Assessment of the Federal Budget Strength

 

Teething tendency showing that the country was out of economic crisis assured higher level of federal budget revenues than was expected last year. Mostly, it is due to more optimistic oil prices (USD75-78 per barrel, which was USD10 higher than last year’s estimates), as well as speedup of economic growth. At the same time, there remains high budget dependency on oil and gas revenues which enhances risks for stability of the state financial system as a whole. For example, in case of oil price fall down to USD50 per barrel 2011 budget deficit may surge to 6.1% of GDP, i.e. grow by 70%. In these circumstances implementation of responsible budget policy which, on the one hand, ensures necessary stability of financial system and, on the other hand, promotes innovative development and represents an objective imperative.  

Tax revenues provide about 55% of the whole budget and thus receipts represent principal sources of revenues of the federal budget for next three years. At the same time, gradual decrease of the share of oil and gas revenues in favor of non-oil and gas revenues is expected. Moreover, a growth of revenues from dividends on JSC shares in federal ownership and part of profit of federal state unitary enterprises (FSUE) from 49.3 bln Rb in 2011 to 53.3 bln Rb is expected in 2013. Receipts from privatization (298 bln Rb in 2011 and 309 bln Rb in 2013) will be used to cover budget deficit. The Reserve Fund will be used to finance deficit only in 2011 in the amount of 242.3 bln Rb which will result in depletion of the Reserve Fund by 2012. The National Wealth Fund will be used to the extent equal to co-funding pension savings (in 2011-2013 correspondingly 5-7, 5-10 bln Rb) which will preserve previously accumulated funds in the Fund for financial stability of the pension system.

Despite the reduction of the federal budget deficit, national debt growth (from 11.5% of GDP in 2010 to 16.3% in 2013) may adversely affect stability of financial system. At the same time, structural change in favor of domestic borrowing (during 2010-2013 internal debt will surge from 11.5% GDP to 16.3% GDP and external debt will remain at 4% GDP) will speak for efficient debt policy of the government.

Amid rather unpredictable situation regarding revenue part of the federal budget, expenditures although falling in GDP terms, remain at a high level and, moreover, and they will start growing in real terms in 2013. 

There are objective reasons for expenditure growth. This is, first of all, negative demographic situation due to aging of population and the need to provide social assistance to certain categories of population which requires adoption of additional state obligations. Secondly, a need to ensure obligations in educational and health care spheres, social guarantees for military personnel, payment of social benefits and compensations, wage indexation for state employees push aggregate expenditure up. Thirdly, in compliance with the decision of the RF President within the framework of law enforcement system reform, financing of public security will be implemented from the federal budget. Moreover, the RF Government is forced to increase expenditures on international obligations and national debt service. 

Increase of expenditures (in % of GDP) is expected along lines “National defense” and “Service of National debt”, on remaining types of activities expenditures will go down.

The number of targeted Federal programs TFPs) are planned to be cut (from 43 in 2011 to 37 in 2012) and as well as the volume of their funding (from 1364.8 bln Rb in 2011 to 1080.6 bln in 2013) which is both due to accomplishment of some of them during next two years and to planned price reduction on building materials. 

Five new targeted TFPs and three state programs will be funded from 2011. At the same time, some of them are not among budget policy priority, identified by the RF President. For example, TFP “Clear water” developed, according to expert opinion, under the pressure of the parliamentarian lobby, as well as “Development of domestic and foreign tourism” are unlikely to be qualified as priority ones requiring additional financing in the wake of the budget deficit. Moreover, the share of expenditure on new TFPs constitutes nearly 20% of the overall expenses on TFPs in 2011-2013.

Analysis of expenditure structure on unveiled TFPs demonstrates that with general reduction of funding volumes, there is an increase in expenditure in 2010-20133 only on “innovative development and modernization of the economy” (from 436.5 bln Rb in 2010 to 579.3 bln Rb in 2013) which complies with provisions of the Budget Message.

In the course of 2011-2013 budgeting the RF Government on the whole managed to resolve issues assigned by the Budget Message aimed at ensuring budget balance, restriction of “irresponsible” annual expenditure growth with mandatory execution of social obligations. At the same time, budgetary system still remains in unstable equilibrium depending on world energy prices. In view of this expenditure growth on defense and funding of targeted programs which are not priority ones does not correspond responsible budgetary policy

I.А. Sokolov – Candidate of Economic Sciences, Head of the Department of Budget Policy laboratory, 
Т.V. Tishchenko – Senior Researcher, Department of Budget Policy