Budget will be balanced at the expense of economic growth

The Government Commission for Budget Projects will consider on July 2, 2014 a Draft Federal Budget for 2015 and the Planning Period of 2016 and 2017, taking account of the recent proposals of the Ministry of Finance Russia on reducing budget deficit by more than 0.5 p.p. of GDP (from 1 to 0.4% of GDP).

Such a reduction will be possible by increasing federal budget revenues from oil and gas (by Rb 702bn) and cutting off certain expenditures and raising more funds externally. According to the Ministry of Finance of Russia, it will be possible to increase oil and gas revenues by improving terms of trade (growth in prices of the Urals crude oil and prices of gas exported to non-CIS countries) and growth in the projected US dollar exchange rate.

The Ministry of Finance plans to replenish the revenue side of the federal budget also through privatization of Rosneft in 2014–2015 and budget revenues to be generated in the 2016 budget. Additionally, the Ministry considers that imposing an extra tax burden on the economy may become another source of budget revenues. In particular, this refers to indexing excise rates on cigarettes of the expensive price segment, abolishing VAT refund for public investment, lifting the withholding tax rate, as well as introducing excises on the gas exported to Turkey via the Blue Stream gas pipeline.

Making comments on the afore listed proposals of the Ministry of Finance, we should note that the First Deputy Prime Minister Igor Shuvalov stated as early as the past spring, after several meetings with Prime Minister Dmitry Medvedev, that the tax burden will be left intact until 2018.

In our opinion, growth in the tax burden is not the measure that should be taken to boost economic growth rates at the current development stage of the Russian economy. After the overheating followed by the crisis in 2008–2009 the Russian economy is currently facing a new, lower phase of the cycle. For instance, our estimates show that in 2014 the market component of growth rates in Russia’s GDP, including business-cycles component and contingent shocks, will stay at -1.6%. Therefore, positive economic growth rates in the current year (1.1%) forecasted by the Ministry of Economic Development of Russia will be achieved through a positive foreign trade component. The Ministry of Finance is absolutely right, saying that given growth in global oil prices and export prices of gas, the current terms of trade are truly favorable in terms of growth in budget revenues.

At the same time, the proposals of the Ministry fail, in our opinion, to promote steadily high economic growth rates in the long run, which cannot be achieved through easy ways.

First, the reliance on oil and gas revenues is indicative of that the Russian budget’s large dependence on export of raw commodities has been left intact in the face of experts’ recommendations to undergo economic restructuring and reorient the economy away from the oil and gas sector towards the producing sector.

Second, it is obvious that hardening the tax burden will discourage the production sector. The Russian economy is facing slower growth rates for deeper, fundamental reasons which cannot be addressed though budget policies at this stage. Therefore, the choice of budget balancing at such a painful cost invites some questions in the current circumstances of economic stagnation and the threat of its entering a recession phase.

Maria Kazakova, PhD in Economics, Head of Economic Development Department, Deputy Head of International Center for Budget Sustainability Study.