Local Authorities: Political loyalty, economic stagnation

Summary

In 2011 the degree of centralization of local authorities in Belarus remained high both in the administrative and in the financial spheres. Local authorities demonstrated a high efficiency in maintenance of political stability on the subordinated territories that was endangered by the growth of social intensity and protest activity in regions. However the “chain of command” showed worse results in realization of economic tasks put forth by the central authorities, which requires a certain initiative from the local authorities.

Simultaneously, keeping the status quo in administrative control over local authorities, the centre gave more and more competences in financial and economic activities to local authorities. In 2011 the principle of distribution of taxes between different levels of local and republican budgets was changed. In comparison with the previous year the share of gratuitous revenues in local budgets from the republican one increased. The intention of the central authorities to stimulate economic development of the regions through changing sources of a profitable part of local budgets faces inertness of officials who continue to count on centre subsidies. However republican bodies cannot support former amounts of budgetary transfers and expenses on the state programs any longer, the financing of which was one of the reasons of monetary and financial crisis of 2011.

Trends:

• The share of local budgets in distribution of tax revenues of the consolidated budget increases;
• The further increase of the level of centralization of resources in the republican budget is typical for budgetary process;
• Disproportions of the level of subsidies are observed in the regions. Simultaneously the quantity of non-subsidized budgets and budgets with moderate level of subsidies at the primary level of local authorities increases;
• Competence and responsibility of local authorities in the financial sphere extends, however they are hardly used.

Local chain of command: loyalty acknowledgement

The system of bodies of local government and self-government of Belarus in 2011 did not experience cardinal changes and was characterized by actual absence of the autonomy of Belarusian regions from the centre. Local representative bodies (councils) continue to act a symbolical role and entirely depend on local administrations/executive committees that are actually public authorities of a local level. Councils are deprived of their executive bodies and their activity is limited partly to the adoption of decisions of local executive authorities that have a strategic importance for regional development.

At the same time the competence of representative bodies of power in the financial sphere continues to decline, which is to the good of the local administrations. In 2011 local financial bodies and executive committees received additional powers to modify the decisions of local councils concerning the budget and to specify the indicators of the local budget.

It should be noted that local authorities in 2011 had to play a big role in the political process when the central authorities at the first stages of the monetary-and-financial crisis lost control over the situation, which caused the growth of discontent of the population with the state policy. However the local authorities testified loyalty to the incumbent president and managed to stop protest activities quite effectively in their regions.

Summer protests of Brest and Hrodna businesspeople that were engaged in illegal frontier trade and felt restrictions of their possibilities, were soon stopped by regional authorities by means of agents of national security, pressure of tax department and negotiations. “Silent actions” in the regions, the peak of which occurred in summer 2011, were crushed even more cruelly. Disturbances of workers at some enterprises were suppressed in their turn and did not become systemic: they were stopped through concessions from the local authorities and fulfillment of remonstrates’ requirements.

With a considerable delay the president reacted to the growth of social intensity that was obviously shown in separate regions, having begun “territorial protection” to struggle against external and internal enemies, having awarded the rank of major general to the heads of regional executive committees.1 Regional authorities were assigned to carry out the duties on territorial protection one of which was a prevention of “chaos of revolutions”.

In comparison with 2010 local authorities after other state institutes lost the trust of the population to a certain extent. However this decrease was not so sharp as the falling of the president’s rating,2 which testified to the fact that society understands the real position of local authorities and self-government in the system of decision-making.

Local finance: centralization and initiative stimulation

In a situation of reduction of resources for maintenance of the former social-economic model the central power intended to provide a bigger interest of officials in local sources of a profitable part of budgets. In 2011 tax sources of profit were redistributed in a budgetary system for the good of local authorities. At the same time they failed to reach the targets on investments, import substitution, development of business and property privatization last year because of the inertness of local administrations which lost initiative because of an excessive budgetary centralization during the previous years and count exclusively on gratuitous revenues from the republican budget.

In 2011 the policy of republican authorities was directed at the increase of the interest of the local controls in the development of the territories through the introduction of a new mechanism of distribution of profit tax. In 2010, 50 % of this tax remained in the republican budget and 50 % went to the local level while in 2011 the whole profit tax of the enterprises of municipal property and also the profit tax of the enterprises of non-state form of property remained at the disposal of local budgets. The profit tax of the enterprises of republican form of property was distributed as earlier: 50 % – to the republican budget, 50 % – to local.3 A new way of distribution of the profit tax allowed leaving 67.6 % of all revenues from this tax which is imposed in regions at the local level.4

However it is impossible to say that the increase in tax base of local budgets at the expense of the profit tax became an essential stimulus for creation of new manufactures in 2011, which is proved by the reaction of the central authorities. Last year in March the State Control Committee of Minsk region criticized the activity of local authorities for their insufficient support of entrepreneurial activity, and in October the Prosecutor’s General Office testified that local executive committees were not active enough in searching for and attracting investors, in informing subjects of entrepreneurial activity on privileges at realization of investment projects. The chairman of the House of Representatives Mr. U. Andreichanka joined the criticism, having stated a low level of independence and lack of initiative of the local authorities while solving the problem of import substitution.

Except for profit tax, income tax (100%), property tax (100%), value-added tax (29.4 %) and a number of other taxes (about 32.4 % in total) were added to local budgets in 2011. At the same time the fiscal policy in Belarus remains centralized: for all regions there is a unique order of income taxation and land and real estate taxation defined at the republican level. In 2011 local authorities still had a right to raise property tax – only twice as much.

It should be noted that during the last five years one could observe a constant tendency of increase in the share of profits of local budgets in comparison with the republican budget from tax revenues. In 2007 only 44.7 % of tax revenues went to local budgets while in 2011 this figure was about 58%.5

Thus there is an essential distinction between the regions in sources of a profitable part of the consolidated budgets. In Minsk the public sector has 51.8 % of revenues, in Brest region this figure is 55.7 %, in Hrodna – only 30.4 %.6 In Brest, Mahilou and Hrodna regions a considerable part in tax revenues of the consolidated budget is taken by income tax: 33.1 %, 29.2 % and 27.3 % accordingly. At the same time in the Minsk, Homel, Vitebsk regions and in Minsk city the income tax constitutes only 18.8 %, 15.9 %, 12.7 % and 12.6 % accordingly. A part of revenue from the profit tax in Hrodna, Brest, Homel, Mahiliou regions and in Minsk city is almost identical – 16.2 %, 16.5 %, 15.5 %, 15.3 %, 16.4 % accordingly. In Vitebsk region the share of the profit tax is the lowest – only 8.2 %. Minsk region is a leader among the regions with the highest budget revenues from dividend payment and other revenues from other forms of participation in the capital – 37.1 %, the profit tax also occupies a considerable part in the structure of revenues – 21.6 %. However the general share of local budgets revenues of the consolidated budget decreased from 37.9 % in 2010 to 36.5 % in 2011.

The part of gratuitous revenues from the republican budget in a profitable part of local budgets increased from 34.3 % in 2010 to 35.4 % in 2011, keeping grants and subventions at the highest level during the last years.

The share of expenses of local budgets in expenses of the consolidated budget of 2011 increased to 55.3 % in comparison with 53.5 % in 2010.

In 2011 the share of non-tax profits of local budgets was insignificant. Local officials hamper the process of privatization of real estate and refuse to sell it to Belarusian businesspeople: the part of profits of the consolidated budget on this article makes only about 0.28 % of gross national product. Besides, local officials received an additional tool of pressure upon business activity and the possibility to interfere into the process of privatization due to Decree no. 677, according to which regional executive committees and Minsk city executive committee have a priority right to acquire the shares of economic associations, including those of the strategic ones. However the use of these privileges by regional authorities remains limited in practice because of the absence of money in local budgets.

At the same time the government of each region and Minsk city received the task to attract foreign investments the amount of which in 2011 exceeded the planned targets of 2010 in times. However all regions failed to achieve the mentioned indicators, having fulfilled them at the level of 7 %. The greatest indicator of hitting the target was in Mahiliou region – 13 %, and the smallest was in Vitebsk region – 3.4 %.

With his Decree no. 75 the president authorized regional authorities to attract external loans in foreign currency in order to get additional resources. In 2011 Minsk city executive committee planned to issue five years' eurobonds of USD 200-300 million; however it failed to do so because of a low credit rating and a high price of loans. According to the Decree loans of local authorities were not officially a type of state external debt of the country, which allowed the Belarusian government to manipulate with the rate of public debt of Belarus. At the same time, since January 1, 2011 the right of local authorities to loan when the sum of the planned payments on repayment and service of newly and formerly accepted debt duties in the current or in every next year exceeds 15 % of the incomes of the budget planned for the current year without the received subventions was limited, which testifies to the concern of the central government about the growth of loans of local authorities.

Strengthening of financial independence of the primary level of local authorities

Since 2011 the personal income tax has started to be accumulated at the primary level however there is an essential difference in the realization of the state policy among country regions. In its turn specification of the budget expenses at the primary level had a positive impact on the functioning of local authorities that nonetheless are far from being financially autonomous.

Since 2011 deductions from personal income tax have been included into the revenue of budgets of the primary level. The specifications of deductions should be defined by regional councils of deputies depending on a tax payment of each territory. Before 2011 this tax, collected on territory of the village council, was not added to their budget but had been distributed between district and regional budgets. The region could have taken up to 20 % of the income tax collected on territory of a district. The change in income tax distribution had a positive influence on self-sufficiency of primary budgets: the number of non-subsidized village councils grew 7 times: in 2010 there were only 33 of them, and in 2011 there were more than 240. Besides, the quantity of budgets with a moderated (less than 50 %) level of subsidies increased almost twice: in 2010 there were 389, and in 2011 – 742 (out of 1358).7

However the degree of concentration of resources at the level of village councils in regions differs and depends on the distribution of the finance by Councils of Deputies of regional and base levels. In Homel, Brest and Mahiliou regions the greatest part of expenses at the primary level is provided at the expense of grants, and in Minsk, Hrodna and Vitebsk regions the majority of primary budgets are self-sufficient.

Since 2011 a new mechanism of an expenditure of the off-budget means received by self-taxation has been introduced. Before this off-budget means hadn’t passed through the budget, and since the last year the means received from self-taxation has been included into the profitable and, accordingly, cost-based part of the primary budget. However the lack of budgetary funds forces the government of the basic level to increase the personal base of incomes of primary budgets: village executive committees receive tasks on scrap metal and waste paper collection and “targets” on self-taxation.

It should be noted that local authorities at the primary level, having expanded profitable base of budgets, faced a lack of cost-base powers that essentially interfere with the initiative of local executive committees. For example, there are difficulties with the mechanism of use of means that came to the budget of a village council as a result of land sale at an auction.

Conclusions

Having faced the reduction of resources for maintenance of the Belarusian social-economic model, the central authorities try to create conditions for the increase of activity of local administrations on attraction of investments into regions, creation of new manufacture and increases in the share of profits of local budgets at the expense of local sources. However, the local chain of command got used to the state policy of previous years when its primary goal was to preserve social-economic stability in regions due to grants from the center. Changes and expansion of sources of the profitable part of local budgets is not a stimulus for local officials to show their initiative when the lack of financial assets is always compensated by grants from the republican budget.

Thus the aspiration of the Belarusian government to improve the business climate in the country in comparison with the partners of the Customs Union and to stimulate business activity through decrease of tax loading on economic subjects will negatively affect profits of local budgets which are formed at the expense of these taxes. Besides, it seems improbable that essentially understated targets on attraction of investment will be fulfilled in 2012 by local authorities which continue to hamper the process of denationalization.