the quality and standards of living of the population, democratization of the
society, increasing efficiency and accountability of the government, and achieving macro-financial stability. They should be achieved using the criteria of economic efficiency, budgetary responsibility, social justice, and political consolidation. Political consolidation in this context can be defined as the process of consolidation of unity and accord of social and political forces (people, social groups, political parties and public organizations, etc.) in order to strengthen their responsibility and determination to solve common problems.
Thus, the operational goal of fiscal decentralization reform is real decentralization of the budget system, namely, the expansion of official powers and responsibilities (budget autonomy) of territorial associations, while creating and strictly adhering to unified rules in relations between different branches of government.
According to foreign experience, all models of fiscal decentralization are formed to achieve territorial (regional) justice. At the same time, it is necessary to focus on the most successful approaches in the foreign practice of fiscal policy regarding equalization of territorial development of regions, elimination of vertical and horizontal imbalances in the socioeconomic development of the state.
4. Statement of the base line
Inter-budgetary relations in the context of fiscal decentralization act as both economic and political concepts. From the political point of view, it is possible to consider this term from the standpoint of state law where intergovernmental relations act as a form of government based on the principle of subsidiarity and the idea of basic democracy. Regarding the economic aspect, in the context of fiscal decentralization, intergovernmental fiscal relations represent a system of decentralized use of public funds formed according to the principle of effective allocation of resources. The above two directions are closely interconnected and cooperate with each other. Namely, the first direction within defines the purpose and objectives of the principle of subsidiarity. The second direction resolves the task and purpose within the framework of the theory of fiscal decentralization defining the criteria for decentralization and ways of implementing this idea in practice.
The effective allocation of resources is based on the rational and optimal placement of production factors, such as scientific potential, land, labour, and capital. Thus, the efficiency of the country's economic system is an estimating category.
One of the main aspects of the regulation of intergovernmental fiscal cash flows is the interaction of all levels of government with financial responsibility in accordance with their powers in order to maximize the effectiveness of the provision of public services of
a varying range of action. The term fiscal decentralization is defined by the above-mentioned in the expert environment.
As for functioning of the state, the principle of effective allocation of resources at all levels of decentralization of power determines its targeting solely on the interests and needs of citizens and implementation of functions using the minimum amount of resources.
5. Datasets and methods
5.1. Study area
The current challenges faced by the Ukrainian economy are caused by many destabilization factors which, in turn, lead to macro-financial instability (Table 1) and intergovernmental imbalances (Table 2). Because ofthe unfavourable economic climate in Ukraine, aggravation of migratory mindset and increase of labour migration, the World Bank forecasts that Ukraine as a state may face a shortage of skilled labour and able-bodied young people in the near future, and hence the lack of a rising and promising young generation.
Along with the situation of macro-financial instability, since April 2014, the Government of Ukraine has begun reforming local self-government and territorial organization of power. Thus, in the period from
2015 to 2018, there are 728 amalgamated territorial communities (ATCs).
These amalgamated territorial communities (ATC) are composed of 3378 former local councils (State Statistics Service of Ukraine, 2017) where 6.3 million people live. Adjustments were made to the Budget Code of Ukraine during this period. However, there is still no clear budget strategy in this direction, no clear legislative constraints or mechanism of budget decentralization itself. An effective public financial control has not been introduced either, especially in the context of the democratization of society.
Consequently, a model of intergovernmental regulation of money flows needs to be developed; it will be an element of an innovative socio-economic mechanism to balance the financial system of the country.
5.2. Data Sources
The datasets used in this study include: (1) Ukraine's GDP for 2008-2018 taking into account data updates; (2) macro-financial indicators of Ukraine for 2008-2018 taking into account data updates; (3) indicators of the amalgamated territorial communities (ATC) (including data on ATC formation, ATC macro-financial indices, ATC population dynamics).
Region 01.12.2017 01.12.2016 01.12.2015 01.02.2014 01.12.2013 01.12.2012
Vinnytsia 656764770 469871947 440773154 23402307 312295690 289627476
Volyn 445254282 321786796 310035241 8617324,1 162899446 156531787
Dnipropetrovsk 1448054291 1106206762 1048154725 59993335,8 1156471263 1109381413
Donetsk 782976263 602306882 656250849 68498738,6 1414854555 1311542661
Zhytomyr 515168842 380864370 350340936 12782229,2 245306785 232628073
Zakarpattia 457940498 338242333 336189080 8515308 164959144 154574109
Zaporizhzhia 739145656 570141442 509334292 25497209,1 506090626 486496207
Ivano-Frankivsk 556307893 422514173 383572115 10416014,4 217846540 218559322
Kyiv 850067845 595469294 525472230 26303390 529988526 480618712
Kropyvnytskyi 399791690 297873330 276892661 10517480,8 212492608 199698087
Luhansk 263568102 208214987 233400724 27726593,8 507556768 520547098
Lviv 1051427187 771439204 711668606 24406829,3 502459048 484711066
Mykolaiv 441222944 333821403 320148684 13371562,4 257216016 258906613
Odesa 949424185 704767921 659572749 32772989,8 583681867 555798805
Poltava 667416629 496066447 436451820 22277997,7 438611881 448962424
Rivne 483355695 347117901 338383232 9932386,04 201816271 195872684
Sumy 459526385 354164312 304439755 14937934,7 248055262 244841347
Ternopil 414396585 319084485 282123425 7252232,2 153495656 141268739
Kharkiv 1029029873 796942832 717287316 37046646,1 725954254 697641652
Kherson 382667181 287744586 280425538 14447165,1 191536707 185533579
Khmelnytskyi 529913969 389709862 358449522 13777670,1 248652527 227093627
Cherkasy 528651322 390592319 349510879 14270087,1 281665024 279184954
Chernivtsi 331988233 255464466 238962298 7648303,49 144586694 131566707
Chernihiv 427464282 310409550 278467245 11721172,1 203175444 196724142
The City of Kyiv 1620098536 1326963573 1273701471 76555146,4 1448779257 1399894550
Source: The table is compiled by the authors based on the State Statistics Service of Ukraine data
Table 1
Implementation of local budgets by income (taking into account transfers from the state budget), US dollars
Table 2
Statement of equalization from the state budget to regional budgets of Ukraine, thousand US dollars
Regional budget 2012 2013 2014 2015 2016 2017
Vinnytsia region 131014 140568 103980 3310 1773 1536
Volyn region 63137 82657 62155 3462 2671 2229
Dnipropetrovsk region 24079 36793 18908 0 0 0
Donetsk region 100429 101353 122897 0 0 0
Zhytomyr region 70783 98467 62338 2649 1538 1530
Zakarpattia region 63822 82380 58387 5263 3827 3931
Zaporizhzhia region 71064 92175 69328 0 0 0
Ivano-Frankivsk region 58909 84888 64044 4131 3885 4278
Kyiv region 33986 46929 37619 0 0 0
Kropyvnytskyi region 52168 64096 43628 1584 921 1013
Luhansk region 94701 115671 91482 1128 582 798
Lviv region 105203 151920 113088 2041 610 1075
Mykolaiv region 65008 81015 58499 1505 1339 955
Odesa region 81109 115148 81143 465 500 0
Poltava region 26954 65081 42235 0 0 0
Rivne region 59412 79173 56561 3292 2250 2495
Sumy region 47817 76858 51976 385 501 594
Ternopil region 59991 77370 55325 3127 2081 3364
Kharkiv region 61971 115682 85039 0 0 0
Kherson region 65318 81306 57187 3499 2356 2620
Khmelnytskyi region 75583 93179 66366 3448 1732 1954
Cherkasy region 57422 74989 53707 1654 1005 811
Chernivtsi region 47139 60957 44395 3987 2998 3587
Chernihiv region 49684 70038 48637 2097 1225 903
The City of Kyiv 0 15594 0 0 0 0
Source: The table is compiled by the authors based on the State Statistics ,
5.3. Methods
The study of inter-budgetary regulation of cash flows as a condition for self-realization of local budgets was carried out in classic fashion: (1) the choice of subject, object; definition of the purpose and objectives of the study; (2) accumulation of information; (3) development of hypotheses; (4) choice of research methods; (5) processing and analysing of the results of experimental research; (6) writing the text and presentation of results.
In this study, we aim to explore the main aspects of the model of intergovernmental fiscal regulation connected with the European integration processes in Ukraine, the need to restructure the budget system, development of the society democratization, and the need to achieve macro-financial stability. In this research, we identify the leading aspects of international experience in this area, including achievement of budgetary equilibrium, the formation of territorial development funds, and analysis of necessary changes at the legislative and executive levels.
To analyse the current ATC state and the possibility of achieving budget security in line with the financial security of the territories, the method of analysis was used, namely: the specific international experience of fiscal decentralization and budgetary decentralization
ce of Ukraine data
in the context of restructuring the budget system were analysed. The formalization method: used to construct hypothetical-deductive models of functioning of budget decentralization elements; constructing a model of linear dependence for determining indicators of influence on the macroeconomic situation in the country. The hypothetical method was used in the process of developing the hypothesis. The observation was used throughout the whole research period to monitor changes in the global economy, in the national economy that could have affected the process of budget decentralization or shape its specific characteristics. The comparison was used in the research process of the role of fiscal decentralization and its impact on the achievement of macro-financial stability; budget decentralization in the countries of the world as a factor of democratization of the society; reconfiguration of strategies and mechanisms of interaction of fiscal decentralization of world budget systems and their elements.
To study the issue of fiscal decentralization and the issue of achieving budget balance, we divided the whole Ukraine into the following categories: strong, medium, and weak territories, depending on industrial production (Figure 1) and the regional gross product (Figure 2). The time period from 2008 to 2018 was investigated (Table 3).
Figure 1. Classification of regions of Ukraine according to the volume of sold industrial products (goods and services)
| | strong territory; HH medium territory; | | weak territory
Table 3
Regional gross product,
$
Regions 2008 2009 2010 2011 2012 2013 2014 2015 2016
Ukraine 189611 114168 135321 162760 182387 190332 132243 90388 91745
Vinnytsia 4019 2513 2949 3637 4128 4524 3666 2721 2862
Volyn region 2557 1528 1804 2205 2501 2578 2016 1440 1375
Dnipropetrovsk 20937 11666 14517 17503 18496 19113 14712 9782 9403
Donetsk 23529 12967 16123 20128 21347 20616 9999 5228 5288
Zhytomyr 3002 1841 2343 2741 3106 3210 2485 1747 1843
Zakarpattia 2642 1568 1912 2257 2676 2675 2010 1316 1246
Zaporizhzhia 8489 4681 5342 6191 6854 6794 5497 4048 4012
Ivano-Frankivsk 3577 2155 2556 3344 4036 4150 3137 2084 1977
Kyiv 7137 4694 5619 7394 8708 8616 6630 4729 4948
Kropyvnytskyi 2792 1674 1969 2505 2757 3164 2397 1748 1770
Luhansk 8597 4806 5693 7150 7346 6889 2616 1084 1206
Lviv 7107 4494 5207 6513 7745 7916 6077 4304 4417
Mykolaiv 3882 2542 3007 3454 3651 4004 2951 2191 2224
Odesa 9399 6081 6735 7687 8093 8720 6245 4535 4608
Poltava 6824 4204 5536 6532 7073 7308 5819 4358 4472
Rivne 2815 1684 1985 2413 2724 2751 2394 1602 1518
Sumy 3242 2008 2292 2863 3117 3346 2533 1889 1780
Ternopil 2124 1397 1591 2037 2245 2261 1806 1212 1195
Kharkiv 11878 7365 8162 9608 10278 10664 8050 5675 5957
Kherson 2635 1680 1956 2306 2420 2596 1938 1464 1490
Khmelnytskyi 3212 1970 2262 2855 3280 3303 2680 1868 1879
Cherkasy 3820 2338 2794 3377 3908 4136 3206 2311 2285
Chernivtsi 1767 1061 1237 1496 1646 1720 1254 841 817
Chernihiv 2984 1830 2126 2646 2992 3030 2346 1680 1668
The City of Kyiv 33913 21192 24580 27972 34461 39069 29781 20532 21505
Source: The table is compiled by the authors based on the State Statistics Service of Ukraine data
Figure 2. Classification of regions of Ukraine, according to the regional gross product
^ strong territory; [ | medium territory; | | weak territory
6. Discussion of the raised problem
The purpose of intergovernmental regulation at the regional level is to ensure local budgets with necessary financial resources, thus, allowing the implementation of certain powers secured in legislation (Figure 3; Figure 4). In this context, the main instruments of intergovernmental regulation can be:
1. A legislative determination ofthe rates of deductions to local budgets from taxes subject to enrolment to the higher-level budget (National Budget of Ukraine or local (territorial) budget).
2. Grants to local budgets in order to equalize their budget security through the creation of financial support and other financial assistance.
3. Deductions from local budgets to higher-level budgets: 'negative (deductible) transfers' from budgets that are most secure (Saburov et al., 2001).
As a result, this mechanism can be allowed to provide local budgets with the necessary revenues.
The advantages and disadvantages of the aforementioned models are specified in Table 4.
Consequently, the authorities are facing the number of questions of proportional distribution of main funds of intergovernmental regulation between the transfer channels for local budget funds (Figure 5).
According to world practice, the proportion in the distribution of the major amounts of funds is chosen once for a long term (Gershberg and Winkler, 2004). The advantages of long-term deductible rates include: the ability of local authorities to independently forecast their own revenue for a long period; increased incentives in cities and regions to increase tax collection and, accordingly, increase the tax base in the territories (Figure 6).
Table 4
Advantages and disadvantages of budget decentralization models
German Model American Model
Probability of existence with significant interregional disproportions + -
Possibilities for solving social policy tasks > <
Preservation of incentives to improve the quality of socio-economic policies from representatives of regional authorities - +
The degree of approaching the traditions of the Ukrainian economy < >
Source: The table is created by the authors
Benefits of Decentralized Production of Public Goods
O <9> ♦
# O ^ o ^ ^
The Benefits of Centralized Production of Public Goods
Figure 3. Classical theory of fiscal decentralization
Source: The scheme is compiled by the authors based on (Saburov et al., 2001)
^ The German Model of Cooperative Federalism
(provisions of the Basic Law - ensuring equal conditions of life in the general territory of the country, minimum powers for territories under significant federal regulation of territorial development) The American Model of Decentralized Federalism
pr (maximum authority of the territories with insignificant federal regulation of territorial development)
Figure 4. Variety of models of fiscal decentralization
Source: Compiled by the authors based on (Saburov et al., 2001; Kyrylenko, 2002)
Figure 5. Disputed and unsolved issues in the field of budget expenditure
Source: The scheme is compiled by the authors
Figure 6. Quantitative standards for decentralized budget services
Source: Hie scheme is developed by the authors
% N
N5*
•. the context of differences between people in preferences, inclinations,
>*
S
income distribution according to needs (involves inequality only in
ti
<5L «0s etc-) S -
5 income distribution according to utility / contribution (more people
j- benefit from the activity(those involved in this activity should
t, ^ receive more)) & -
^ ^ compensation for tight working conditions that affect people in
earning income
S
Figure 7. The concept of territorial justice
Source: The scheme was adapted and modified by the authors from (Harvey, 2010)
However, this mechanism is limited, namely, the tax base is distributed unevenly throughout the territory of Ukraine, which, in turn, can lead to a significant difference in the budget security of different territories as a result of consolidated uniform standards.
The use of inappropriate financial support for cities and regions with their own revenues makes it possible to ensure a more even fund distribution between
local budgets, but this may reduce the interest of local authorities in increasing the volume of revenues and taxes and developing their own tax base (Table 5).
Providing financial support to the regions and territories of Ukraine in the form of government grants, in turn, allows public authorities to significantly influence the policy of local governments in accordance with the priorities defined at the regional level (Figure 7).
Table 5
The purpose and basic principles of providing financial assistance to lower-level budget
Purpose — Elimination / Reduction: Basic principles: Maintaining incentives for a lower-level budget to pursue an effective fiscal policy
Vertical imbalance ^ ^ inconsistency of budget revenues of different hierarchical levels and expenditures for the fulfillment of functions assigned to them;
Horizontal imbalance ^ ^ difference between adnumstrative-teiritorial units of one bieraiclucal level in the ability to cover expenditures by their own income
Source: The table was compiled by the authors based on (Saburov et al, 2001; Bordignon, 2006)
Options for approaches to equalizing interregional disparities:
1. Ensuring equal living conditions throughout the country
2. Ensuring minimum social standards
The situation in Ukraine:
The Ukrainian legislation does not regulate the obligations of the authorities regarding the equalization of interregional disproportions
There is a traditional contradiction between donor and recipient regions
Figure 8. Determining the extent of equalization of interregional disproportions
Source: The scheme was developed by the authors
Thus, the choice of proportion between the amount of funds provided to local budgets in the form ofdeductions from taxes, government grants, and subsidies should be determined by the ratio of priorities: stimulation of local authorities to tax base development and uniformity in financial resource distribution (Figure 8).
Similar choices should also be made by regional governments with respect to their territorial communities since the regions should also have the right to use the indicated tools (Harvey, 2010). However, it should be borne in mind that, according to world practice, territorial communities may also receive financial assistance from the regional budget, in addition to financial assistance from the regional budgets, and its amount is determined annually, whereas the norms of deductions to the budgets of territorial communities should be established by the decision of the regional representative body and should have a certain validity period (Table 6). Therefore, the options facing local governments in the year of adoption of uniform tax deductions from the budgets of territorial communities may somewhat change in subsequent years. Therefore, regional authorities can review the norms of deductions to the budgets of territorial communities with greater probability.
With regard to negative (deductible) transfers, this tool allows for an increase in the following ratio: uniform deduction rates => financial assistance. With the help of negative transfers, it is possible to set higher rates of deductions to less secured local budgets (which, in turn, will significantly increase budget security in the respective cities and regions) (Figure 9). At the same time, the rationale for using higher standards is fully preserved in the cities and regions that do not list
Table 6
Forms of intergovernmental transfers at the regional level
negative transfers and match the criterion for collecting a negative transfer, since only a certain proportion (no more than 50%) will be withdrawn from the amount of the excess of their twice-average income level (De Mello, 2000).
The financial resources that can be allocated to carry out delegated powers do not relate to their own revenues and do not affect the balance of local budgets. These funds should be allocated for financial support to implement the powers at the level of government transferring these funds. These funds' allocation should be clearly determined by the relevant budget services available in the regions and cities and, if necessary, the cost factors that reduce or increase the cost of these services.
Today, the current legislation of Ukraine needs change, namely, to establish the possibility of establishing territorial development funds to transfer government grants to local budgets for partial financing of investment programs (projects) for the development of territorially important public infrastructure, as well as regional funds for co-financing social expenditures for transferring funds to support financing first-priority socially significant expenditure of local budgets (Gershberg and Winkler, 2004). A similar scheme should be formed for regions. Changes to the Budget Code of Ukraine should allow the use of other forms of financial support for cities and regions, including budget loans (Table 7).
Direct distribution of funds through any of the funds must be carried out according to a unified method and/or based on the common criteria and conditions for all types of cities and regions that must be established by Ukrainian Legislature.
Forms of intergovernmental transfers at the regional level Funds provided to local budgets to equalize their budget security through financial support funds
Grants from regional funds for financial support of territorial communities
Grants from regional funds for financial support of districts
Grants from district funds for financial support of territorial communities
Source: The table was compiled by the authors based on (De Mello, 2000)
XT i ^ -*t Baltic Journal of Economic Studies Vol. 5, No. 4, 2019---
Figure 9. Negative transfers from the most sustainable city budgets
Source: The scheme was created by the authors based on (Gershberg and Winkler, 2004)
Table 7
Budget loans for regions (source of deficit financing)1
The purpose of providing budget loans:
1. to partially cover the budget deficit of districts, regions, cities of Ukraine (for up to three-year term);
2. to cover temporary cash disruptions (for up to three-year term);
3. to implement measures to eliminate the consequences of natural and industrial disasters (for a term up to three years at a 0% rate);
4. for construction; reconstruction; overhaul; repair and maintenance of public roads (for a term up to five years);
5. for implementation of measures to support the monocities of Ukraine in total (for a term up to 3 years);_
_The loan _ fee is № of the refinancing rate of the National Bank of Ukraine_
Source: The table was developed by the authors based on (Patsias et al., 2013)
Regional funds of financial support for territorial communities and local budgets are necessary for the provision of undesignated financial assistance (grants), their use should be within the competence of the recipient but comply with the current legislation. This fund distribution mechanism is aimed at providing financial resources to relevant local budgets for solving issues within the competence of local governments of the respective levels of the budget system (De Mello, 2000).
The issue of government grants also needs further elaboration, namely, in consolidating the possibility of delegating to the subjects ofthe highest level the authority to provide subsidies to territorial communities at the expense of the regional budget (Table 8). The funds for implementation of this delegated authority should be provided to higherlevel entities from the Regional Compensation Funds (Prud'Homme, 1995). This mechanism should be clearly defined in the legislation of Ukraine.
Table 8
Comparison of subsidies to equalize budget coverage to support measures ensuring the balance of regional budgets
Grants for equalization Grants for providing balance
Approval of the Law on the State Budget Volumes in general and for each recipient region are approved; The total volume is approved; it is distributed by regions by the Government during the year;
The degree of "transparency" of distribution methods by region Significant (advantage) Low (drawback)
Possibility of prompt response to the situation in the regions Missing (drawback) Available (advantage)
Source: The table was compiled by the authors based on (De Mello, 2000)
1 Monocity is a locality that depends on one or several city-forming enterprises in terms of employment and infrastructure. The word monocity is a reduction of the monoprofile city concept where the prefix 'mono' means 'sole'.
Expenditure needs are estimated by adjusting the average Ukrainian per capita expenditures of regional budgets using the established system of coefficients
(with division of expenditures into: labour costs, housing and communal services and other expenditures);
Most regions and cities of Ukraine receive government grants.
Distribution is based on comparison of tax potential and expenditure needs of regions;
The tax potential is estimated on the basis of tax bases of certain defined taxes in previous years;
Figure 10. Distribution of subventions by regional fund of financial support
Source: The table was created by the authors based on (De Mello, 2000)
As a result, this mechanism will prevent the emergence of imbalances in the alignment of the budgetary provision ofterritorial communities, which may arise when levelling their budgets directly at the regional level.
A new type of intergovernmental transfers (subventions) - negative transfers - should be levied from the most secured cities and regions to reallocate these funds to other, poorly resourced cities and regions (Figure 10). Negative transfers paid from local budgets should be credited to the Regional Fund of Financial Support of separate territorial communities (Prud'Homme, 1995). According to the current legislation and approved by the Verkhovna Rada of Ukraine, negative transfers paid from district budgets should be credited to the Regional Fund of Financial Support.
Transfer of such subvention from local budgets to the national budget can be provided if the estimated tax revenues of local budgets of the corresponding type are twice as high and exceed the per-city average (of the same type) per person. At the same time, the withdrawal in the form of a negative transfer is subject to no more than 50% of the amount exceeding the double level of the calculated tax revenues of the average regional level (Prud'Homme, 1995).
The procedure for calculating a negative transfer must be determined by the legislation of Ukraine.
It should be noted that in highly subsidized regions, despite the fact that the range of fiscal provision with tax revenue of cities may be substantial, it is likely that
none of them is able to cover their spending needs at the expense of local and fixed taxes and fees.
When using a negative transfer, it is also necessary to take into account that after a reduction of the incomes of withdrawn cities, their budget security should be ensured to be not lower than in other cities after the disbursement of financial assistance.
Donations from the Fund of Financial Support should be directed to cities that do not list negative transfers from their budgets (Prud'Homme, 1995) (Figure 11).
In the event that the city fails to fulfil the obligation to transfer the said subvention, public authorities should have the right to reduce the rates of deductions from the national and (or) regional taxes for this city, as well as to centralize part of the proceeds from local taxes into the budget.
Funds of financial support of cities are created in order to provide them with financial resources to perform functions of local government. This task can be solved by reducing the gap between levels of cities' budget provision and sufficient levels to discharge their powers. Calculation ofbudget support for potential recipients2 of financial assistance and equalization procedure will be different for different funds (Prud'Homme, 1995).
The budget security of cities is the object of budget equalization. The budget security (tax revenue) is defined as the ratio of estimated tax revenues per inhabitant that can be obtained based on the level of development of the city and its economic structure (tax potential), and a similar average indicator in cities of the same type
2 Recipient (lat. Recipere - receive, receive) - an object or entity that receives anything from another person or entity called donor.
Figure 11. Options for decentralization reform of intergovernmental transfers
Source: The scheme was developed by the authors
taking into account the structure of population, social, economic, geographical, climatic and other objective factors and conditions influencing the cost of providing the same amount of budget services per capita.
Estimated tax revenues - tax potential - are estimates of revenues that can be charged to the city budget from tax sources fixed by the city budget. When calculating this value, it is not necessary to use indicators that objectively characterize the possibility of receiving tax revenues from the tax base fixed to the city but the actual income for the reporting period. This requirement has an exception during the transition period, when the assets of individual financial support funds may be partly distributed using actual and projected incomes of individual cities (Dabla-Norris and Wade, 2002).
The use of data on actual incomes in calculating budget security can lead to reduced incentives for cities to mobilize revenues, as a reduction in revenue from tax sources will be compensated (when they are included in the estimated tax revenues) by increased financial
assistance in the following year. Conversely, an increase in actually received tax revenues from the local budget may lead to an adequate reduction in the amount of financial support, that is, ultimately, to the absence of an increase in its own revenues (Figure 12).
Calculation of tax potential can be based on the assessment of the tax base in the context of the corresponding type of cities by the aggregate indicator (similar to the gross domestic product, the volume of industrial production and turnover) or using the tax base by type of taxes (Dabla-Norris and Wade, 2002).
In case of using an aggregate indicator reflecting the overall level of development of the city's economy (i.e., tax potential), the assessment is based on the ratio of value-added (industrial production, wage fund) with the projected tax revenues from the unit of value-added (industrial production, wage fun) (Alfirman, 2003). If necessary, conversion factors for the sector structure of the city's economy can be used; they reflect differences in the level of entrusted tax revenues from the equal
Figure 12. System of incentives for regional authorities
Source: The scheme was created by the authors based on (Dabla-Norris and Wade, 2002)
amount of value-added (industrial production, wage fund) in various sectors of the economy of the city. It should be emphasized that the use of conversion factors is necessary in the case indirect taxes (for example, excise taxes on alcohol), as well as unevenly distributed resource payments (related to used aggregate indicators that are not directly correlated with value-added, industrial production, wage fund) are transferred to cities.
The formula for calculating the tax potential (TCU «X») (Alfirman, 2003) in the case of Ukraine is the following:
TCU«X» = FTR * VDU«X» * CFU«X» / TVAU (1) The tax capacity of the "X" city of Ukraine = total Ukrainian forecast for tax revenues in cities of this type * the amount of value-added (industrial production, wage fund) in the city "X" of Ukraine * conversion factor for the sector structure of the "X" city's economy of Ukraine / total value added in Ukraine (industrial production, wage fund).
The conversion factor for the sector structure of the city's economy (CFU«X») is determined by the formula (Holtz-Eakin and Rosen, 1988; De Borger, 1994): CFU«X» = I {(AVAU«XY» / AVAU«X») x (R«Y»/R) / / (AVAU«Y» / AVAU)} (2)
Conversion factor = Z (amount of value-added (industrial production, wage fund) in "Y" branch of the economy (industry) in the "X" city of Ukraine) / (value-added (industrial production, wage fund) in all branches of economy ( industry) in the "X" city of Ukraine) * (projected (reporting) volume of all tax revenues assigned to cities, for "Y" sector of the economy (industry) of Ukraine) / (forecast (reporting) volume of all tax revenues assigned to cities in all sectors of the economy (industry)) of Ukraine / (value-added (industrial production, wage fund) in the "Y" sector of the economy (industry) in all cities of Ukraine) / (value-added (industrial production, wage fund) in all sectors of the economy (industry) in all cities of Ukraine).
At the same time, in order to ensure the most stable distribution of financial assistance, it is necessary to use the reporting data for several periods (years) to determine the tax potential.
Tax potential can also be estimated by types of taxes in the case of the possibility to allocate and estimate indirect metrics of the tax base of cities. For example, for land tax, the cadastral value of land could be used as an indicator (probably, with adjustments to certain defined benefits for certain categories of taxpayers); for taxes on small businesses - the volume of their turnover could be used (Brueckner and Saavedra, 2001).
The tax potential by type of tax should be assessed based on the assumption that the tax base available in the city is used with the region's average efficiency (the same amount of tax is levied from one unit of measurement in which the tax base is expressed). For these taxes, the tax potential is estimated by multiplying the indicator selected as the tax base for the average representative3 tax rate. Thus, the average representative tax rate (for entities) is calculated as the ratio between the projected tax collections and the tax base of this tax for all cities (Brueckner and Saavedra, 2001).
TCU«XY» = TBU«XY»xTFTRU«Y» / TTBU«Y» (3)
The tax potential of the city "X" of Ukraine and from the "Y" tax of Ukraine (TCU«XY» ) = the "Y" tax base of Ukraine in the "X" city of Ukraine in the forecast year * the total forecast of tax revenue "Y" of Ukraine to the budgets of all cities of this type of Ukraine / total tax base of the tax "Y" of Ukraine.
Thus, the tax potential for all types of taxes (TCU «X» ) for this calculation will be determined by the formula (Brueckner and Saavedra, 2001):
TCU«X»=Z(TCU)«XY» (4)
Theamountoftaxpotentials in the city by type of taxes in the city "X" of Ukraine (the amount of tax potential) = E (tax base of tax "Y" of Ukraine in the city "X" of Ukraine in the forecast year).
When using the assessment of tax potential based on aggregate factors, it is not necessary to use separate accounting for a significant number of branches of economy and industry, especially if one takes into account the fact that the levels of tax burden practically do not differ for each of them. In the same way as the representative tax rates method is applied, which does not necessarily include the assessment of each type of tax (especially if its share in the city's tax revenues is insignificant).
The adjustment factor for expenditure should be used to assess the differences between cities of the same type to find the cost of providing one and the same amount of budget services per inhabitant in the area (Dabla-Norris and Wade, 2002; Gershberg and Winkler, 2004).
The use of an adjustment factor is necessary for the distribution of intergovernmental transfers for the cities with significant objective socio-demographic, climatic, geographical, transport and other conditions that determine the more or less high cost of an identical set of goods and services. In case that these differences are insignificant, the application of this coefficient is ineffective (Dabla-Norris and Wade, 2002; Gershberg and Winkler, 2004).
In general, the factor should represent the amount of budgetary funds to be used in the city for implementation
3 Representativeness is the ability of the sample aggregate to reproduce the main characteristics of the general aggregate. Representativeness is achieved through the correct formation of a sample which must reproduce the overall object by principal for the study parameters.
Parameters like reliability and validity play a significant role in determining the quality of information obtained as a result of empirical research, in addition to representativeness.
of its assigned budget service responsibilities, taking into account price factors, compared to the per capita average for all cities of the type considered, located within the respective territory (Dabla-Norris and Wade, 2002; Gershberg and Winkler, 2004).
The Financial Support Fund distribution based on the assessment of the level of budget security must be carried out in order to increase this level in the least secured cities.
The level of budget security shows how many times more or less the amount ofbudget revenues of a particular city is (reduced to a comparable type by accounting for price factors and the number of consumers of budget services), the average per capita income of all cities of this type (Dabla-Norris and Wade, 2002; Gershberg and Winkler, 2004). The level of budget provision of cities by their own revenues to the distribution of funds of financial support funds (BPU«X» ) may be determined by the following formula (Gershberg and Winkler, 2004; Brueckner and Saavedra, 2001): BPU«X» = (TCU«X»Z [PU«X»xAFENU«X»}) / / (TFTRU / PU) (5)
The level of budget provision of the city "X" of Ukraine to the distribution of the Financial Support Fund finances = the tax potential of the city "X" of Ukraine / population of the city "X" of Ukraine * adjustment factor of the city's expenditure needs "X" of Ukraine / total Ukrainian forecast for tax revenues in cities of one type / population of the city, oblast of Ukraine.
If the level of budget provision of the city, obtained using this formula, is more than one, then it is provided with income more than all cities of this type (by 20%). And if the level of budget security is less than one, then this city's income is less than average among cities of this type (60% of the average level) (Dabla-Norris and Wade, 2002; Gershberg and Winkler, 2004). The next step after determining the levels of budget provision of cities of the same type is ranking by levels.
In general, the main purpose of allocating financial support for cities is to reduce the differences
References:
(equalization) of the level of local budget revenues (compared considering population and price factors) by increasing the amount of financial resources in the least secured tax revenue cities, in order to ensure the highest possible budget services to the population (in accordance with the powers of local self-government bodies).
Equalization of budget security is carried out by various methods, in particular, by the method of proportional equalization, alignment to the maximum possible level, and the combined method.
Thus, the proposed model of principles, tools and mechanism of distribution and regulation of intergovernmental fiscal flows will provide an opportunity to ensure the unity of all levels of the budget system and their interaction, which, in turn, will ensure macro-financial stability of the state, efficient allocation of budget expenditure, development of society's democratization and uniform socio-economic development of regions of Ukraine.
7. Conclusion
The issue of intergovernmental regulation of cash flows is of great current interest due to the following challenges: the policy of European integration; carrying out the decentralization of power reform; increasing population migration; devaluation of the national currency; military-political tension; negative dynamics of macroeconomic indicators; economic turbulence; reduction ofinvestment attractiveness; outflow ofskilled labour; and reduction of expenditures for the following socially significant areas: health care, education, social assistance for the elderly. The proposed model of principles, tools and mechanism of distribution and regulation of intergovernmental fiscal flows will provide an opportunity to ensure the unity of all levels of the budget system and their interaction, which, in turn, will ensure macro-financial stability of the state, efficient allocation of budget expenditure, development of society's democratization and uniform socio-economic development of regions of Ukraine.
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