As table 3 shows, the total size of budget subsidies covers a significant portion of the expenses and is rapidly increasing. A large potential growth of subsidies is related to a forthcoming oil and fuel price rise and higher grain prices. Thus local authorities are deprived of freedom of action: the total expenditures on subsidy-related expenses, social, cultural and welfare programme expenses reached 80% of all expenditures already in the first half of 1992. With a new inflation surge the region will not be able to cover these expenses. Moreover, the fact that large subsidies are available influences the behavior of people and enterprises and leads to greater expenses.

The general approach is made more specific as regards subsidies of different kinds.

HOUSING AND COMMUNAL SERVICES SUBSIDIES.

These subsidies are prepared to be transferred to incomes of individuals along with the preparation for changing the scheme of financing the objects of the social infrastructure which are part of enterprises' assets.

With the Nizhni Novgorod oblast as a model, the scheme is shown in the chapter "Social Infrastructure Conversion".

As an interim solution it was suggested to single out communal services payments (separating them from the apartment rents), garbage collection and removal payment, and elevator payment, as well as to double the central heating hot water supply payment. As a result, the monthly sum of the rent and the communal services payments will on the average be 2.2 times higher and will total less than 10% of the average per capita income. A corresponding draft regulation is now under consideration by the region and city councils.

SUBSIDIES TO COVER PASSENGER MOTOR TRANSPORT LOSSES.

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The region is searching for various ways of solving the problem of financing passenger motor transport.

a) The regional administration's finance department has prepared proposals to impose a transport tax on the payroll fund of city-based enterprises and organizations irrespective of their affiliation and form of property. For the period of June-September 1992 the tax rate was 2.8%. The payment sum is attributed to a product cost. The regional council has twice rejected the proposal to impose a transport tax. However, the Russian Federation Law "On the Budget System of the Russian Federation in 1992" gives the executive powers of republics, areas and regions the authority to levy such a tax, thus allowing the regional council to reconsider it.

b) Beginning in September a new fare system is implemented in the region's cities. Its introduction is related to the apparently ineffective fare system based on the use of cash-boxes and fare-coupons, with fare rates

constantly increasing (plus passenger discomfort, the growing numbers of passengers not bothering to pay fares, and substantial revenue losses).

The essence of the system elaborated by the transport department of the region's administration is as follows:

- cash-boxes and punches will no longer be used;

- special tickets valid for different periods (one day, five days, a month) will be introduced. Season tickets are protected against forgery;.

- tickets costs include discounts depending on the validity period. For example, with the current fare of 1 rouble, a daily ticket will cost 3 roubles, a weekly ticket - 15 roubles and a monthly one - over 65 roubles;

- passengers entitled to fare discounts will keep their discount season tickets;

- bus drivers will sell single ride tickets at a higher rate of 3-5 roubles;

- the fine for riding without a ticket is increased to 50- 100 roubles; a special ticket-collector service is being set up. However, throughout the period of implementation of the new fare system (2-3 months) fines will only be issued in exceptional cases.

The use of the system will make it possible to:

- receive additional revenues not only from higher fare rates but from an improved fare payment system as well; - reduce cash-box and punch related expenses as well as expenses for maintenance of personnel;

- provide more flexible responses to further inevitable fare increases;

- make the fare system more convenient for passengers.

c) Funds from the region budget and extra-budget reserves have been allocated for the purchase of new buses and spare parts; their delivery has already begun. This will enable improvement of the service on longer bus routes.

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SUBSIDIES ON MEDICINE (THE PHARMATSIA ASSOCIATION).

At present more than 340 medicines are price-controlled. The sum of subsidies is increasing and will keep on rising because of the rouble's ever rising exchange rate. It is suggested that a list of medicines with restricted prices be limited to 14 items, while the whole sum of the subsidies be used to finance the purchase of medicines by medical institutions. Diabetes and asthma patients will retain their benefits.

This will make it possible to reduce expenses, and increase the effectiveness of the medical system (prescriptions, hospital treatment).

COMPENSATION OF THE DIFFERENCE IN PRICES FOR SOLID FUEL USED BY THE POPULATION.

The region has set limits of solid fuels issued to individuals at fixed prices (3 tons of bituminous coal, 10 cubic meters of firewood, 5 tons of peat briquettes). As an interim solution fixed prices were doubled. Extra fuel is sold at free prices which are 9 to 13 times higher than the retail prices. Various calculations of probable subsidies per house over the year have been made.

An individual consumer system of subsidies is proposed. Consumers make requests to purchase fuel and gives their savings bank account numbers. RAYGORTOPSBYT (district and city fuel supply centres) make up lists of clients and their account numbers. Centre employees keep records of fuel received by each house. From a respective budget account the subsidies are transferred to a client's account. All fuel is sold at free prices.

The above system cannot be introduced at this stage because of the likely rapid increase of beneficiaries of subsidies and volume of the fuel supplies. Only one third of all consumers currently buy fuel through the fuel supply centres.

BREAD SUBSIDIES.

In the Nizhni Novgorod region, bread and bakery products are now sold at free prices. However, facing a further price rise brought about by higher costs of newly harvested grain, the idea is now being considered of fixing the price of one type of bread - Darnitsky rye bread - and mixed fodder sold to the population.

A step like this one will result in a tangible alteration of the bakery product consumption pattern and a 50-60% increase in the rye bread output. By the end of the year bakeries will need about 1.5 billion roubles in budget subsidies. Farmers are likely to feed cheap bread to their cattle. A relatively cheap bread price will also encourage its removal from "border" cities (Navashino-Murom, for example) and further beyond the regional boundaries.

Therefore, fixed bread prices should be made available as a stand-by for situations of extreme social discontent, with their actual use envisaged as a last resort only.

The policy of transferring subsidies to population incomes requires that various consequences of each step be calculated. Each step with regard to a specific service (or commodity) should be gradually introduced, that is, all decisions taken should be spaced in time. It is also very important to explain to the population the reasons for, implementation and consequences of each step.

In the absence of consistent economic policy pursued by the federal government and under the burden of inflation, the local government faces great uncertainties when planning the budget outlays. To adapt to these uncertainties it is advisable to:

- use every opportunity for concentration and targeted expenditure of financial resources (see "Manipulating resources of the extra-budget funds");

- form considerable reserves in the region, city and district expenses which grow along with inflation. The Nizhni Novgorod region consolidated budget for the second half of 1992 provides for such a reserve totalling 7.2 billion roubles or 25% of the expenses. The district and city budgets also provide for such reserves totalling 13% of all expenses that are intended to be used for increasing expenses when prices go up;

- adhere to a principle of steady rates of tax payment allocations into the budgets of every level. The regional administration should stick to this principle when dealing with the central government and follow it in preparing the rates of tax allocations into district and city budgets. Out of 50 district and city budgets in the Nizhni Novgorod region, 41 budgets have a similar rate for corporate income tax allocations - 12%, while 44 territories have a similar rate for VAT allocations - also 12%. All the other territories have individual rates;

- identify protected items in the budget outlays and apply the procedure of even reduction of planned appropriations of unprotected budget items depending on actual revenues received.

When making up the regional budget for the second half of the year, priority was given to housing and communal services, solid fuel and the agroindustrial complex.

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