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Union maniac as a phenomenon of the subculture of the Union of admirers

Union Punk is a wide circle of like-minded people who respect the era of the Soviet Union.
In many cities and countries of the former USSR there were fans who willingly share their memories with the same fans.
Proud of old times, constantly compare reality with the past.


Союз-маньяк как явление субкультуры Союз-поклонников

EVOLUTION OF THE BUDGETARY CRISIS IN 1996-1997

Date of publication: 2018-01-31 13:42:45
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The state of public finance on the eve of presidential elections

In spite of the fact that a certain drop in the level of public revenue during the first months of the year was common in Russia beginning with 1992, from 1996 the fall of budgetary revenue in Russia was dramatic. Tax revenues in the federal budget in January 1996 in comparison with the end of 1995 dropped by 3.5 percent of GDP (from 10.3 percent to 6.8 percent). It occurred, first of all, at the expense of profit tax (down by 1.5 percent of GDP) and taxes on goods and services (down by 1.2 percent of GDP).

The volume of tax revenues into the consolidated budget in the first quarter was 29 percent less than in the first quarter of the previous year (23 percent of GDP). In the second quarter situation in tax sphere continued to remain quite tense and was characterized by low tax revenues. The volume of tax revenues in the consolidated budget made up 17.9 percent of GDP in the first half of 1996 against 24.7 percent of GDP in the first half of 1995 (see Figure 14). In spite of certain growth of tax revenues into the federal budget up to 7.4-7.7 percent of GDP, this index remained below the level of 1995 (10.2 percent of GDP in 1995).

The study of tax arrears as one of the main factors of reduction in the level of tax revenues testifies about a close link of this phenomenon with political crisis in Russia, in general, and with the weakening of the federal power, restriction of the room for maneuver, in particular (see Figure 15).

Considerable growth of tax arrears started in January 1996 when their real volume in the federal budget went up by more than 40 percent. Aggregate volume of arrears in the consolidated budget in fixed prices went up at the beginning of 1996 by 37 percent in comparison with December 1995. In January 1995 an increase of the real volume of arrears in the federal budget constituted 3.5 percent, and in the consolidated budget--7.1 percent. To a certain extent, an increase of arrears is conditioned by a seasonal increase of the volume of calculated taxes in the first month of a quarter that follows the quarter under review. In this case, the shortage of liquidity leads to the growth of arrears. Moreover, to our mind, the growth of arrears at the beginning of 1996 was conditioned by a high political instability and became an important factor of the tax crisis.
 

 

Such growth of arrears was a consequence of two interconnected circumstances. Firstly, election campaign of the acting president could not be accompanied with tough measures of executive authorities towards future voters. Secondly, possibility of Zuganov becoming president influenced enterprises' fiscal behavior. Economic agents thought that in case of Yeltsin's success, it was unlikely to expect persecution for violating tax discipline. Thus, the enterprises before elections have cut the volume of tax transfers to the budget taking into consideration both possible relaxation given during the election campaign and likely tax amnesty in case communists come to power.

Reduction of the federal budget public expenditure at the beginning of 1996 was much bigger than the cut in revenue. The servicing of public debt remained at the same level in comparison with the end of 1995. All other articles were cut in January 1996 from 15.2 percent of GDP down to 7.1 percent of GDP.

The structure of federal budget expenditure in the first quarter was determined by the government's aspiration, according with the election promises of the president, to pay off wage arrears in budgetary sphere. Priority articles where plan projection were overfulfilled were national defense (by about 10 percent), coal industry (by more than 20 percent), agriculture (by about 20 percent), transfers to the pension fund ( by more than 100 percent). At the same time, investment into the industry were cut (underfulfillment of the plan by more than 75 percent), transport and communication (underfulfillment of the plan by 60 percent), culture and arts (underfulfillment by 60 percent), public health and fundamental research (underfulfillment by 40 percent), education (underfulfillment by 30 percent).

Increase of the federal budget deficit in the end of the first quarter of 1996 (from 2.8 percent of GDP in January-February up to 3.37 percent of GDP in the first quarter) was financed mainly at the expense of the growth of domestic borrowing (growth from 1.69 percent of GDP up to 2.34 percent of GDP for the same period) by way of attracting means on the GKO-OFZ market. In May and June the federal budget deficit calculated by applying the Ministry of finance methodology tended to decrease by about 0.3 percent of GDP and constituted in the first half year a little bit more than 4 percent of GDP. In overall figures the deficit made up 70 percent of the level passed by the law for 1996. Dynamics of evaluating secondary deficit together with yield on GKO was the same: in January-April 7.11 percent of GDP, in January-May 6.5 percent of GDP, in January-June 6.1 percent of GDP.

Recorded growth of expenditure on the servicing of public debt was determined by dynamics of yield on state securities which, in its turn, was under a considerable influence of the election campaign and the need for massive expansion of the Ministry of finance on the domestic borrowing market in view of the tax incomings crisis to the budget. Thus, during the election campaign the government have made a choice between the tax reform required to increase tax withdrawals and further growth of public debt in favor of the latter.

 

Public finance in the second

 

half year of 1996

After the election of the Russian president, tax incomings to the federal budget slightly increased (by 3.5 percent in fixed prices in July). Incomings to the consolidated budget grew in July by 6.8 percent in fixed prices. Further dynamics of aggregate tax incomings show their stabilization (at the level of 8.2-8.4 percent of GDP into federal budget and 19-19.2 percent of GDP into consolidated budget). This trend was conditioned by slowing down of the arrears growth. However, there was no radical change in the dynamics of tax arrears. Real volume of arrears in the consolidated budget remained at the level of 60-70 billion rubles (in December 1991 prices)

At the end of the year there was some increase in the budget revenues. In December tax revenues in the federal budget calculated in fixed prices went up 1.8 times in comparison with November. Growth of real tax incomings in the consolidated budget constituted 1.6 times. Major source of tax incomings growth became a cut in the volume of arrears which reached 46 percent of tax incomings increase in December in current prices. However, the government did not manage to control this trend. Partly this was connected with a sharp increase in political pressure on the executive power from the part of politically influential economic agents and regions, partly it was connected with a new Yeltsin's illness which again put the country in a situation of political instability.

Some growth of the federal budget expenditure against the background of a continuing tax crisis (up to the level of 15 percent of GDP in July and to 15.5 percent in August) did not allow to cut budget deficit to the level passed in the 1996 law of the budget. The volume of federal budget expenditure in September-December 1996 remained at the level of 14.8-15.3 percent of GDP.

In July the deficit calculated by applying the Ministry of finance methodology constituted about 4.1 percent of GDP, in August--4.2 percent of GDP, in December 1996--3.29 percent of GDP. Additional calculation of the costs of servicing state borrowing, by our calculations, increases the volume of secondary federal budget deficit to 6.1 percent of GDP in July, and 6.5 percent of GDP in August. On the whole, the level of secondary deficit constituted 7.2 percent of GDP. At the same time, expenditure on servicing the state debt--5.6 percent of GDP, meanwhile in 1995 the level of secondary deficit made up 4.7 percent of GDP (at the same time, servicing of state debt--3.2 of GDP).

Thus, the end of presidential campaign has not brought about change in the development of the fiscal crisis. This fact can be explained by at least three considerations that do not exclude one another. Firstly, preservation of the stable "anti-tax motivation" among the economic agents caused both by the weakness of the federal government and by a fear of loosing competitive positions in case of obeying tax discipline. Secondly, involvement of the majority of the subjects of federation in the campaign of regional elections (which basically took place between September 1996 and January 1997). That, as it happened during the presidential elections, weakened possibilities of conducting a tough policy towards enterprises.

 

Deepening of the fiscal crisis

 

in 1997

The fall of tax revenues into the federal budget constituted about 4 percent of GDP at the beginning of 1997 in comparison with December (5.7 percent of GDP in January 1997 against 9.7 percent in 1996). Despite certain increase of budgetary tax revenues in January-March 1997, their volume remains below the volume of the second half of last year. Budget execution practically in every revenue article does not surpass 60 percent of the planned volume.

As can be seen at graph 15, in January-March 1997 the volume of tax arrears into consolidated budget in real terms remained approximately at the level of the end of 1996. In February-March one can note certain decrease of its volume by 0.64 and 2 percent of GDP correspondingly in relation to the previous year. Thus, in March the total volume of arrears in the federal budget constituted 77.2 trillion rubles. At the same time, about 64.5 percent of that volume make up arrears on VAT, about 14.3 percent--on excise taxes and 11.4 percent--on profit tax.

At the beginning of 1997 there was a fall of federal budget expenditure by about 6 percent of GDP (9.02 percent of GDP in January 1997 against 15.33 percent of GDP in December 1996). Although there was some growth of expenditure in February-March up to 10.4 and 12.4 percent of GDP correspondingly, nevertheless these volumes were considerable less than the volumes of the second half of 1996.

The tendency to a reduction of the budget deficit outlines at the end of the last year continued in the first months of 1997. If in 1996 the volume of federal budget deficit constituted 3.28 percent of GDP (in comparison with 3.5-4 percent of GDP in the second half of 1996), then in January-February 1997 it made up 1.73 and 1.61 percent. The volume of secondary deficit constituted 5.3 percent of GDP and 5.8 percent of GDP in January-February 1997, correspondingly.

Thus, one can distinguish several factors in the deepening fiscal crisis in 1996-1997.

The main reason for the fall of budget revenues was the growth of tax arrears. A decrease in tax incomings was the result of the growth of the scale of illegal evasion of tax payments by using the very different ways, and what is most important--by carrying out economic operation with cash which was not registered in book-keeping. As a result of a rather serious growth of debtor indebtedness, the taxable base of profit tax and VAT has shrank. The volume of debtor indebtedness sharply grew at the beginning of 1996 (from 191 percent of a monthly GDP in December 1995 up to about 295 percent of GDP at the end of 1996 and up to 334-355 percent of GDP in January-February 1997 correspondingly). As an additional factor which explains the reasons of the tax crisis, one can give growing barterization of economy, wide use of complicated schemes for non-monetary debt settlement between suppliers and their clients which leads to a distortion of the taxable base, difficulties in registration of money flows and to a decrease of liquidity of enterprises.

The tax crisis which sharply worsened between 1995-1996 in its consequences turned out to be a rather complicated phenomenon. Had it been only for the elections reasons, then tax collection should have more or less automatically returned in the second half of the year to at least a starting level. However, the real situation turned out to be substantially different. The acuteness of fiscal problems which somewhat softened in mid-year made itself felt sharply in autumn of 1996 and especially in the beginning of 1997.

Mass tax evasion which sharply increased in 1996 simultaneously signified a transition of the tax crisis to a qualitatively new stage. In 1995-1996 the scale of the so called "negative selection" among the tax payers sharply increased. Previously tax violations were meant to cut by enterprises their costs without influencing the general competitive environment on the market. Now increased tax evasion and existence of many individual privileges on taxes have led to the fact that adherence to the tax legislation puts conscientious businessmen into obviously unfavorable conditions which undermine possibilities of efficient business activity.

 

Prediction of the budgetary situation in 1997

In calculating 1997 budget as parting conditions GDP is envisaged in the volume of 2727 trillion rubles, its real growth by 1 percent of its 1996 volume. Average monthly inflation--0.8 percent (according to IMF evaluations, the volume of nominal GDP must constitute 3425 trillion rubles with real GDP growth by 4 percent and inflation of 12 percent annual).

In our calculations we proceeded from average inflation rate of 1.23 percent, real GDP at the level of 1996 and actual volume of GDP for the first three months of 1997. With these premises the volume of the nominal annual GDP will constitute 2617 trillion rubles. This index was calculated proceeding from a supposition of maintaining the dynamics of 1997 real GDP at the 1996 level. Monthly indices of 1997 GDP were calculated taking into consideration 1996 nominal GDP and the aggregate price index to a corresponding period of 1996. As a deflator were taken both 1996 actual consumer price index and predicted 1997 price index.

While evaluating the share of tax revenues in GDP, we were proceeding from the introduced at the beginning of 1997 changes in laws on profit tax, income tax, excises and some other legislative changes implementation of which we consider most likely (in particular, cancellation of a number of privileges on profit tax and VAT). we were not taking into account a possible increase of the volume of tax revenues as a result of implemented measures against illegal tax evasion. In this case, according to our calculations, tax revenues will constitute about 9.9 percent of GDP which is below the planned by the Ministry of finance 12 percent of GDP. The Institute for the Economy in Transition 1997 tax payments in the volume of 5.8; 6.5 and 7.6 percent of GDP correspondingly, our prediction looks rather optimistic. In the framework of the given scenario total federal budget revenues will make up 10.9 percent of GDP, supposing that the arrears will grow approximately by the same rate in real terms as in 1996 (its annual growth constituted 21.6 trillion rubles).

With such premises, while executing the budget there will appear a need to sequester expenditure by about 35 percent (supposing complete financing of expenses on servicing the state debt). In conditions of tough government's policy directed at fighting tax arrears, the federal budget revenues may constitute 11.4 percent of GDP which will condition sequestering of expenditure in the volume of about 30 percent.

Sinelnikov S., Medoev V.,

Batkibekov S.

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Article description: In spite of the fact that a certain drop in the level of public revenue during the first months of the year was common in Russia beginning with 1992, from 1996 the fall of budgetary revenue in Russia was dramatic.

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