Next year to be the most challenging since the crisis in 1998

On September 18 the Government of the Russian Federation approved a draft federal budget for the mid-term perspective, and the Ministry of Finance gave initial comments on the key parameters of the fiscal policy in an investment forum in Sochi.

Analysis of both the documents from a meeting of the Russian Government at which the Draft Budget was considered and A. Siluanov's interview provides an array of information for thought about the prospects of the fiscal policy and how it can ensure the improvement in the quality of life of Russia's nationals.

The Draft Federal Budget for 2015–2017 provides for a small deficit of 0.6% of GDP each year. Both the general public and the business community may praise the news of that the Draft has no plans to generate revenues from sales tax while the VAT rate is to be kept unchanged. Therefore, the Russian Government has managed to optimize costs without having to increase taxes, including those to finance social commitments and long-term objectives of the development of the Far East, the Crimea and the city of Sevastopol.

However, considering the state of the Russian economy, the consolidated budget of the constituent territories of the Russian Federation is truly limited and the issue of maintaining the level of fiscal capacity in the regions is getting worse, which will have an impact on the quality and availability of public and municipal services to the general public.

Nonetheless, public sector employees are going to see their wages grow faster than the inflation rate, but not until 2016–2017. In 2015, wages in the public sector will be indexed for inflation, which, according to the Ministry of Finance of Russia, will restrain the real sector labor costs which are geared to wages in the public sector.

Considering that statistical data on inflation sometime fail to reflect actual weakening of the ruble purchasing power, it can be assumed that public sector employees' real income would fall in the year to come. At the same time, the decision will be praised by the regional government authorities, because it will allow them to balance their financial capability with the need to implement the Presidential Decrees issued in May this year. However, linking real sector wages with public sector employees' wages implies structural issues within the economy, because it is the private sector that is supposed to have the opportunity to engage most qualified personnel rather than compete for labor force with the public sector, especially state-run corporations.

Another factor of restraining wage increases is a decision of the Russian Government to abolish the wage threshold over which no contributions were paid until 2015 to the Compulsory Medical Insurance Fund (CMIF) (Rb 624,000 in 2014). Therefore, real sector enterprises will have to cut their outlays, hardly by introducing innovative technologies, most likely through layoffs or paying a part of wages in envelopes. The recent history of Russia has already seen the effects of such decisions, especially during recession times.
At the same time, the decision has a few positive aspects for the most of Russia's nationals, because the CMIF budget will finally begin to receive more revenues from top-managers' golden parachutes.

There is positive news for organizations having access to public contracts on the construction of the transport infrastructure and operating within Moscow and the Moscow Region. The Federal Budget for 2015–2017 provides for the allocation of extra budget resources for the development of the transport network in Moscow (Rb 122bn) and the Moscow Region (Rb 18bn), net of extra resources which will be found in the course of redistribution. It can be noted that this decision is the best alternative to the introduction of sales tax which was lobbied by the Moscow government.

Optimism is also buoyed by the fact that the Russian economy's behemoths such as Rosneft and NOVATEK will be supported as part of the standard procedures rather than through administrative pressure. Another positive aspect is the retention of a 60% ceiling of spending of the National Wealth Fund resources (NWF) on infrastructural projects.

Therefore, the analysis of the key parameters of the Draft Federal Budget proves that the year to come is going to be the most challenging since the crisis of 1998 in terms of financial and economic stability both for the country and the private sector and the general public. However, it is the year 2015 that should see the commencement of institutional, economic reforms initiated by the government and supported by the business community for the benefit of the entire population.

Tatyana Tischenko, Ph.D. in Economics, senior researcher, Budget Policy Department, Gaidar Institute