Russian Economy General News: #2

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The task of ensuring the sustainability of the budget system need to be addressed carefully and purposefully, with the expectation of long-term stability is not only the financial system but also the competitive pace of socio-economic development of the country.  However, given the limited factors of economic growth raises the question about how to use the budget to stimulate it.  Many countries, both developed and developing, in similar circumstances to do so.  But before taking such decisions, it is necessary to analyze the risks associated with each of the mechanisms of fiscal stimulus spending, as well as to justify their usefulness.

Reserve stimulus wasted

The question of the possibility of stimulating the economy at the expense of budget expenditures is rather complicated, as rises under tight budget constraints.  In the structure of the budget for 2015-2017.  you can see the Russian Finance Ministry pledged a substantial reduction in the cost of the development of science, infrastructure and innovation.  In addition, each year the proportion of social and military spending.  And this is despite the fact that the Ministry of Finance budget projections also take into account the optimization of the protected items of expenditure.  Budget situation is aggravated by the fact that in the long term, the country's income from previous periods will continue to decline, which makes the absence of significant changes in the economic and fiscal policy of the state expect to change the prevailing negative trends.

It is important to note that in previous years there was a gradual increase in costs.  Such a situation was tolerable in an ever-rising oil prices.  However, when  the price of oil , though remained at a high level, but has ceased to grow, increasing the budget expenditures are subject to significant risks.

Now, when the projected oil price of about $ 100 per barrel in the next few years will be typeset in the budget deficit already, albeit small, that shows the critical level of accrued liabilities.  This means that the provision of stimulating the economy largely dissipated before and want to find new sources of growth.  In the course of discussions recently discussed three areas to ensure implementation of the budget: a drastic reduction in costs, a significant increase in the tax burden, increase the budget deficit.


Mechanisms to ensure the additional costs

Raising taxes to balance the budget - the most undesirable for the country at the moment.  Firstly, the level of taxation - is the most important part of the social contract of the state and society.  At the beginning of a new political cycle, it was announced that the decision not to increase the tax burden .  Three months ago, this decision was confirmed in    "Main directions of tax policy for 2015 and the planning period of 2016-2017." Now disavows this obligation.  Secondly, the effect on the budget of tax increases may be significantly lower than expected, which will not solve the problem of balancing the budget, but will have a depressive   impact on the economic activity of economic entities and, as a result, may lead to an actual reduction in tax revenues.  Third, the state of the Russian economy, balancing between stagnation and recession, in fact, excludes tax increase from feasible solutions.


With regard to improving the sustainability of the budget through spending cuts, on the one hand, of course, we must abandon the unemployed and costly programs, removal of subsidies on unnecessary expenditures of public companies and natural monopolies.  In the new economic conditions, the government should tighten their belts.  But at the same time to optimize the cost must be approached responsibly, carefully.  Principle    "Front" cuts when all budget expenditures are reduced by a fixed percentage , will not bring a positive effect - does not remove the fat layer, where they have a long and skillfully disguised, and thus have a significant impact on reducing the efficiency and quality of the programs in which the costs were laid to a minimum.  And there are a lot of state programs in the structure.  At the same time, it is worth remembering that the most significant and fastest-growing expenditure for 2015-2017.  - Is the financing of social obligations and military spending.


In addition, we can say that we have entered a stage of negative economic cycle.  Lack of demand is now a significant barrier that prevents restore sustainable growth.  Under these conditions, a decrease in government spending even more strengthen the negative trends in the economy, which in turn, will significantly improve the fiscal position.


Stagnation in the Russian economy, there has been since 2012 - a result not primarily unfavorable world economic situation and even geopolitical changes, and the weakness of the Russian economy.  I must admit that though the quality of institutions that we have, it is impossible to significantly improve the business climate, attract investors.


However, the moment seems to be the best ever for the most effective investment in the development of the country.  With the introduction of retaliatory sanctions to restrict imports, we have a unique opportunity to develop the most important sectors, such as agriculture and food processing.  The subsidy program for farmers, insurance and joint public-private financing of construction companies that can provide a full import substitution, require significant resources.


It is important to note that an additional 1% of economic growth provides the financial system of 200-300 billion rubles.  additional income, and it is only the direct effect.  The choice that confronts us - and be content with little hope for an acceptable foreign trade conditions for many years, or actively work to ensure that the required rate of socio-economic development of the country.

These circumstances again raise the question as to whether we are right in their desire to preserve the fiscal rule - the basis of the fiscal policy of the country that has experienced several interpretations.

Rule old realities

In discussions about the budget rule, we usually pay attention to the fact that it involves the accumulation of reserves in case of a favorable world market conditions in the oil market.  It was assumed that by smoothing the cyclical dynamics of oil prices, fiscal rule, therefore, is a good mechanism for counter-cyclical public policy.  Now, however, it is clear that this mechanism is no longer fully satisfy us.  We have been unable to stimulate the economy through fiscal policy at a time when our state is close to recession.  When it is necessary to strengthen measures aimed at mitigating the negative effects on the growth of geopolitical tensions.

Level of public debt is now extremely low - less than 11% of GDP.  The conservative position is that we are irresponsibly shatter the stability of its budget increase.  When investing a large amount of investment in the reform of institutions and vital industry  inflation will increase, which will lead to a deterioration in the credit rating of the country.  If they fall, the credit rating , we will not be able to attract cheap money through Western financial instruments .

But, on the one hand, given the new realities associated with the aggravation of geopolitical situation, we do not plan this in the near future.  If we analyze the effect of the latter set of sectoral sanctions on Russian state-owned banks will be clear: none of them for at least the next year and so will not be able to attract long-term debt capital in the West.

On the other hand, an increase in the limit of expenditure budget can afford with a deep analysis of its structure to hold her balance and devote resources to the so-called productive expenditure.

For the reduction of the budget deficit to rise    (Eg up to 2% of GDP), it is important to optimally plan funding sources of its funding.  If funds only from the domestic market may be    " crowding-out effect "- reduced resources for bank lending and investing in corporate bonds.  However, the issue of bonds increases the amount of federal loan mortgage securities, which enables the Bank to expand Russia refinancing.  Of course, the Bank of Russia can strengthen open market operations , increasing its balance sheet through the purchase of risk on sovereign debt with the balance sheets of commercial banks.  In addition, it is necessary to work on long-term debt capital in the East, this market is open to us.

How to dispose of this opportunity

Currently, public funds should be directed to the sectors, the most dependent on public investment.  Changes and the role of innovation economy    (Engineering, communications, research and development,  education , health care), which is associated with the organization of import-substituting industries and localization of a number of products.  These high-tech industries are able to create additional demand for the products of Russian companies, giving impetus to the stability and growth of the existing trend.

It seems that in today's additional costs aimed at undoing bottlenecks in infrastructure and manufacturing, will not have an inflationary effect.  On the contrary, to curb rising food prices, it is necessary in the near future to significantly increase agricultural proposal that will be extremely difficult to do without government support.

The main risk in this case is to maintain the low efficiency of public spending.  Any increase in government spending must be done with utmost care, combining public investment in non-monetary incentives to economic activity - deregulating its ordering and comprehension.  In large-scale infrastructure and industrial projects to direct state funds only in conjunction with private investment.  You can use a tool such capitalization of development institutions, as  VEB and    "Eksar" to support lending to the economy and the non-oil exports.

All these measures we have already started to work out - now it is important to look for opportunities to their full implementation.  Economic growth at    "Okolonulya" - this is not a new economic doctrine, but only the omission of fiscal, monetary and economic policy in general.  Responsibly approached the planned increase in the budget deficit, we can provide a new round of high tide of economic power, which is so important in the face of the deteriorating geopolitical situation.  We have a real opportunity to develop key sectors of the economy - and so it is important to use it.


Author - Minister of Economic Development of the Russian Federation