Inter-budgetary aid in Russia: Political and economic factors

Abstract

In federal states with large inter-regional differences, an important problem is the effective redistribution of resources through the federal budget. Inter-budgetary assistance in such states performs a number of functions: equalizing, social, stimulating, stabilizing. The distribution of federal transfers between regions is influenced by macroeconomic factors, as well as the institutional environment and political processes. This study aims at identifying the influence of political and economic factors on the distribution of federal transfers between the constituent entities of the Russian Federation. The multifactorial model shows the dependence of the level of federal assistance to the regions in 2020 on the logarithm of own sub-federal budget revenues per capita, the level of social burden on employees, investment activity, area per capita, and the index of political loyalty of the regions. The regionʼs political loyalty index is built on the basis of official data on voting results and voter turnout in the 2016 State Duma elections, the 2018 presidential elections, and the 2020 constitutional amendment referendum. Evaluation of the model by the least squares method confirmed that federal transfers in the Russian Federation perform equalizing, social, and stimulating (investment activity) functions. An ambiguous relationship was found between the level of federal assistance and the regionʼs political loyalty index, which is expressed in clear support for the most loyal regions and a differentiated attitude towards less loyal regions, some of which could receive incentive payments. Research findings can be used to manage institutional environment to increase the effectiveness of inter-budgetary assistance in Russia.