Research : the lost decade of the Russian budget

Russia under Putin has continuously increased its spending on social security, defense industry, bureaucracy. It is possible to do rising in price, and in recent years, before the collapse of 2014, obscenely expensive oil.

That all changed in 2014. The authorities continued to spend money to send hundreds of billions of rubles on anti-crisis program of support industries to pay for the promised increase in pensions and benefits, but sanctions have closed for the government the international financial market, and the tense geopolitical situation are forced to spend on its military more and more. The collapse in oil prices has led to a dramatic reduction in oil revenues, and the Treasury had to spend all the savings reserve funds.

The turning point was the year 2016, after which the budget will miss more than 2.6 trillion rubles oil and gas revenues (compared to 2014), and their share in total income is reduced to 36% (compared to 50% two years ago). Costs reached a peak because of the support of defense enterprises, and the budget deficit will rise to a maximum of six years. The government decided that further so to live, and was prepared to tighten their belts.

Russia is poorer than you think

In nominal terms the budget expenditures in the next year decrease for the first time since the early 2000s, although very slightly, but revenue is expected to grow by 2019 11% relative to the level of the current year. Due to the rapid growth of the revenue authorities expect to reduce the budget deficit to 1% of GDP in 2019, compared to 3.7% of GDP by the end of 2016.

A somewhat different picture opens, if you look at the dynamics of the budget in real terms — at constant prices (counting methodology, see “How we felt” in the end of the study). It turns out that the expenditure budget is reduced from 2014, that is, for the third year in a row, which is intuitively consistent with the feeling of the infamous “no money”. And by 2019, if all goes according severe plan of the Ministry of Finance, the real cost will shrink by 15.7% relative to 2016. So right now, Russia is approximately in the middle of a five-year cycle of compression of budget spending in real terms.

The real income over the coming three-year period, almost do not grow, hovering around 13 billion rubles of the 2009-2010 level. By the end of the 2019 income, adjusted for inflation, will not exceed comparable values in 2016.

Costs are reduced in parallel with economic activity (GDP in 2016 will be reduced for the second year in a row). It turns out that the Russian authorities chose to follow the so-called counter-cyclical policies and cut the budget when the economy is in recession. That is acted troubled Eurozone countries after the global financial crisis of 2008-2009, it did not help to revive the economy.

Some experts, in particular from the economic faculty of Moscow state University, in its opinion on the budget 2017-2019 years, I believe that in the current economic crisis, the Russian fiscal policy should be countercyclical, that is, actively stimulate economic growth. The deficit is increased due to privatization and domestic borrowing, and fiscal consolidation can begin then when growth resumes. But the authors of the budget from the Ministry of Finance with such a scenario do not agree.

Income: fidelity VAT and there petrodollars

In the era of oil prosperity, income from foreign trade, emerging mainly from export duties on oil, gas and petroleum products, brought to the state from 30 to 41% of total revenue, is evident from the data . The present low oil prices led to a reduction of this share is below 20%.

Against the background of falling incomes, which directly depend on world oil prices, the structure of budget revenues has been changing dramatically before our eyes. The authorities began actively to make up for the lost oil and gas revenues the increase in revenues from domestic taxes (VAT, excises), as well as an increase in the tax on mineral extraction (met), which at low energy prices covers the reduction of export duties.

In the end, as follows from the data the share of revenues from domestic VAT and excise duty will increase by 2019, more than 10 percentage points over 2014 and will exceed 30%. Authorities have linked a significant portion of the growth from VAT with the improvement of administration (ASC-VAT-2, the automated control system for the payment of the tax). From 2017, the government significantly increases the excise tax on tobacco and alcohol, introducing excise tax on electronic cigarettes and nikotinsoderzhaschie liquid. Furthermore, the draft three-year budget relies on a number of “mobilization” decisions, such as the collection of state-owned companies and the state 50% of profits as dividends.

Budget expenditures: in war and peace

Security forces, military and social support — that is a major part of the Federal budget expenditures.

From the point of view of expenses of the Russian budget and social power. The largest share in the costs traditionally is a section “Social policy” (social benefits, transfers to the Pension Fund, etc.), by 2019, these costs reached nearly 30% of the total budget.

In 2016 with the social costs comparable to the cost of the defense (of 27.1 and 22.8%, respectively). But in the next three years defence expenditure will be reduced and will not exceed 16,7% of expenditure, of course, if the military is not prolobbirovat, as in 2016, a sharp increase compared with the planned. In the meantime, the sequestration of military spending, seems quite consistent with the “calming” tone of the recent message of Vladimir Putin to the Federal Assembly: “We do not want confrontation with anyone, we don’t need it: neither we nor our partners, nor to the world community. Unlike some foreign colleagues who see Russia as an enemy, we are not looking for and never looked for enemies.”

Another “power” article — the cost of national security — in recent years remained at the level of 12.5–15.5% of costs overall, but had dropped to 11.4% in 2016. During the next three-year budget spending on law enforcement and investigative agencies, internal troops and special services will consistently balancing around 11% of the total budget expenditures.

Spending on health and education have traditionally been seen as investments in human capital, and in terms of the Federal budget, these investments are not doing well. But relatively low (and declining) Federal expenditures for this purpose should not mislead: if you look at the budget system as a whole (Federal budget, regional budgets and extra-budgetary funds), the numbers look quite differently since the bulk of expenditure on education and health care falls on the shoulders of the regions. For example, in 2015 the total costs of the Federal centre and regions on health care amounted to 22% and education 23% of total expenditures of the budget system. This is comparable with defense spending, whose share in the consolidated budget accounted for 24%.

What is the optimism of the Russian debt

The national debt is not the biggest problem in Russia. At the end of 2016 it will account for just over 16% of GDP, while, for example, the public debt of Eurozone countries exceeds 90% of GDP, US debt is 100% of GDP. But the authorities are gradually increasing and its not going to stop: it is national debt should help Finance the budget deficit with the exhaustion of reserve funds.

In 2016, the amount of foreign (translated into rubles at the exchange rate from the forecast of Ministry of economic development) and domestic public debt is expected to grow to 653 billion rubles in 2017 growth is expected to reach 1.48 trillion rubles, in 2018 — 1,54 trillion In 2019, the authorities plan to slow the pace of borrowing — to 1.41 trillion. Thus, in 2019, the size of the national debt was $ 15.4 trillion, which is slightly less than the total budget expenditures in the same year.

In terms of depletion of reserves, government loans to be an important source to cover the budget deficit. Accordingly, the annually increasing debt service costs. Last year they amounted to 556 billion rubles, but by 2019-mu reached 870 billion rubles.

The authorities rely on internal borrowing: in 2016, for example, their share in the total amount of debt is 66.7%, and in 2019 its size will increase to 75.2%. That the Ministry of Finance rely mainly on domestic borrowing, the head of the Ministry Anton Siluanov said in June at the St. Petersburg economic forum. “Because external borrowing, see — trying everywhere sticks into our wheels. You can, of course, to enter the market of external borrowing more aggressive, but you have to understand that investors do not want to quarrel with Western authorities,” he explained.

All the mysteries of the state budget

In the budget, a high proportion of non-transparent costs that you can include as classified waste, and with some stretch provision, passing under article “other expenses”. Often authorities tend to classify the expenditure on the military and security forces.

Budget expenditures are not always transparent or rather transparent only in part of the articles. The share of classified spending has steadily increased since 2012 — if then it was 11.6%, in 2016 will increase to 21.8%, which will be a post-Soviet high. But next year the government will reduce the secret expenses, and in 2017 they should be only 17% in 2018 is 16.7%, and in 2019 back to the level of 17%. Judging by the amendments to the second reading of the budget on 7 December, the authorities have a setting to display from the classified section at least costs that are not directly related to defense and homeland security.

Traditionally, the most secret article is “national defense”: in 2016, the proportion of hidden costs is 71,9%. Second place is a secret the cost of national security and law enforcement (33,17% of the total expenditure on this article). Data for the other sections more transparent: the share of hidden costs does not exceed 9%.

As we thought

In a country where prices are rising on average by 9.5% per year (Rosstat data for the period of 2006-2015), nominal monetary indicators alone cannot give a complete picture. For example, if government spending on healthcare has grown in the nth year by 10% compared to the previous year, and inflation was 20%, it is obvious that real spending growth to speak of.

To ensure the comparability of budget data by year and track the “real” dynamics of revenues and expenditures of the state, we adjusted the data for average annual inflation by recalculating them to the 2016 prices. In other words, the revenues and expenditures of the budget, expected in 2016 (according to the October amendment of the Ministry of Finance in the budget), was taken as a starting point, and the actual figures of the previous years restated for inflation. Thus, the adjusted figures of the past years was higher than nominal, and rates of subsequent years. None of the methods of bringing the nominal numbers to real is perfect, but plus the use of the average rate of inflation that intuitively the price increase more understandable than, for example, special indexes-deflators calculated by Rosstat.

In addition, data for average annual inflation from 1990-ies, based on the statistics of Rosstat, in the database of the International monetary Fund (IMF), and the predicted values of the average rate of inflation for the years 2016-2019 are taken from the basic macroeconomic forecast of economic development, forms the basis of the budgetary projections. “In the current environment, I would have deploravel the consumer price index, because, first, it is more than common, and secondly, another deflator is now really not,” — confirmed the appropriateness of the calculations of the senior analyst, group research and forecasting ACRES Dmitry Kulikov.

With the participation of Vladimir Dergacheva, Polina Zvezdnoi