Reduction in budget expenditures and growth in revenues has potential limits

Versus the socio-economic development forecasts adopted with approval of Federal Law-216 "On the Federal Budget for 2013-2015", the following indicators were lowered in calculating federal budget revenues and expenditures for three years to come;
- GDP growth from 3.7 to 2.4 % in 2013, from 4.3 to 3.7% in 2014 and from 4.5 to 4.1% in 2015. Economic growth up to 4.2% is forecasted in 2016, but its growth rates are expected to be lower than in 2011 (4.3%);
- total imports (regarding the range of goods recognized by the Federal Customs Service) - from $356,5bn to $334,9bn (-6.4%) in 2013, from $388,3bn to $351,4bn (-10.5%) in 2014, from $420,8bn to $367,2bn (-14.6%) in 2015. In 2016, total imports are expected to increase to $385,1bn, or by 4.9% against the preceding year.

Oil prices which are used to calculate parameters of federal budget revenues in 2014-2016 in accordance with the fiscal rules are expected to remain at $100-101 per barrel. An insignificant fall (by 1.4%) in prices of natural gas is expected in 2014, by 4.1% in 2015 and by 5.7% in 2016.

It is slower economic growth rates worldwide (unsettled debt-related issues in the euro area, the United States, slow-down of economic growth in China) that are responsible most for slow-down in economic growth in Russia.

 

Corporate profits are expected to contract against the previously accepted estimated figures: by 10.4% in 2013, by 12.5% in 2014. Given that corporate profit tax accounts for around 25% of all consolidated budget revenues of constituent territories of the Russian Federation, such a reduction of corporate profits would become a key factor of regional budget stability. At the same time, the estimated figures of wage bill, which is the tax base of personal income tax payable to regional and local budgets, are quite optimistic, thereby somehow mitigating risks.

 

Thus, the global macroeconomic situation and persistent problems in the real sector support the concerns of that the following three years will be most difficult over the past 15 years in terms of ensuring long-term balance and sustainability of the budget system.

Enlarged government's budget revenues, net of inter-budget transfers, are expected to decline from 36.9% of GDP in 2013 to 34.4% of GDP in 2016, subsequently declining to 33.6% of GDP in 2025 and 32.7% of GDP in 2030. Consequently, budget system revenues are expected to decline from 35.8% of GDP in 2014 to 34.9% of GDP in 2016, subsequently declining to 33.6% of GDP in 2025 and to 33.0% of GDP in 2030.

 

Federal budget revenues are forecasted to stay at 18.2% of GDP in 2014, being 1.1 p.p. of GDP less against the preceding year; 17.4 of GDP in 2015 and 16.6% in 2016. Oil and gas revenues are expected to decline at slower rates vs. federal budget revenues: by 1.0 p.p. of GDP in 2014 and 0.8 p.p. in 2015 and 0.3 p.p. in 2016 against the preceding year. Oil and gas revenues are forecasted to stay at 5.9 of GDP in 2025 and 4.7% in 2030, whereas their share in total revenues is expected to contract from 43.9% in 2025 to 33.0% in 2030.

 

A share of federal budget revenues in total budget system revenues is expected to decrease from 51.8% of GDP in 2014 to 48.0% in 2016 and to 45.8 in 2025 and 43.2% in 2030 through much slower decline in consolidated budget revenues of constituent territories of the Russian Federation and revenues of state extrabudgetary foundations.

Federal budget expenditures are forecasted to stay at 18.7 of GDP in 2014,18.0 in 2015 and 17.0% in 2016, subsequently declining to 15.7% of GDP in 2025 and to 14.5% in 2030. Consolidated budget expenditures of constituent territories of the Russian Federation are expected to decline insignificantly in 2014-2016: by 0.2-0.3 p.p. of GDP in 2014-2015 year-on-year, whereas in 2016 expenditures are expected to remain at the level of the preceding year, 12.5% of GDP.

 

A federal budget deficit of 0.5-0.6% of GDP in 2014-2016 and 0.3% in 2025 and 2030 is forecasted in both short- and long-term periods. Oil and gas deficit is forecasted to contract to 6.0% of GDP by 2030 against light debt burden (less than 15% of GDP). Enlarged government's budget deficit is expected to stay at 0.7 % of GDP in 2014 and 0.5 % of GDP in 2016, whereas budget system revenues and expenditures are expected to reach balance in 2025.

 

It is the Reserve Fund that servers as the principal source of financing of federal budget deficit and crisis response measures if crude oil prices go down (to $60 per barrel). The Reserve Fund accounting for 7.0% of GDP is supposed to be sufficient to cover effective expenditure obligations within three years, subject to the implementation of additional measures aimed at optimizing costs and mobilizing sources of income. Public borrowings are expected to be the principal source of financing of federal budget deficit in 2014-2016 due to drastically downtrend forecasts for revenues from privatization as a source of financing of federal budget deficit (by Rb 100bn in 2014 and Rb 150bn in 2015 less than it was approved in the previous budget cycle), thereby increasing state debt of the Russian Federation to Rb 11,665,9bn in 2016, exceeding by 0.9 p.p. of GDP the forecast volume in 2013.

 

The forecast shows that key measures aimed at optimizing federal budget expenditures, including
- reducing intra-budget transfers to state extrabudgetary funds, which are intended to ensure balance of their budget;
- reducing budget allocations to purchase goods, works and services;
- optimizing other current expenditure obligations,
up to Rb 3217,8bn allocated to finance the objectives set forth in the Presidential Decrees dd. May 7, 2012 would be reallocated in 2014-2016.

 

The FPG presents for the first time the parameters of draft federal budget expenditures in 2014-2016 not only through budget functional classification but also state programs' key lines. However, the share of non-program federal budget expenditures is relevant and account for around 45% of total federal budget expenditures due to delayed adoption of the two most troubled state programs, namely ‘Pension System Development in the Russian Federation' and ‘National Defense Provision'. It is true that most of state programs have substantial deficiencies which make them impossible to be regarded as full-fledged instruments of result-oriented planning.

 

The presented FPG contain a few innovations in the field of intergovernmental fiscal relations, including consolidation from 2014 of federal budget subsidies to the budget of constituent territories of the Russian Federation based on the state-program-against-subsidy principle as part of ‘Culture and Tourism Development', ‘Physical Culture and Sports Development' and ‘Healthcare Development' state programs.

 

As far as the functional structure of federal budget expenditures in 2014-2016 is concerned, it should be noted that the share of expenditures on ‘National Defense' in total federal budget expenditures is expected to grow from 15.7% in 2013 to 20.9% in 2016, whereas the share of expenditures on ‘Education' is expected to contract from 5.1% in 2013 to 4.0% in 2016 and ‘Healthcare' from 3.8% to 2.1%. The reduction in federal budget expenditures on relevant items which provide the quality of human potential is supposed to be compensated through an increase in consolidated budget expenditures of constituent territories of the Russian Federation and extrabudgetary funds, whereas enlarged government's budget expenditures on the same items are expected to decline: ‘Education' - from 4.3% of GDP in 2013 to 4.0% in 2016, ‘Healthcare' - from 3.7 of GDP to 3.4% respectively.

 

Federal budget expenditures on the realization of the Presidential Decrees dd. May 7, 2012 will amount to Rb 554,7bn in 2014, Rb 793,7bn in 2015 and Rb 838,5bn in 2016, and most of budget allocations will provide financial support to the constituent territories of the Russian Federation in the form of subsidies to ensure balance (Rb 100bn in 2014) and raise wages of certain categories of workers (Rb 80,2bn in 2014). Furthermore, state support to the R&D sector through state foundations financing scientific and technical activity will be enhanced.

 

All in all, the presented in the FPG basic parameters of the draft federal budget for 2014-2016 are in line with the goals and objectives set forth in the Presidential Budget Message 2013 in terms of ensuring sustainability of the fiscal policy, subject to unconditional financing of obligations as part of the package of Presidential Decrees dd. May 7, 2012. However, the reduction of budget expenditures and growth in revenues has its limits, and the objective to enhance the effectiveness of budget expenditures remains to be relevant in three years to come as well. The development in this year of a set of measures aimed at enhancing the effectiveness of public investments for the promotion of economic growth can be regarded as a solution of this objective.

 

T. V. Tischenko, PhD in Economics, senior researcher, Budget Policy Department