The Lack of Structural Reforms Creates Risks for Economic Stability

At the end of June 2015, the Russian government approved "Main Directions of the Budgetary Policy for 2016 and for the Planned Period of 2017 and 2019" submitted by the Ministry of Finance.

However, final decisions have not been taken regarding a number of key issues, approaches to social expenditure adjustment have not been defined and differences between the financial and economic and the social blocks of the government have not been settled.

The Ministry of Finance defined the volume of the federal budget outlays for 2016 and the minimum level determined by the Budget Code (the volume approved for 2016 by the effective Law of the Federal Budget for 2015-2017 minus conditionally approved expenses), in other words in the amount of Rb 15.9 trillion or 19.2% of GDP with the deficit at 2.4% of GDP. For 2017, the volume of outlays was approved parting from the 'budget rule' at the level of Rb 16.7 trillion (or 18.3% of GDP) and for 2018 – Rb 16.6 trillion (or 16.7 of GDP).
Is such policy justified? It is important to understand that during pre-crisis period of 2005-2008 the volume of the federal budget outlays remained at the level of 16-18% of GDP, later they grew to 22-25% of GDP in 2009-2010 due to the need to finance anti-crisis measures of the government. Moreover, in fact the drawing on reserves commenced in 2013 when within modification of the 'budget rule' part of oil and gas revenues subject to credit to the Reserve Fund was directed to compensate the reduction (in comparison with forecast) of non-oil and gas revenues. Because of large, significantly higher than pre-crisis levels, expenditures effected in 2012-2014, by the onset of a new recession the Reserve Fund failed to accumulate a sufficient volume of reserves. In the wake of falling federal budget revenues due to long-term decline of oil prices down to USD 50-70 per barrel, it is impossible to maintain expenditure at the previous level.

On the whole, the Ministry of Finance proposals regarding budget projections for 2016 envisage maintaining a whole set of expenditures (including education and health care) at the level close to the 2015 volume with reduction of expenses on defense by 5.7% and curb growth of social expenditure at 16.2% (in nominal terms). Curbing growth of social expenditure will be achieved first by not adjusting pensions to real inflation for the previous period).

One must take into account the fact that further reduction of expenditure without implementation of structural reforms creates serious risks for economic and socio political stability in the years to come (in 2017-2020). Without structural reforms the budgetary policy will lack the room for maneuver which can be required in 2017-2018. Moreover, positive macroeconomic effect of ruble devaluation is also cancelled.

This is not the issue exclusively linked with the budgeting for the next fiscal year. However, it is necessary to elaborate on certain decisions in the sphere of Russian economy structure together with approval of 2016 budget.

Arseny Mamedov – Head of Budgetary Policy Department
This comment was drafted on the basis of anarticle by Arseny Mamedov published by Forbes "Budget Maneuver: What Danger Formal Reduction of Expenditure Poses"