Prepared by Kamran Ismailov Willamette University Atkinson Graduate School of Management Salem, Oregon, Spring 2002 Budgeting in the State Governments of Ukraine and Azerbaijan

2 The Government Expenditures * National Defense * International Affairs * Income security * Health * Medicare * Social security * Veterans Services * Education * Commerce * Administration of Justice * Transportation * Environment * Energy * Community development * Agriculture * Social security * Interest * Education * Science/space/technology * General Government

3 The Main sources of the Government’s revenue * Taxes (Individual, Corporate and Social Insurance) * Excise taxes and Public Fees * Customs duties – Tariffs, etc. * Foreign bonuses * Utility pays * Government Reserves

4 * Political Decentralization * * Political Decentralization * Administrative Decentralization * Fiscal Decentralization * Privatization * Deregulation Types of Decentralization

5 Budgeting System of Ukraine Govern‘t Verhovna Rada (Local Parliament) Cabinet of Ministers Ministry of Finance Annual Budget of Ukraine Republic Local-Regional Municipalities Annual State Expenditures & Programs Monetary collections of Ukraine Republic

6 Ukraine Govern't tries to answer: What are responsibilities of state and local governments in respect to the budget expenditures? How should these expenditures be funded? How should the gap between revenues and expenditures be covered? If decentralized how to regulate the budget relationships between the state and local govern’ts? How to ensure full coverage on the social protection in the state and local govern'ts’ programs? How to separate the revenues between local and state govern’ts?

7 What is the answer? The answer is: Create the budget codes that will divide expenditures into groups according to the principle of subsidiary. The budget codes will clearly define function, where and how each budget expenditure should be financed. Regulate budget transfers between State and Local Self-Government entities Local Budget expenditures Expenditures taken into account on transfer calculations Expenditures NOT taken into account on transfer calculations

8 Ukraine - Local Self-Govern'ts’ revenue sources These are: State duty (related to local budgets) License fees for some economic activities Fee for state registration of business entities Trade patent fees for some business activities Proceeds from penalties imposed by executive bodies of local Radas Single tax for small business entities related to local budgets The land tax – 50% stays in local budgets

9 Oblast budget 25% of the personal income tax 25% of the land tax license fees for some business activities Rayon budget 50% of the personal income tax collected in local communities 25% of the land tax within the limits of rayon License fees, state registration fees, and fines Ukraine - Local Self-Govern'ts’ revenue sources Oblast Rayon

10 Ukraine Govern't – Local borrowings Budget codes stop loans from other budgets Only credit and financial orgn’s may grant loans to local budgets Mechanism of borrowing is available only for city Radas with population above and oblast Radas Budget codes limit the debt by 10% of annual expenditures Each outstanding payment will be penalized by the 5-year ban to make borrowings

11 Ukraine Govern't - Advantages of the Budget Reforms Adoption of Budget Codes is break thorough of the Public Reforms Social and Economic development of local communities Transparency of Nation budget structure has grown Created a great public support in the country in reforming of the Public sector Clear procedures for loans and local budgets were provided Fundamental basis for corruption prevention is set up in Public Financial sector

12 Delivers a stimuli for local economic development, expansion of taxation base, growth of receipts from tax payments, ensuring development of regions and support depressive zones. Delivered coherent and complete specification of all budget process procedures Financial resources and their receivers are specified and defined Support of local Govern'ts in tax collection Ukraine Govern't - Advantages of the Budget Reforms

13 Methodological – shortage in professional experts to conduct reforms Political aspects of Public Reforms by the State Government Legal irregularities or gaps and drawbacks in local legislation Bureaucratic elite – this layer of social strata is losing a political power Common Ukrainian mentality – almost habitual disrespect of law by Ukrainian citizens Ukraine Govern't - Obstacles of the Budget Reforms

14 Azeri Govern‘t Budgeting System Milli Mejlis (Local Parliament) Cabinet of Ministers Ministry of Finance Annual Budget of Azeri Republic Local-Regional Municipalities Annual State Expenditures & Programs Monetary collections of Azeri Republic

15 Azeri Government’s Policy Agenda Second Structural Adjustment Credit (SAC-II) Second Structural Adjustment Credit (SAC-II) Between Azeri Govern’t & IMF PRGF in July 2001 In particular, SAC-II will support: public sector reforms to strengthen: (i) management of future energy revenues; (ii) policies and institutions for public expenditure management; (iii) poverty monitoring, social services and safety nets, especially for the vulnerable refugee and internally displaced groups.

16 Azeri Government’s Policy Agenda * Establish public sector institutions * Adopt policies conductive to private sector * Preserve human capital * Minimize the hardship on vulnerable groups * Reforms in Public Expenditure Management * Establish public sector institutions * Adopt policies conductive to private sector * Preserve human capital * Minimize the hardship on vulnerable groups * Reforms in Public Expenditure Management

17 Azerbaijan – Country Assistance Strategy, FY00-02 Improve Expenditure management (including auditing) Revise generic budget law Increase budget coverage Improve budget preparation procedure and disclosure Improve budget execution procedures Reform public procurement Extend coverage of treasury Create a supreme audit institution

18 Azerbaijan – Country Assistance Strategy, FY00-02 Design and Implement Administrative reforms (including civil service reforms) 1. Improve the transparency 2. Implement a civil service reform strategy 3. Implement the licensing regime 4. Implement a revised pay policy for the budgetary sector

19 Azeri Govern't Problems Absolute education, old soviet mentality Red tape, self – established rules Corruption, bribing, dragging reforms in sense of authority power losses Recruiting, old generation, staff is not motivated Less involvement of Graduates from Foreign Universities War in Nagorny - Karabakh