New Budget Code a Non-Starter

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The federal budget for 2008 to 2010, the first to cover a three-year period, was recently passed in first reading by the State Duma, thus setting in motion a reform that the Finance Ministry has long described as necessary.

In trying to achieve their objectives in switching to the new system -- converting the budget into an instrument of strategic planning and increasing transparency in the budgetary process -- reformers are likely to run into certain problems at the federal, regional and municipal levels.

The actual start of the budget process reforms came in April, when the State Duma passed a new Budget Code, calling for medium-range planning targets that will transform the budget into a document orientated toward achieving specific, well-defined goals.

The immediate question that arises is what is meant by "goals" and what criteria will be used to determine whether they have been achieved. Politicians, bureaucrats and the general public are all likely to have different views on whether a particular state policy has been successful, so the question is vital both for strategic planning and for increasing transparency in the way the government manages its finances.

The main shortcoming of the new Budget Code, one that threatens the success of the whole project, is the absence of institutional consolidation mechanisms allowing the legislative branch to create methods for determining the effectiveness of government spending. This represents a severe limitation of taxpayers' ability to influence governmental policy through their representatives in parliament, which is unlikely to increase the level of transparency in the process.

An example taken from Britain provides insight into just how important this kind of public involvement is. The British government chose the average length of hospitalization as an indicator of the effectiveness of the country's medical institutions -- the shorter the better. This put many doctors in an uncomfortable position: They could either do their ethical duty and provide quality treatment, regardless of the length of the time it would take, or they could focus on keeping hospital stays as short as possible. The association representing the country's oncologists finally convinced the government to switch to more effective indicators, but only after making its case in Parliament. Such an outcome would be unlikely in Russia, as the Duma has no role in setting criteria.

There are two already-existing problems that the new code failed to address that will continue to hinder reforms of the budget system.

The first problem is interdepartmental wrangling between the Audit Chamber and the Federal Financial Monitoring Service, which has fueled skepticism that the new system will be able to tighten controls over state spending Neither the Audit Chamber nor the Federal Financial Monitoring Service, or any other agency for that matter, has been given sufficient auditing authority to move past the basic tracking of expenditures and on to making recommendations to ensure that programs are actually achieving federal policy targets. Agencies performing this function are in place, for example, in Canada. All the same, the fact that criteria have at least been introduced to gauge the effectiveness of government spending will make the Audit Chamber's life easier.

Another difficulty for the Finance Ministry in switching to a system of targeted medium-range budget planning is the human factor. The problem is that not enough has been done to provide standards in the job descriptions and contracts of bureaucrats that could be used to measure their performance. As a result, there is no way to put in place a system of bonuses that could be used to help increase productivity.

All of this said, the biggest risks and contradictions generated by the new Budget Code are related to the treatment of regions and municipalities.

One risk is generated by the fact that there will be a transition period during which the regions and municipalities will switch over to the targeted budget-creation system, even though the federal government will already be operating according to this standard. During this period two different systems will be in operation at the same time: One oriented toward results at the federal level and another, in most regions and municipalities, focusing on spending. If the budgets at lower levels are formulated according to a different rationale, then the federal budget becomes more of a strategic declaration than an instrument of strategic planning. Any relatively competent administrator at a lower level is going to focus on the spending estimates and not worry about the logic of the targets.

Meanwhile, at both the regional and municipal levels there is already significant experience in drawing up budgets based on targets and results, as well as existing mechanisms for their adoption.

One region that could provide a useful example for other regions (and possibly at the federal level as well) is that of Chuvashia. The republic not only involves legislative bodies in the establishment of criteria to judge the socio-economic effectiveness of different expenditures, providing for a transfer of information between government and society, but provides for competition between proposals from different agencies. There have been 40 of these competitions so far this year alone, which provides the executive branch in the republic real alternatives in achieving its strategic objectives.

At the municipal level a good example can be found in Surgut's gradual implementation of so-called service budgeting. The main advantage of this approach is that it is based on the services provided by the government. Given that municipalities deal directly with the people who benefit from such services, this model is considered optimal for local government. As the Surgut case shows, the main difficulty in implementing this model is apportioning the results of city agencies in a way that conforms to the traditional concept of one agency, one service. If this isn't done, the responsibilities of individual city officials become unclear and the whole point of going over to a result-oriented budget is lost. For this reason, Surgut is pursuing administrative reform as it introduces the new budget rules.

The second problem with establishing the new system in the regions and municipalities is the new code's lack of provision for a working group to improve coordination between the federal, regional and municipal levels. This complicates procedures for reaching agreement between the government and various bodies in the State Duma and the Federation Council, in particular on interbudgetary transfers. This is vital for preventing inappropriate decisions made at the federal level from generating harmful results in the regions and municipalities.

It is clear that the latest version of the Budget Code falls short of many of the expectations people had for it. Thus, it shouldn't come as a surprise that the Federation Council passed amendments to the code on April 18, and at the same time created a working group under Budget Committee deputy head Vladimir Petrov to formulate further amendments. Judging by the questions raised by a number of senators, including those touching on the lack of clarity in expenditure indicators and the unclear legal status of state expenditures not covered in the budget, what we are seeing is the beginning of work on the next new Budget Code.

Alexei Kuzmin is prorector and Mikhail Zorin a researcher at the Higher School of Management. This comment appeared in Vedomosti.