No reason for easing the budgetary rule

The Ministry of Economic Development of Russia has prepared a baseline scenario of macroeconomic projection for 2014–2016 which provides for easing the budgetary rule in 2014, which is determined by growth in budget expenditures in response to the accession of the Crimea as a constituent entity of the Russian Federation.


There are two development scenarios. Under the former, which provides for adjusting the budget rule and increasing budget expenditures, Russia's GDP is expected to increase 1.1% in 2014. Under the latter, which allows for a more conservative option, it is anticipated to grow no more than 0.5%.

Easing the budget rule provides a possibility to further increase in expenditures. However, the Russian economy is not yet ready for monetary easing because of business environment issues. Broadly speaking, should road construction financing be doubled, it doesn't mean that there will be twice as many roads, because roads tend to get more expensive. Under the current circumstances, macroeconomic and fiscal stability is more important than economic growth through monetary easing. Despite that the current budget rule allows for a deficit of up to 1% of GDP, there is talking about increasing the threshold to 2-3% of GDP. In my opinion, there is no point to interfere with the budget equilibrium for a 1.1% growth in GDP.

Higher budget expenditures required by the accession of the Crimea could be covered by borrowings either in Asian markets or the internal market, especially when capital markets' interest rates keep historical low and international ranking agencies have downgraded the forecast, not the ranking, for Russia, which shouldn't make credit resources more expensive for Russian companies. In this case, therefore, there is no point to interfere with the budget whose latest version was prepared with difficulties.

Alexey Vedev, Director of Gaidar Institute's Center for Structural Research