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Russia’s pessimistic budget

Last Friday, the State Duma reviewed in its first reading draft federal budget for 2018 and for the period of 2019-2020.

Drawing by Yuri Aratovsky

To review over 10,500 pages of the document, the lawmakers did not have even a month. The drafters claim that will be the very last budget on paper and the format of the document will change, even though that does not necessarily mean the essence of the law will change, too. Independent experts are certain that being overenthusiastic about the idea of producing a well-balanced budget within the shortest possible term, Russian authorities thus compress national economy with a resulting loss of 2.3 percent of the gross national product over the next three years. At the moment, the budget overview is pessimistic and the forecasts will be self-replicating.

Overconservative expectations

“Draft law does not merely maintain but expands the practice of a multiple concealed provisioning”, expert opinion on the draft budget, presented by Presidential Commissioner for Entrepreneurs’ Rights Boris Titov’s office, Growing Economy Institute, Business Russia Association, and Russian Academy of Sciences’ Economic Forecasts Institute, states.

Experts believe, such a provisioning is a factor of excessive dissuasion of a domestic demand.

“Over the next two or three years we will have, at best, a neutral input by the budget to the national economy. It is most probable though, it will be negative”, Alexander Shirokov, Deputy Director of the Economic Forecasts Institute, assumes. “Regretfully, we are on the way back to accumulating financial resources at a stage of resuming an economic growth”.

The experts’ assessment is, a flat deduction from the GNP caused by reduced budget expenses in all major spheres will reach RUR 2.5 trillion ($ 44 billion) or 2.3 percent of the forecasted GNP, by 2020.

The specialists who reviewed the budget, are certain it is not the Ministry of Finance’s fault since it follows the logic which is supported by the national authorities and which is the only one possible in a situation where there is no approved strategy. The need to develop such a strategy was discussed at a special meeting a year ago, followed by adoption of a federal law on strategic planning. Still, a long term development plan does not yet exist.

The budget drafters are too pessimistic about the situation development. Experts believe the anticipated oil prices (at $ 43 per barrel) are evidently too low while the forecasted exchange rate (at RUR 64 per $ 1) is certainly too high. A conservative forecast for these parameters and for the GNP nominal value results in underestimated tax collection. The anticipated revenues volume is underrated by 9% for 2018 and by 12% to 15% for 2019-2020, Economic Forecasts Institute specialists claim. The authors of the expert opinion point out that in a consolidated budget (which includes extrabudgetary funds as well), the degree of underrating the income basis is even more sizeable and reaches RUR 1.5 trillion ($ 26 billion) in 2018 and RUR 1.6 to 2.4 trillion in 2019 and 2020.

What if some development occurs?

Low forecast of the revenues was followed by cuts in spendings, that having the gravest impact on the regional budgets. Those will, at the very best, remain at their current levels. A deficient implementation of the budget potential causes to the national economy both direct (failure to raise living standards of the population through budget allocations and transfers in kind) and indirect (declining consumer demand and growing fiscal burden on businesses) losses. Should the draft budget have taken account of more realistic parameters, both major goals of balancing the budgetary system out and maintaining the expenditure levels at the 2016-2017 level, could have been secured at the cost of a 1.5 percentage points increase in the sovereign debt by the 2020 year end.

Business ombudsman Boris Titov stressed it is time for the authorities to shift from a stagnation budget to a development budget. An economy growth is a key instrument to accomplish that.

“One can hardly imagine who may be serious when talking about a 2 percent potential growth of the national economy, given the nosedive we have had and the idle capacities we see, and given the fact 20 percent of industry employees work reduced hours only. That is an evidence the national economy may advance at a faster pace”, Alexander Shirokov states.

To stir up a growth, a simultaneous alleviation of the budget and monetary policies is required. Despite the rhetoric on the loan interest rates decrease, with the declining inflation in the background, real borrowing rates for businesses have gone up by seven to eight percent, and the consumer loans rates still range between 14% and 18% per annum. The Economic Forecasts Institute assesses the aggregate effect of the interest rates drop for the ultimate borrowers by two percent, at 1.6 percent of GNP growth.

Time to free fiscal rule from oil

When struggling for a deficit free budget, Kirill Nikitin of the Business Russia underlines, the authorities enhance some existing taxes while introducing new ones. Increase is now foreseen, for instance, in excise duty rates, water tax (1.7 to 2.3 times), forests usage charge (2.17 to 2.62 times), waterbodies surface waterways usage fee (10-fold). The taxation novelties are the recycling charge on production tools and the investment charge on sea ports.

Business Russia is strongly against increasing a fiscal burden on the businesses. The organization is calling to observe the fiscal neutrality principle declared in the document and loudly voice by the authorities, namely, nonenlargement of the taxation burden on prompt payers. It also suggests to move further. Economy sciences and businesses representatives believe that the tax burden should decrease as tax collection grows and economy becomes more transparent. Computerized taxing services will further help reduce shadow economy share.

Non-government experts suggest to introduce a new fiscal rule under which tax revenues above inflation level should be “refunded to the economy by means of lowered taxation rates and granting additional benefits”.

Unlike the fiscal rule to be in force in 2018, the suggested rule will not allocate all revenues derived from oil sales after oil price is above some fixed level, to government reserves. The future fiscal rule will not be conditioned by the oil prices at all.

The experts submitted their opinion to the State Duma’s Committee on Budget. The success of the idea’s advancement will nevertheless depend on its support by the general public and business community.

By Anna Oreshkina

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