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This paper was written at the invitation of MOCT-MOST: Economic Policy in Transitional Economies, and will appear in the June 1996 edition. The authors thank Guzel Anulova, Jack Diamond, Ian Lienert, Henri Lorie, David Orsmond, Janet Stotsky, and George Tsibouris for their helpful inputs to the paper, and Scott Anderson for assistance with the data. The views expressed are those of the authors, and do not necessarily represent those of the International Monetary Fund.
The abbreviation “FSU” in this paper is used to refer to the region previously covered by U.S.S.R. statistics. It does not connote any political grouping.
Throughout this paper, 1989 Soviet data are used as a reference point, and are compared with unweighted averages from the USSR’s successor states. The comparison has obvious shortcomings, since financial structures varied widely across the USSR. However, fiscal data from Soviet republics are an even less valid basis for comparison, because they did not include most central government functions, which were carried out at the union level. Unweighted rather than weighted averages were chosen: to reflect the policy efforts of the separate states; to avoid the problem of Russia’s overshadowing developments elsewhere; and because of likely inconsistencies in aggregating GDPs across countries. Problems in national income data suggest that caution should be used in interpreting the ratios of fiscal aggregates to GDP. Year-to-year movements in these aggregates are, however, likely to give a relatively accurate picture of fiscal trends.
The data presented in the paper, with the exception of Table 8, have been reconciled so that the deficit is equal to expenditure less revenue plus grants, and financing items equal the deficit. Data not shown in the paper which account for apparent discrepancies include grants, valuation adjustments, arrears, and timing differences between budget and financing data.
The paper makes several references to the fiscal policy strategy that was considered optimal at the outset of the FSU transition. There was a fairly wide consensus on the strategy, which is most comprehensively presented in JSSE (1991). This study is also the source of all U.S.S.R. statistics quoted, unless otherwise noted.
In FSU statistics, “social security” is usually shown as a separate sector in the GDP framework used for budgeting. Given the quadrupling of payroll contributions, it also expanded significantly since 1991, and in that sense explains some of the relative shrinkage in other bases.
In Ukraine, for instance, VAT exemptions were estimated to have reduced the potential base by one-third (nearly 4 percent of GDP) in 1994.
See, for instance, JSSE, Vol. 2, pp. 22–23, on the need for the privatization strategy to balance government revenue and redistribution.
Specifically, the price-earnings ratio used to value the assets was set so as to assess them at around one-tenth the value of assets generating comparable output in industrial countries.
For instance, a joint venture between a western oil company and the Kazak government netted privatization receipts of more than 2 percent of GDP in 1993 but excluded the joint venture indefinitely from a wide array of direct and indirect taxes.
In Russia, for instance, it proved easy to privatize the oil sector (after which the contribution of the sector to the budget shrank sharply), but the heavily loss-making coal sector remains in state hands and is receiving 1.3 percent of GDP in identified subsidies (IBRD, 1995a). In Kazakstan, state coverage of state enterprise losses cost the government 7 percent of GDP in 1994.
Defense expenditure is discussed in more detail in Chapter IV, below.
See for instance, Allison and Yavlinsky (1991) p. 23: “Western nations spend more than $250 billion annually defending themselves against Soviet military threats. Economic and political reform in the U.S.S.R. that sharply reduced such threats would create the opportunity to realize a significant peace dividend.”
Price liberalization also implied the monetization of the taxes which had corresponded to the implicit subsidies. However, the receipts from the liberalization could not (or could only in part) be transferred to government (i.e., be taxed at a rate of 100 percent), because the role of the price liberalization in the transition was to ensure that producers began to receive market-based returns for their output. Hence, the asymmetric impact on the budget. Besides, as indicated previously, governments’ tax collection capacity was severely circumscribed.
The need for governments to take charge of restructuring was recognized from earlier transition experience in Eastern Europe. See, for example, Bruno (1992, pp. 774–775): “Another related issue is the perceived role of government…a hands-off policy during the transition from a centrally-planned to a market economy would be most inappropriate.”
The implications of the figures for real domestic resource use should be drawn with caution, since their domestic value in percent of GDP depends on quoted exchange rates, and these have fluctuated widely.
These data are more than usually speculative, and are in some cases estimated as a residual. Since they are net, some developments in gross financing cannot be seen.
See IMF (1996). Seignorage is a slightly broader concept than the inflation tax, but in this context the measures are essentially equivalent.
Table 7 includes some ad hoc adjustments for arrears which are not included in original FSU budget sources.
The case of Russia is discussed in more detail below.
The apparent growth of expenditure in Estonia and Latvia is likely to be due to changes in recorded coverage.
The use of a lower-than-expected inflation rate in the budget lessens the impact of this practice.
The interpretation of Russian expenditure figures is not straightforward, because of shifting coverage--particularly of aid-related outlays. A consistent treatment would probably reduce the estimated decline in expenditure but leave the size of the contraction unchanged (because counterpart revenues would offset the higher expenditure).
Other estimates put sequestration in 1995 at 5–6 percent of GDP.
This is one reason why wage arrears continue to be reported, despite the “protection” of wages in most budgets.
In Ukraine, for instance, spending agency deposits grew by 2 percent of GDP in 1994, despite unprecedentedly tight financial conditions.
The expenditure figures are not fully comparable with those of Table 7, which do not always monitor social benefits from earmarked funds or budgetary loans.
The composition of the support has, of course, changed significantly, given the shift in relative prices. Moreover, important subsidies which emerged in 1992 (notably in Russia) on account of foreign aid transferred to enterprises without domestic counterpart have been eliminated.
One element of spending on the economy which was expected to grow but has not is environmental expenditure. In Moldova and Ukraine, budgetary expenditure on environmental protection amounted to 0.14 percent of GDP in 1994. The Ukrainian figure includes the budget allocation for the clean-up of Chernobyl. In Kazakstan, environmental spending was budgeted at 0.09 percent of GDP in 1995.
This category also includes spending on culture and physical education.
In addition to the sample in Table 8, it may be noted that consumer subsidies in both Azerbaijan and Belarus were 4.9 percent of GDP in 1994.
It should be noted, nonetheless, that many consumer subsidies have been abolished. Notably, direct food subsidies have been widely eliminated--though continuing agricultural support has cushioned the impact on food prices. In Ukraine, for instance, meat and milk subsidies alone amounted to nearly 5 1/2 percent of GDP in 1993, but were phased out by the beginning of 1994.
For comparison, US defense spending amounted to 13 percent of general government expenditure and 5 percent of GDP in 1992, the latest year for which data are available.
The cutbacks are arguably somewhat overstated, because they reflect the fact that many military pensions have been shifted to general pension schemes, some military housing is now being covered by foreign project grants, and parts of the security forces have been demilitarized and moved to the police force or the general administration (explaining some of the rise in these categories of expenditure). However, these reclassifications are in line with western statistical practice.
This was the main explanation for the relatively low allocation for defence in the Soviet budget (compared with western estimates of Soviet defence spending, which tended to be built on assumptions about purchasing power parity). For instance, a large part of the army was composed of conscripts, who received subsistence allowances rather than pay.
Government procurement of military goods and basic supplies (food, fuel, alcohol, etc.) for a broadly defined military sector--including, for instance, most of the population in the closed cities--played an important role in the Soviet economy but has been practically decimated in the FSU countries where data are available. These stockpiles, which functioned like stabilization funds with deficits replenished and surpluses sold on a seasonal basis, met most of the basic needs of the army and also provided important sources of income. The shrinkage of the reserves has arguably impoverished the defense forces to an extent greater than implied by the budget figures.
This does not include investment through centralized funds, which amounted to a further 5 1/2 percent of GDP in 1989. Arguably, this part of soviet public capital formation was equivalent to private sector industrial investment in western countries.