Russia: a low deficit… for now

Дата публикации
Четверг, 14.11.2013

Luke Smolinski

Financial Times 13.11.2013

Should Russians worry more about the budget deficit? Looking at government figures for last year, it is not clear that they should.

The country’s federal deficit was 0.1 per cent of output in 2012; public sector debt was 12.5 per cent of GDP, enviable by western standards.
But a new research paper from economists at the Gaidar Institute and Ranepa, two think tanks, suggest Russia’s total obligations are much more extensive than they appear in the official data.
The authors calculate the fiscal gap – the difference between the current value of its future government spending and its future receipts – is over 8 per cent of its future GDP in 2013 rubles. The US’s long-run fiscal hole, reputedly the biggest in the world, has been estimated at 10 per cent of GDP.
To plug the gap, policy makers would either have to slash spending by more than a fifth or raise all taxes permanently by nearly 30 per cent, according to the study. Seems like a lot for such a country that currently has a small deficit.
Why the widening debts? Over the long term, government expenditure ought to outpace receipts. Like the US, Russia is ageing. Pension liabilities are expected to balloon. Oil will run dry within 65 years, the paper predicts, even if the country’s oil reserves are 25 per cent more plentiful than current estimates suggest.
Official debt statistics hide the true amount that the government owes, according to Laurence Kotlikoff of Boston University, who co-wrote the paper. “It is more a matter of language, not economics,” he says. This from the paper:
What is measured with these statistics is what the government in question chooses to label an official as opposed to an unofficial or implicit debt, i.e., what shows up on the government’s books as an official liability is whole a function of what the government does and doesn’t decide to put on its books.
The authors tot up the expected government liabilities and tax inflows until 2100 based on projected fertility rates, GDP levels, labour productivity, oil and gas revenues and so on. All of this is highly uncertain. How does anyone know what Russian immigration is in 2050, what Putin’s successors will spend on education and what structural reforms will take place? Will high oil prices drive new discoveries and higher government revenues, or will environmental concerns squeeze income from oil?
Kotlikoff says that he is aware of the uncertainty. The total fiscal gap is estimated to be between 5 and 10 per cent. “Under reasonable assumptions, things look pretty grave,” he says.
Indeed, pensions seem to pose a problem for Russia. The ranks of over-65 year-olds is predicted to swell from 13 per cent of the population to 23 per cent in 2050. The IMF reckons public pension spending will rise by 3 per cent of GDP by 2030. Resolve is needed, thinks Nicholas Spiro of Spiro Sovereign Strategy, a consultancy. “Raising the pension age, which the IMF has been advocating for some time, is essential but would be politically damaging to an administration which relies on pensioners and the rural population for support,” he says.
The reliance on oil and gas revenues will bite Russia in future, too. The charts below show how, without oil revenues, the public finances would be in a more parlous state. What’s more, Kotlikoff cautions, higher GDP has no effects on the pool of oil and gas reserves. As output rises, the share of oil and gas revenues as a share of GDP will decline, ceteris paribus. “Paradoxically, good times economically speaking are in some ways bad fiscally speaking,” Kotlikoff says.


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