S.G. Sinelnikov-Murylev attended International Investment Forum Sochi-2014

On September 19, Gaidar Institute for Economic Policy's Scientific Supervisor Sergey Sinelnikov-Murylev participated in the International Investment Forum in Sochi, and made a speech on Budget balance or growth acceleration: Time to choose? at a business breakfast.

In his speech Sinelnikov-Murylev brought up the issue of regional budget balance which may be deteriorated by the adoption of the government's major initiatives. He noted that regional budgets were generally balanced during the period between 2007 and 2012, except at the height of the crisis in 2009 when the total budget deficit accounted for 0.8% of GDP, and 2012 when the budget deficit was 0.5% of GDP. It was the federal budget that played the core role in the provision of general balance of regional budgets through the mechanism of intergovernmental fiscal transfers. For instance, in 2012 the imbalance at the regional level began to increase in response to the reduction in the amount transfers to the level observed during the crisis while the amount of tax revenues remained unchanged.

In 2013, the amount of regional budget revenues reached 12% of GDP, the lowest ever recorded since 1995 (against 15% of GDP in the pre-crisis period of 2007–2008 and 13–14% of GDP in 2011–2012) while budget expenditures were retained at a level of above 13% of GDP. It is the need to implement the 2012 presidential decrees on wage increase, especially for public-sector employees, that became the key obstacle to further cutdown in spending. The two key adverse effects were growth in the regional debt and decline in investment cost.
Economic growth rates are anticipated to further slowdown to 0.5%. In 2014, total volume of revenues at the regional level may reach the level of 2013 through increased tax revenues and simultaneous cutdown in federal transfers (0.2% of GDP each). At the same time, spending may see an increase of 0.5 p.p. of GDP, with a 100% implementation of the spending plan, in which case total regional budget deficit is projected to reach 1.5% of GDP.

Overall, the budget balance at the regions can be enhanced in the mid run though the three sources as follows:

1) increasing federal budget transfers;

2) transferring extra tax revenues to the regions (or introducing new regional taxes);

3) delegating certain powers to spend money to the federal level fr om the regional level (or simply imposing a lim it on the volume of powers to spend resources of the regional budget), for example, powers to pay insurance contributions for the unemployed to the system of compulsory medical insurance (0.5% of GDP in 2013)