Federal transfers: Leeway to higher regional debt?

The research focuses on the impact of substituting own revenues in Russian regions by federal intergovernmental transfers on the amount of public debt using the concept of vertical fiscal imbalance (VFI). Vertical imbalance emerges as a result of spending assignment exceeding revenue streams at the lower levels of the budgetary system. It leads to a lack of own revenues and creates risks of accumulating deficits and debt buildup. Vertical imbalance is analyzed as a whole and by its components - the deficit of a subject of the Russian Federation and the types of intergovernmental transfers. Shared revenue sources with sharing rates differentiating among regions and allotted at the discretion of regional authorities to local administrations are considered to be regional intergovernmental transfers as well. Quantitative analysis was carried out by panel regression with fixed effects of regions and observation periods based on the data for 2011-2020. It is found that vertical imbalance does not have a significant impact on the amount of debt, as federal intergovernmental transfers do not restrain growth of tax base or efficiency of spending, as laid out by the theory. We refer the low risk of negative consequences to the low powers of regions in generating revenues and big primary spending obligations.