Fiscal Capacity: an Overview of Concepts and Measurement Issues and their Applicability in the Russian Federation

Intergovernmental fiscal relations in the Russian Federation have evolved significantly since the onset of economic reforms in 1991. Since then, the Russian government has set out to replace the old Soviet system of expenditure norms and negotiated transfers with a more stable and transparent system of fiscal federalism that is compatible with a free market economy. Fundamental to the development of a system of intergovernmental transfers is an understanding of the concepts of fiscal capacity and fiscal effort. These concepts are presented in Section II. In Section III, this note will discuss a variety of ways in which fiscal capacity and effort can be measured; benefits and shortcomings of each of these measures will be discussed in detail. Section IV will provide a summary and make some concluding remarks. The next technical note on fiscal capacity will conduct an analysis of the measures available to the Government of the Russian Federation based on currently available data and techniques.Working Paper Number 97-03