Less Resources of the Reserve Fund Could be Spent

In 2016, further reduction of the total volume of federal budget revenues to 17.5% of GDP fr om 18% of GDP in 2015 which is much below the level of budget administration in 2014 (20.3% of GDP) is planned. It is to be noted that a decrease in the revenues takes place due to reduction of oil and gas revenues in a situation of falling global prices on oil. At the same time, non-oil and gas revenues are quite stable. The total volume of expenditures which is to grow somewhat on the basis of the results of 2015 to 21% of GDP from 20.8% in 2014 will, on the contrary, slightly fall to 20.5% of GDP in 2016. In 2016 the budget deficit will remain at the level of 2015, that is, 3% of GDP; nearly all the deficit volume (about 2.7% of GDP) is expected to be covered by means of the Reserve Fund.

                                                                                                                                                                                                             Table 1.
The main parameters of the federal budget in the 2014–2016 period (billion Rb and % of GDP)

Generally, the policy aimed at restraining growth and gradual reduction of the volume of state expenditures in shares of GDP is quite justified. An increase in the volume of expenditures at the expense of a higher volume of the budget deficit is inexpedient and entails substantial risks. Firstly, the current level of expenditures of the federal budget is higher than the “conditionally optimal” one (in terms of macroeconomic conditions), state expenditures were highly inflated in a period of high oil prices and grew even further during the 2009 crisis, however, after that they did not return to the pre-crisis level of 18% of GDP (in the past few years expenditures were steadily above 20% of GDP).

As a result, it can be stated that even a decrease in the expenditures to 20.5% in 2016 is not of a procyclical nature as the volume of expenditures still exceeds in shares of GDP the pre-crisis level of 2007-2008. Secondly, in terms of a large volume of the deficit and buildup of the debt it is important to understand for how long federal budget revenues will keep falling. So far, the scenario wh ere oil prices return to about $100 a barrel or even more is highly unlikely in the near future, so, the current level of budget revenues should be regarded as the one that prevails in the mid-term or, probably, long-term prospect (the world may have entered a new cycle of a decrease in global prices on energy commodities). Due to the above, adaptation of the budget policy to new macroeconomic conditions is needed, otherwise, Russia runs the risk of finding itself in a situation of a number of the EU countries which used to spend for a long period of time more funds than they could afford in terms of economic realities.

As regards approaches to financing the budget deficit, it is important to point out the following. According to our estimates, both in 2015 and 2016 the Government has at its disposal a broader and unutilized set of instruments to finance the deficit by means of commercial loans in a situation of a relatively small volume of the state debt (by the end of 2015 it is expected to amount to 15.6% of GDP). ). In such conditions, they may spend less resources from the Reserve Fund and borrow more in rubles on the domestic market (attraction of foreign loans in the current foreign economic situation may be complicated).

The case for the above is the following: firstly, a slower depletion of the accumulated financial reserves in a situation of uncertainties about the prospect of improvement of the macroeconomic situation and the situation on the global market of energy commodities in the mid-term and long-term prospect. Secondly, the ruble equivalent of the resources of the Reserve Fund deposited in foreign currency assets appreciates in a situation of weakening of the ruble exchange rate against foreign currencies. Thirdly, government bonds play an important role on the financial market and as an instrument of the monetary policy (the Vneshekonombank needs reliable financial instruments for investment of pension savings, while banks may receive loans from the Central Bank of Russia against a collateral in the form of government bonds).

Arseny Mamedov, Head of the Budget Policy Department