BOFIT Viikkokatsaus / BOFIT Weekly 2018/03

Regional budgets (consolidated budgets of the regional and local levels) represent slightly over a third of Russia's government-sector spending. Regional budgets are largely responsible for funding housing, education and culture as well as covering a big bulk of health care costs. Most of the government sector's low-paid employees are on the payrolls of regional or local governments. Since 2012, defined government-sector wage hikes and other spending increases have been a considerable strain on budget balances in some regions in particular.

Rising regional indebtedness in 2013–15 reflects the fact that many regions covered their deficits with bank loans. In 2015, debt-servicing costs of regions were reduced by refinancing these bank loans with three-year loans from the federal budget. Even so, some regions have been overwhelmed by their debt-servicing costs. In October, several regions, including the Republics of Udmurtia, Khakassia and Karelia, publicly requested help from the finance ministry to cover their expenses. Some of the federal budget loans maturing this year will now be turned over with extended maturities and lower interest rates.

As a whole, regional budgets are almost in balance, but there are large variations across regions. Many regions have limited opportunities to lower spending or increase revenues. About half of regional budget revenues come from corporate profit taxes and personal income taxes. Transfers from the federal government to regional budgets on average account for less than 20 % of total revenues. Transfers, however, fund about 40 % of regional budgets in the Far East Federal District and about 70 % in regions of the North Caucasus. The two federal districts each have a number of poor regions that are completely dependent on budget transfers and budget loans.