On the Budget Message of the President of Russia to the RF Federal Assembly

On 25 May 2009, President of Russia D. Medvedev signed and dispatched to the State Duma of the Federal Assembly of the Russian Federation his Budget Message.

As part of our analysis of the provisions of the Budget Message, two specific circumstances should be pointed out. First, in accordance with the requirements stipulated in Article 170 of the RF Budget Code, presidential budget messages must be prepared every year in order to map out the main directions of this country’s tax and budget policy for the next 3 years, and so there inevitably arises the issue of continuity of the goals and tasks set in each budget message on an annual basis. Secondly, one distinguishing feature of the 2009 Budget Message is the necessity of developing a proactive anti-crisis policy in conditions of budget constraints. Thus, when analyzing the 2009 Budget Message, special attention should be paid to the combination of continuity of approaches with the anti-cyclical nature of the measures that are to be implemented in the budget and taxation spheres.

Just as a year before, the main goal of the government’s budget policy is to ensure macroeconomic stability as a necessary precondition for the fulfillment of government obligations in the years to come, and primarily the obligations in the social sphere. However, if in the previous Budget Message it was intended to achieve this goal through more strict coordination of the volumes and directions for allocating additional budget expenditures with the regulating capacities of this country’s monetary system, in the 2009 Budget Message it is already pointed out that it will be necessary to implement “a reasonable policy aimed at restricting the growth of state expenditure” and the size of budget deficit.

Consequently, if the previously set vector of socioeconomic development remains unchanged, we have now to deal with such issues as the need to save budget resources, to increase the return per ruble on budget allocations, and to revise the timelines for the previously adopted projects and programs. And, given the fact that social welfare will remain a priority area for budget spending, cuts on budget allocations should be expected instead in the sphere of support of the national economy, which is confirmed by the statement in the Message that “state support must be granted… only for well-substantiated reasons, and in this connection state financial aid should be allocated only in accurately determined and correct amounts”. On the basis of this statement, the President then urges the bodies of authority of all levels to give up the practice of adopting populist decisions which inevitably involve increased budget spending on unimportant items and to abstain fr om trying to solve current problem in certain sectors if this can create obstacles to achieving more long-term goals.

It is evident that the necessity to reduce federal budget expenditure has resulted in a situation wh ere regions and organizations are now relying more on their own means, and thus they are left, in fact, to deal with the crisis on their own. It is recommended, in particular, that the regions should focus their efforts on increasing their own revenue base – mainly through promoting the activity of small and medium-sized businesses, as well as restructuring their budget networks and optimizing the costs of their administrative bodies. Moreover, it is suggested that regional and local powers should be expanded, while the issues of financial backing for such measure are not even mentioned.

Alongside the clearly “moderating” interbudgetary policy of the federal center, it is planned to enhance the mechanisms of financial control and even to introduce temporary financial administration in the event of a failure, on the part of subjects of the Federation or municipal formations, to fulfill their obligations or to spend efficiently the financial aid granted to them. One can hardly call “responsible” an interbudgetary policy which will result, if it is actually implemented, in reduced amounts of interbudgetary transfers and in decreased levels of regions’ (or municipalities’) budget sufficiency, more frequent conclicts between different levels of authority, and “conservation” of crisis phenomena in the regional economies.

In contrast to the 2008 Budget Message, this year’s documents gives no priority at all to any particular sectors of the Russian national economy. Moreover, when envisaging support to the real sector, it is suggested that an individual approach should be devised for dealing with each enterprise, and that budget funding can be allocated only either to competitive entities (which are, however, are not so numerous in Russia), or to those whose products are purchased under state orders. To be fair, it should be noted that, in order to smooth over social conflicts that may develop at and around inefficient enterprises in need of state support, some compensatory mechanisms are indeed envisaged; however, the Budget Message does not offer any details as to their nature and ways of implementation. Evidently, the majority of enterprises in the real sector will remain outside of the range of state support, and so they will have to rely solely on their own devices. It means that their survival potential will directly depend on the longevity of the global crisis and the stability and flexibility of Russian banks.

In the social sphere, the priorities of budget policy for the next 3 years are defined rather specifically, because these have largely been borrowed from the previous budget message. As independent goals, the President pointed out the necessity to complete the creation of a financially stable pension provision mechanism in the long-term perspective, the improvement of the quality of social services, and the restructuring of the budgetary network. Besides, the priority areas for spending budget resources also include the implementation of national projects and measures designed to create a “barrier-free” environment for disabled persons, to modernize the army and to fulfill certain international obligations, including the hostong of the APEC summit and the Olympic Games at Sochi.

In the sphere of tax policy, the measures suggested in the Budget Message are aimed at finding a way to achieve two opposite goals at once: on the one hand, it is necessary to promote modernization of Russia’s national economy, and on the other, to ensure an inflow of tax revenues into the budget. Nevertheless, a more detailed analysis of the measures designed to optimize the tax system has led to the conclusion that they are mostly aimed at achieving the former goal. Thus, in particular, the President suggests that the upper margin for proceeds at which the simplified taxation system can be applied should be doubled; the upper margin for the amount of interest on debt chargeable to costs should be increased; that investors’ expenditures on construction or funding certain objects of transport, social and utilities infrastructures, as well as the engineering networks used for state or municipal needs, should also be chargeable to costs; that a temporary procedure for treating organizations’ arrears of taxes should be introduced; and the institution for flexibly changing the terms of paying taxes and levies (carry-forward, installment plans, tax investment credit) should be actively developed. In fact, all this means a more relaxed tax regime, which is a justified measure in a situation of economic crisis, as it maintains an adequate liquidity level for a substantial number of enterprises.

However, these measures, most probably, will result in a loss of some budget revenues, and in this connection the compensatory sources indicated in the Budget Message do not look very convincing. Alongside the traditional schemes applied against tax evasion, it is suggested that active measure should be taken in order to introduce the tax on immovable property, that the rates of excises on tobacco and alcohol products should be increased, and that the system of taxes and customs duties applied to the extraction and export of oil and petroleum products should be optimized. And while the former two measures cannot in principle generate any significant budget revenues, the new tax measures for the oil sector are also described too vaguely, although it can be gleaned from the document’s logic that the tax burden on this sector is going to be increased.

At the same time, one cannot but estimate positively the initiative aimed at decreasing the tax administration costs through implementing state-of-the-art technologies, eliminating redundant tax reporting and optimizing the number of on-site audits.

A new component in the Budget Message’s structure is the separate section devoted to measures aimed at improving the currently applied technologies for forming and executing the budget. And although most of the proposals have already been put forth previously in some or other form (in particular, the necessity to improve the management of the Reserve Fund’s and the National Welfare Fund’s resources, to ensure an adequate rhythm of the execution of the federal budget, to improve the efficiency of state procurements, to further improve state and municipal control, and to implement state assignments for the provision of social services), this circumstance has by no means diminished their importance. Besides, this section of the Budget Message also contains some relatively new proposals, which are aimed at improving performance in the sphere of budget expenditure management:
  • the necessity to apply in budget planning the conservative version of budget forecast and to increase the volumes of conditionally approved expenditures, which must minimize budget risks;
  • the enlargement of the approved departmental expenditure structure and the endowment of budget executors with a greater degree of independence in redistributing budget resources within the established medium-term limits on budget expenditures in specific areas of state policy (delegating to them the right to draw up their own budget expenditure and revenue);
  • the switchover to budget funding of some organizations, including through investments in their charter capital, and to applying the mechanism of refinancing these organizations’ debt liabilities;
  • further development of budget planning within the framework of performance-based management by means of switching over to a program-based budget structure incorporating long-term target programs and priority national projects.
Thus, the content of the Budget Message clearly points to the continuation of D. Medvedev’s course towards improving the quality of life for Russian citizens and developing an innovative national economy. However, as demonstrated by the experience of the year 2008, this will entail further growth of state expenditure, which in a situation of crisis and budget constraints is contrary to the need to give priority to the support of macroeconomic stability and fulfillment of the previously assumed obligations. Therefore, because of the need for a compromise between the previously determined strategic goals and the implementation of urgent anti-crisis measures in the sphere of budget and taxation policy, the 2009 Budget Message has become “necessarily conservative” – it is aimed at finding reserves for cutting state expenditure allocated to the support of the national economy, for decreasing the overall tax burden, and for enhancing the importance of procedural measures in budget management.

I. A. Sokolov - Candidate of Economic Sciences, Head of the Department for Budget Policy