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Budget Spending to Exceed Revenues in 2015

Russia will face a budget deficit in 2015-2017; the country’s expenditure on defense and public administration will grow, while the spending on education, health care, and social services will be cut, according to expert analysis published in the recent issue of the HSE’s New Comments on the State and Business

In early September, the Russian government considered and approved the draft federal budget for 2015 to 2017, based on what has been described as a conservative scenario of the country's economic development for the next three years. The HSE's Centre for Development experts believe, however, that the new budget is 'rather optimistic'.

Table 1. Russia's federal budget revenues, expenditures, and deficit in 2015-2017, % of GDP

 201220132014201520162017
reportreportestimateprojectionprojectionprojection
Revenues20,719,519,919,418,918,3
Expenditures20,72019,52019,518,9
Deficit-0,1-0,50,4-0,6-0,6-0,6

Source: the Finance Ministry

According to the HSE's experts, while the revenues are declining, it is not always possible to cut the expenses – in fact, spending needs to increase for certain items. Given the current budgetary rules and the preset parameters of oil and gas revenues, only additional non-oil and gas revenues may allow for larger spending, and the Finance Ministry is trying every means, both realistic and unrealistic, to find a solution.

First, they made some optimistic assumptions in their base macroeconomic forecast for 2015, such as an inflation rate of 5.5% and a limited effect of the recent EU and US sanctions. Then they added 100 billion rubles to the non-oil revenues by including expected proceeds from the sale of Rosneft's shares in 2015. And finally, the Finance Ministry agreed to the idea of confiscating 600 billion rubles from the contributory portion of retirement pensions in 2015; in its turn, the government promised not to increase next year's tax burden.

Education Spending to Be Cut

In drafting the budget, efforts were made to optimize the cost structure and to focus the resources on high-priority areas. The government has refused to support some of the Finance Ministry's proposals, such as the idea of not paying the base part of the retirement pensions to working pensioners.

Table 2. Federal spending structure in 2012-2015, % of the total expenditures

 2012201320142015
National Issues6,256,387,047,18
National Defence14,0615,7717,7319,37
National Security14,315,4514,8513,91
National Economy15,2713,8615,7117,58
Housing and Utilities1,771,330,90,82
Education 4,685,044,653,95
Health Care4,763,763,842,72
Social Policy29,9428,7324,9925,38
Inter-budget Transfers4,655,015,64,38
Public Debt Service2,482,73,12,95
Other Sections1,831,981,591,76

Source: the Finance Ministry, Vedomosti

The share of public administration costs has been growing – apparently, the government finds it impossible to cut its own spending. Quite expectedly, defence spending is increasing by 1.6 percentage points compared to 2014 and by more than 5 p.p. compared to 2012. Spending on the national economy is going up 1.9 p.p. in 2015 compared to 2014.

In contrast, spending on social policies, including transfers to the Pension Fund in 2014-2015, are 3 p.p. to 4 p.p. below the 2012-2013 level, since deductions to the contributory portion of pensions have been suspended.

The share of spending on education will decline by 0.7% compared to this year. The share of spending on health care is expected to drop by 1.1%, despite additional transfers from the Health Insurance Fund. Finally, the share of intergovernmental transfers is reduced by 1.2% compared to 2014.

The Cost of Crimea

The experts make a separate comment regarding the large increase in spending on the national economy in 2015.

Table 3. Structure of spending on the national economy, bln. rubles

 20142015
Total21932722
Public Portion21612529
General Economic Issues363172
Fuel and Energy87
Space Exploration2837
Replenishment of Mineral Resources4040
Agriculture and Fisheries159155
Water Management1716
Forestry733
Transport254333
Road Management498635
Communication and IT3531
Applied Economic Research206207
Other Matters of the National Economy545862

Source: Russia's Finance Ministry

The overall increase in the national economy section is associated with the Road Management and Other Matters subsections. Under the Road Management subsection, new funding is allocated to the construction of the Moscow transport hub – according to Finance Minister Anton Siluanov, it should compensate Moscow and its metropolitan area for the government's refusal to introduce a sales tax.

The additional funding under the Other Matters subsection is the cost of the 373 bln. ruble federal program to finance socioeconomic development in Crimea until 2020.  In 2015, 14% of the funds under the National Economy heading, or 2.4% of the total expenditure – comparable to the cost of health care – will be spent on supporting Crimea, but there is no way to determine what exactly will be financed, the experts note.

Tapping into the National Wealth Fund

The government has decided to spend part of the National Wealth Fund (NWF) in 2015. According to the Finance Ministry, the NWF totaled 3.150 trillion rubles in early September 2014, of which 474 billion rubles are invested permanently with VEB Bank. Officially, VEB is supposed to repay 120 billion rubles in December 2014, but the experts doubt that it will do so.

The government has already decided to invest 60% of the NWF, but not more than 1.740 trillion rubles. If the entire investment occurs within one year, it is equivalent to an increase in the budget deficit at 2.8% of the GDP, which is highly unlikely to improve budgetary sustainability and to curb inflation.

 

September 24, 2014