Inaction plan

How the government is going to restore the economy after the crisis

The government, on behalf of President Vladimir Putin, has prepared a "nationwide action plan" that should restore the economy and incomes of citizens after the coronavirus recession. Its release was postponed several times, and wide public attention was riveted to its preparation.

On June 2, the government's draft plan, a month after development began, was finally presented to the public. The announced cost of measures for the budget, according to Prime Minister Mikhail Mishustin, is about 5 trillion rubles, and the number of individual measures exceeds 500.

It is planned that the way out of the crisis will take place according to a clear schedule. By September, the Russian economy will adapt to the economic shock.

The recovery stage will take the next nine months, and from July 2021 the stage of active growth will begin. All activities are presented in the form of a schedule with the allocation of start and end dates, the responsible public authority and its cost to the budget. It would seem that nothing went unnoticed and uncovered.

However, when studying the full text of the plan, several aspects attract attention.

Firstly , these are low expectations for the tasks set. The main indicators of the implementation of the plan include a steady growth in real incomes of the population and GDP growth of at least 2.5% - all this by the end of 2021. However, next year's macroeconomic dynamics will be largely determined by the depth of the fall this year.

In a sense, the more GDP shrinks this year, the easier it is to achieve 2.5% growth next year. The current forecasts of the Central Bank and the Ministry of Economic Development assume that the decline in GDP will be 5% this year. Thus, even with growth of 2.5% in subsequent years, the Russian economy will return to the level of 2019 only by 2022.

Similarly, a 2.5% rise in real wages or a 3% rise in retail next year will be determined by the extent of the current failure, not by the government's plans. In April 2020, retail decreased by 23.4% compared to April last year. Of course, restrictions on the work of non-food stores significantly influenced these results. However, in the face of rising unemployment and a reduction in real incomes, many citizens will be forced to save on non-essential goods. Consumption recovery may take quite a long time, and a 3% rise from a low base is likely to happen on its own.

The plan initially does not provide that it will be able to significantly affect macroeconomic dynamics. Additional social payments will help support the real incomes of the population, however, the plan does not contain any quantitative targets for this indicator.

Secondly, for the most part, the plan is a mixture of previous anti-crisis programs, transformed priority national projects, as well as various reforms and ideas that have been developed in recent years.

For example, the plan includes mechanisms for investment protection agreements and incentives (PPAs), which have been developed since 2018. Infrastructure projects with a total value of over 2 trillion rubles, approved and agreed upon earlier, also became part of it. Activities for "accelerated digitalization" and the development of electronic public services have largely migrated from the priority national project "Digital Economy".

This mixture of all sorts of old and new initiatives makes it hard to tell what additional new money the government plans to introduce to the economy. Apparently, we are talking about relatively small amounts on the scale of the economy. During April-May, three anti-crisis action plans have already been consistently prepared. Their total value is 3.2 trillion rubles (2.9% of GDP).

The volume of anti-crisis state support in Russia turned out to be relatively small.

In terms of the volume of state support as a share of GDP, Russia is several times inferior not only to developed countries, but also to the volume of assistance in Russia during the crisis of 2008–2009. The recovery plan will not change this picture in a significant way.

The new plan includes little or no new major initiatives to support income or small and medium businesses. The authorities have also finally decided to abandon unconditional direct payments to the population.

The most expensive measure of social support will be a one-time payment of 10 thousand rubles for each child aged 3 to 16 years (192 billion rubles) and monthly payments to needy families with children aged 3 to 7 years (105 billion rubles). In total, the government plans to spend 760 billion rubles on social support or employment support over two years, of which 442 billion rubles will be in 2020.

New initiatives include the creation of a “social treasury”, which should unify the mechanisms for providing social support, certain cosmetic changes in labor legislation, the liberalization of corporate legislation, as well as maintaining restrictions on inspections of small and medium-sized businesses, as well as some other measures.

On the other hand, support for regional budgets appears to be insufficient. Last year, the regions received 2.6 trillion intergovernmental transfers from the federal government. The current additional support of 200 billion rubles is less than 10% of this amount, while the regions could lose up to 30% of budget revenues this year. The total budget deficit in the Russian regions is at the level of 6-9% of their own revenues. Regional budgets may face serious financial problems this year without additional support from the center and without the emergence of new sources of income.

A set of all kinds of measures and initiatives within a single document with the designation of deadlines and responsible executors is a reasonable technocratic approach. Relaxing fiscal discipline and increasing government spending is necessary in the face of an economic downturn and recession. The focus on the development of digital technologies in the public sector, as well as the willingness of the authorities to limit and try to reduce the administrative burden on business, can only be welcomed.

However, the current government plan is by no means a plan for an economic breakthrough or a paradigm shift in economic policy in recent years. We are not talking about the NEP or the "New Deal" - this is a continuation of the same policy, which did not differ in particular economic results. It's hard to believe that the outcome will be different now.