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Volume 26, Number 2, 2018
31
Implementation of world experience in using financial instruments
to stimulate regional development in Ukraine
M. Kuzheliev
ORCID 0000-0002-7895-7879
A. Nechyporenko
ORCID 0000-0003-2494-1465
University of State Fiscal Service of Ukraine, Irpin, Ukraine
Article info
Received19.03.2018
Accepted 30.04.2018
University of State Fiscal Service of Ukraine, Irpin, Ukraine
31, Universytetska str., Irpin, Kyiv Region, Ukraine, 08201
[email protected] [email protected]
Kuzheliev, M., Nechyporenko, A. (2018). Implementation of world experience in using
financial instruments to stimulate regional development in Ukraine. Fundamental and
applied researches in practice of leading scientific schools, 26 (2),31–36.
The article deals with the world experience of using financial instruments for stimulating regional development. It is determined that Ukraine's choice in the direction of European integration necessitates the application of new approaches to regional development, the definition of goals, priorities and instruments for the implementation of regional policy. Under such conditions, the issue of studying the implementation of world-wide experience in using financial instruments for stimulating regional development acquires important theoretical and practical significance. The experience of the developed countries of the world, in particular the European Union countries, in the field of regional development is beneficial for Ukraine. The necessity of implementation of world experience of using financial instruments of stimulation of regional development in Ukraine in the conditions of budget decentralization is determined.
Keywords: financial instruments; regional policy; regional development; fiscal decentralization; intergovernmental fiscal transfers; tax breaks.
Introduction
Current economic processes in Ukraine require new approaches to using financial instruments to stimulate regional development. One of the main tasks of the present day is the search and use of financial instruments for the efficient organization of inter-budgetary relations, through which the optimal redistribution of financial resources between the state budget and local budgets is implemented, taking into account objective differences in the levels of socio-economic development of certain territories, and also capable of providing a balanced development of the country by means of financial equalization in order to fulfill the constitutional guarantees of the population regardless of place of residence.
An important role in the system of inter-budgetary relations in the conditions of economic transformations is given to the transfer policy of the state as an instrument of
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territories in the range of 20-40%. If this figure is above 40% - residents of the depressed territory feel depressed (feeling of a strange state), if below 20% - the incentive to increase budget revenues is lost (Tkachuk, Fischko, Ganushchak, 2006).
In today's conditions of instability of the economic system of Ukraine, the solution of financial issues is a significant lever of its stabilization and sustainable economic and social development of regions, as well as of the state as a whole (Kuzhelіev, Zhytar, 2015). The financial instruments used to stimulate regional development, which are used in Ukrainian practice, prove their low efficiency, and their list is not sufficient. Therefore, in order to ensure stable regional development in Ukraine and to provide a new quality to the policy of financial equalization of territories, the implementation of the experience of developed countries, where such policy is effective and applied effective financial instruments for stimulating the development of regions, becomes actual.
The purpose of the paper is to develop
recommendations on its implementation in Ukraine based on the study of world experience in using financial instruments to stimulate regional development.
Results and discussion
Regionalization and decentralization have become the guiding principles of European and world politics, which has influenced the growth of the role of multi-level governance and significant changes in the organization of the regional level of governance. The decentralization processes taking place in most European countries are accompanied by the introduction and implementation of the principles of sound management under the influence of European regional policy.
Aligning regional development is an important aspect of the European market economy and defines the European Union's policy in the field of regional development. In the European Union (EU) the issue of regional policy focuses on the 50s of the twentieth century. Over a long period of time, the EU countries were guided by the goal of equality in the development of regional policy, but since the mid 70's of the twentieth century gradually more and more attention began to be devoted to economic efficiency. Regional policy began to focus on economic growth through the development of competition and the reduction of unemployment (Stroyko, 2015).
Thus, the experience of European countries with a unitary system and a hierarchy of government (like Poland, France, Italy, etc.), similar to Ukraine, in the formation of local budgets and intergovernmental fiscal relations shows that these countries have similar ratios of national revenues and local revenues transmitted, transfers . The most common are general non-targeted transfers - subsidies that prove their effectiveness, enabling local governments not only to independently determine the priority areas of spending money, but also to promote their rational use. In Ukraine, subsidies also play a significant role in the transfer structure. However, their use is not always rational, and they provide only current consumption. It would be more efficient to increase the share of targeted transfers,
especially those aimed at the development of territories. Decision-making models for intergovernmental transfers in foreign countries are based on direct relations between the state budget and local budgets and the formal approach to determining the amount of transfers (Lunina, 2006).
Also, for many European countries, widespread use, especially by the government, of controlled, targeted transfers is characteristic. For example, in Sweden, by the beginning of the 1980s, three-quarters of the subsidies were targeted, but in the future they declined and amounted respectively to 25 and 18% for urban and rural communities. The legal basis for allocating transfers is the coverage of those financial expenses of communities, which, according to the legislation, are aimed at implementing limited powers. The practice of providing subventions for the financial needs of local budgets is very widespread, especially in the USA, Italy and Japan. For example, in the United States federal funds are provided to states in the form of targeted, block and program grants. Targeted subsidies are used in France (Kostyrko, Velenteichyk, 2016).
The German budgetary system is characterized by a three-tier system of intergovernmental equalization. Firstly, the profit equalization is carried out through the receipt of value added tax to the budgets of the subjects of the federation. The second type of intergovernmental equalization is the redistribution of budgetary resources between land budgets without interference by the federal government. As a criterion for determining the recipients of the transfer, the regional fiscal potential is calculated, which is the sum of regional budget tax revenues with adjustments to the tax benefits granted and the amount of tax revenues of local budgets, adjusted in turn by the population density, the degree of urbanization. The third type of financial support for regions in Germany is direct federal grants for some territories. At the same time, transfers to areas with a low level of budget revenues, as well as territories with a high level of budget revenues as compensation for the high level of equalizing payments in favor of the eastern lands, transfers to special needs of certain lands, transfers to repayment of arrears by regional budgets, transfers to the budgets of eastern lands differ to stimulate investment and economic growth.
The overall effectiveness of the system of intergovernmental fiscal relations in Germany is determined by a well-established and balanced system of factors that accurately reflect the peculiarities of the state: the degree of decentralization of the budget system, the existence of regulatory taxes, the share of central government revenues and expenditures, and the scope and methods of providing financial assistance (Rudenko, 2012).
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system. This allowed to minimize the above-mentioned problems and create conditions for the country's dynamic economic growth. At the micro level, decentralization contributed to improving the quality of public services, the socio-economic situation of cities and towns, the development of depressed regions, the growth of jobs and the slowing down of migration processes due to economic factors.
Due to budgetary decentralization in Slovakia, local self-government bodies have a solid financial base sufficient for their own functions. If by 2005 the share of transfers in the structure of the revenue part of the budget reached 60-70%, now about 70% of the municipal incomes and expenditures are based on their own sources, the rest being targeted subsidies from the state budget. At the same time, all of its functions are financed by local budgets exclusively at the expense of own revenues, while state transfers are targeted and aimed at financing functions delegated by the state. This allowed the formation of an effective budget system in which financial flows are transparent, and the efficiency of the use of funds is followed by a system of clear criteria.
In general, financial sources are distributed among different levels of government in such a way that regions and the government have a strong financial basis for their activities, while the state transfers to local budgets not because they cannot finance their minimum needs but to perform delegated functions. While fully responsible for the socio-economic status of the respective administrative-territorial unit, local self-government bodies conduct an active economic policy, including in the search and attraction of investors. This contributes both to the flourishing of the regions and to the high economic dynamics of the Slovak Republic as a whole (Zhalila, 2010).
At the current stage of Ukraine's development, fiscal decentralization is an instrument that provides local governments with the opportunity to find the resources needed to fulfill their assigned tasks. The acquisition of wider powers of local self-government bodies, in turn, should intensify the motivational factor in expanding its own financial base at the expense of domestic sources and developing appropriate mechanisms for the accumulation of additional financial resources to local budgets. Therefore, in order to ensure effective regional development in Ukraine there is further fiscal decentralization taking into account world experience, in particular the implementation of the positive experience of Slovakia. Implementation of budget reform measures in the context of fiscal decentralization in Ukraine will help ensure a stable revenue base of local budgets, as well as increase their financial capacity and efficiency of using budget funds.
It is worth noting that in Ukraine, starting in 2015, a new system of intergovernmental relations has begun, based on a new mechanism of horizontal equalization of the capacity of territories, the components of which are basic and reverse grants. The positive moment of the new system of intergovernmental equalization is that the balances of unused subvention funds at the end of the budget period are kept on the accounts of local budgets with a view to their use in the next budget period, taking into account their intended purpose. In addition, local councils were able to transfer funds for medical subventions in the form of an intergovernmental transfer to other budgets for the
provision of medical services at the place of service of the population.
Thus, steps have been taken to improve the efficiency of the horizontal equalization mechanism, which is implemented by the tax on personal income and income tax on the basis of the methodology for calculating basic and reverse subsidies. The mechanism of distribution of educational and medical subventions in the context of corresponding local budgets is realized on the basis of the formulaic approach, defined by the Cabinet of Ministers of Ukraine. The volume of these subventions is approved in the State Budget of Ukraine separately for each of the relevant local budgets.
Nevertheless, the need to develop and use common state standards of quality of public services in all spheres should be determined, which will promote a transparent, equitable and reasonable distribution of intergovernmental transfers between budgets of different levels. Implementation of the mechanism of state quality standards will determine the dependence of social priorities on the volume of expenditures of local budgets, which will create conditions for the effective achievement of social goals, the use of budgetary funds, ensuring the targeting of social benefits.
Budget investment is an important and at the same time a controversial budget financing instrument. Budget financing of investment projects consists in state financing of investments connected with allocation of budgetary funds for maintenance of investment and innovative activity. Budget investments can be made in the form of financing of state capital investments, project financing of investment projects, acquisition of a share of shares or rights to participate in the management of the enterprise. In the context of the economic crisis, budget investments must play a stabilizing role and contribute to the economic development of the state. W. Easterly and S. Rebelo note that the main purpose of budget investment is the development of infrastructure, which in general has a positive effect on the social and economic development of the country (Easterly, Rebelo, 1993).
In Ukraine, budget investments are made through financing of state target programs, investment projects, granting of subventions and budget credits. Investments through the financing of state programs have both advantages and disadvantages. Among the main advantages can be called well-regulated target direction of budget funds. However, as the results of the audit of the use of budget funds show, their effectiveness is rather low. Partially low efficiency is laid at the stage of program formation due to poor quality of its preparation, partly due to incomplete or untimely financing of all stages of the program. Financing of investment projects at the expense of budgetary funds involves competitive selection of the most effective and most necessary projects at a certain stage of economic development. However, due to the lack of well-defined priorities for state development and the lack of transparency in the selection procedure (including the lack of common standards), budget funds are not always used effectively in this area. Therefore, there is also a need to improve the approach to defining the list and volume of investment subventions (Paentko, 2016).
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to lower-level budgets and aimed at increasing or updating fixed assets. The distribution of investment subventions is based on indicators of economic and social development (volume of industrial and gross agricultural products, fixed capital investments, wages). Financing in accordance with the budget legislation is made in the amount of 5% of the estimated cost of projects of urban, settlement and rural budgets.
There is a need to improve the mechanism of distribution of investment subventions in order to increase transparency, objectivity and create incentives for local governments to solve local problems. It is advisable to identify the territories whose socio-economic indicators have deviations from the average in Ukraine by 25%. The status of territories that require additional financial support for socio-economic development should be determined for 10 years without revision every year, with the aim of increasing the development rates without affecting the size of the investment subvention. The allocation of investment subventions must be made taking into account the efforts of local governments to enhance the impact on socio-economic development by applying a stimulus factor (Dalievska, 2016).
Additional financing can be provided at the expense of the state budget and the State Fund for Regional Development. Improving the methodology for determining the volume of investment subventions will increase the interest of local self-government in ensuring the economic growth of administrative-territorial units.
The experience of providing direct budget investment in the USA, where they were aimed at supporting small innovative business, is successful. Funds were provided under low-interest budget loans. All federal agencies, whose budget for research and development exceeded $ 100 million. USA, the mandatory participation in SBIR (Small Business Innovative Research) was legally binding (Lobas, 2012). As a result of the implementation of this program, the United States achieved a high level of development of small business, including innovation.
Thus, the experience of economically developed countries suggests that the direction of budget investment to the point of growth of the economy ensures the stable development of national economies and the persistent position of countries in the world market. This is not only due to the development of priority sectors of the economy, but also due to the stimulation of aggregate demand in general. Implementation of the world-wide experience of budget investment in Ukraine is quite feasible and appropriate, especially as regards the practice of financing investment projects. The introduction of such a practice in Ukraine will help increase the efficiency of using budget funds.
In our opinion, the most important task that Ukraine faces today is to improve the implementation of the reform of local self-government. It is she who has to ensure budget decentralization, delegation of powers to the center of the regions, and the allocation of sufficient sources of their own financial revenues, the main part of which is to provide an updated system of local self-government.
It is also important to ensure the maximum harmonization of the list of powers of local self-government with the fixed amount of financial resources, since their
non-compliance will determine the risks of non-fulfillment of functions, decrease of the quality of provision of public services.
Thus, the following steps should be highlighted in order to improve the transfer policy system as one of the principles for stimulating the development of regions:
1. Clear distribution of powers between public authorities and local self-government and long-term legislative consolidation of stable sources of revenues from local budgets.
2. Implementation of foreign experience in drawing up local budgets, which will allow for the further development of a specific region, as well as the use of positive experience with budget decentralization.
3. Continuation of the administrative-territorial reform, which should include the baseline and district level (due to consolidation), the larger they will be, the lower the expenditures, which in turn will be reflected in the revenue side of local budgets.
4. Stimulation of local self-government bodies in the socio-economic development of regions through the introduction of a stimulating component of grants. In European countries, there are examples of stimulating local self-government bodies through subsidies. Thus, in Poland, subsidies are associated with own measures to mobilize tax revenues, namely, raising the level of taxation for this authority leads to an increase in the amount of subsidy for the same authority. This creates incentives for local authorities to maximize their own sources of income. In France, the annual general grant increases annually by a percentage which is defined as the sum of the projected annual inflation rate and half of the actual percentage growth of GDP (Kostyrko, Velenteichyk, 2016).
The transfer policy of Ukraine, despite the reforms already undertaken, needs further improvement, as a significant amount of financial resources is spent on ensuring financial equalization. In order to address the shortcomings in this area and taking into account world experience it is necessary: to expand the list of own revenues of local budgets; introduce a mechanism for providing intergovernmental transfers, which would take into account the main macroeconomic indicators of regional development; to provide subventions from the state budget on the terms of joint financing with the local authorities of social and economic development projects. Implementation of the above-mentioned measures will help to strengthen the financial basis of local budgets, as well as ensure the use of transparent mechanisms for providing basic grants and increase the interest of local self-government in the implementation of regional programs.
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Netherlands and other EU countries - direct payments for pollution above the established limits, taxes, resource payments; Japan - environmental taxes; China - Resource Payments, Taxes, etc.
Together with domestic tax incentives for regional development, attention should be drawn to the global experience of using traditional tax incentives, such as tax credit and corporate income tax reduction. In more detail, consider the experience of countries such as Japan, Korea and the United States.
Thus, Japanese enterprises are granted a tax credit of 20% of the increase in research and development costs (hereinafter referred to as R & D). A tax credit may amount to a maximum of 10% of the tax liability. In addition, there is a tax credit of 6% of R & D investment in the basic technology sector (development of new materials, biotechnology, etc.) (Andrushchenko, 2006).
Tax incentives in the form of a reduction in corporation tax and capital gains tax contributed to an increase in investment in Korea in the 1980s. In this country a number of advanced technologies are allocated, in the development of which investment is invested in terms of maximum assistance. At the same time, the system of tax privileges provides for exemption from taxes on income for 5 years, reduction of the tax burden for the next 3 years, reduction of the tax on dividends and a number of tax privileges (Andrushchenko, 2006).
Tax incentives in the United States for small businesses include two lower tax rates of 15 and 28 percent, while private sector R & D has a hidden incentive in the form of giving the right to choose between assigning R & D costs as costs to record in their asset (Chichkan, 2013).
In general, it should be noted that various incentives for tax incentives or their combination are used to stimulate innovation abroad (Alekseev, Zheleznyak, 2012):
- Provision of research and investment tax credit (delayed tax payments in the context of profit-cost for innovation purposes);
- Reduction of the tax on growth of innovative expenses; - tax holidays for several years on the profit derived from the implementation of innovative projects;
- reduction of profit tax rates for custom and joint R & D; - connection of granting of privileges taking into account the priority of executable projects;
- preferential taxation of profits resulting from the use of patents, licenses, know-how and other intangible assets that are part of the intellectual property;
- reduction of taxable profits on the amount of equipment and equipment costs transferred to higher educational institutions, research institutes and other innovative organizations;
- deductions from taxable profits of contributions to charitable foundations, whose activities are related to the financing of innovations;
- transferring part of the profit of the innovative organization to special accounts with subsequent preferential taxation in case of use for innovative purposes.
In a market economy, support for innovation should be provided through effective tax incentives. However, there are a number of problems that hamper the development of innovation in Ukraine (Kuzhelіev, Zhytar, 2015, p.14).
Based on the experience of developed countries, in order to increase the efficiency of tax privileges in Ukraine, it is necessary to ensure the following conditions (Moldovan, Medvedkova, 2013):
1) introduce clear criteria for granting tax privileges (they should limit the scope of the applicants to sole proprietors who carry out transparent economic and financial activities and are in fact intending to develop production);
2) to formulate a system for assessing the effectiveness of the use of tax benefits, which should include indicators of economic, social and fiscal efficiency;
3) introduce restrictions on the maximum amount of tax credit. The size of the investment tax credit rate must not exceed 50% of the amount of the assessed income tax, and the size of the individual tax credit is 50% of the tax base. This balance is optimal in terms of maintaining a stimulating effect and protecting against significant budget losses.
Consequently, in today's conditions, the implementation of world experience in using financial instruments to stimulate regional development in Ukraine is extremely important, as the progressive development of the developed country's economy was conditioned by an effective fiscal policy of the state with a stimulating purpose. Despite the fact that privileges were granted mainly to enterprises located in specific regions of the country, the benefits of such policies were felt almost throughout the country. Investments in advanced and knowledge intensive sectors of the economy through tax incentives contributed to the development of the country as a whole and regions in particular. In turn, Ukraine, taking into account global experience, has to absorb and adapt it to its conditions. A clear and well-balanced fiscal policy will allow to overcome negative processes in the social and economic sphere and achieve balanced regional development.
Conclusions
The increased attention paid to the problems of regional development in developed countries is evidence that state regional policy should be considered as one of the most important mechanisms for ensuring sustainable regional economic development and based on regional development programs, and the use of effective financial instruments should become a priority task of the state in the direction of stimulating regional development.
Therefore, based on world experience in stimulating regional development, the key factors for the successful implementation of the state regional policy in Ukraine may be:
- improvement of inter-budgetary relations on the example of developed countries' experience taking into account national and regional peculiarities and conditions for the formation of local budgets;
- granting of tax privileges, in particular for enterprises engaged in innovation activity as a motive of economic development of the country and regions;
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- transparent legislative support, backed up by
financially sound programs supporting the development of regions and ensuring the implementation of the principles of the European Charter of Local Self-Government in Ukraine.
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