Finance Minister Anton Siluanov / E. Razumny / Vedomosti

It is unclear to what extent it will be possible to adhere to the budget parameters set for the entire three-year period, write economists from RANEPA and the Gaidar Institute in their review of the draft budget. The government may need money in 2017 for additional payments to public sector employees and pensioners, warns Vladimir Tikhomirov from BCS – next year is an election year, and people's lives are getting worse. The imbalance of expenditure in favor of social and defense costs has a negative impact on economic growth, says the review of the Economics Department of Moscow State University: it would be more appropriate to revise the budget parameters taking into account the real needs of the economy and the impact of the budget on its growth. However, despite the comments of experts and auditors, the State Duma Budget Committee recommended adopting the draft budget in the first reading in its current form, as follows from its conclusion.

It is very important to adhere to the established ceilings of budget expenditures, even if oil prices rise, writes Finance Minister Anton Siluanov in a column for Vedomosti (see page 06). The growth of budget expenditures will force the Central Bank to keep real interest rates at a higher level, the share of government expenditures in the GDP structure will grow, he warns, and their increase does not contribute to economic growth.

The government set the expenditure ceiling at 15.787 trillion rubles. This is the level of expenditure that we can afford in the current situation, taking into account all the risks, Siluanov said in the summer. In fact, 2017 expenditures were already exceeded in budget projections by 450 billion rubles due to a one-time payment to pensioners and additional capitalization of VEB. By 2019, expenditures in relation to GDP will decrease to 16.2% from 19.8% in 2016.

Extensive growth in spending does not ensure economic growth

Opinions / Analytics

The draft budget for 2017–2019 includes a conservative oil price of $40 per barrel. The Ministry of Economic Development took into account large oil and gas revenues in the “base+” scenario, a ministry representative recalls. According to the Finance Ministry’s calculations prepared for budget meetings in early September, a $1 increase in the oil price would bring the budget about 145 billion rubles – in 2017 conditions with an oil price of $40 per barrel and an exchange rate of 69.4 rubles per dollar. Oil may cost more, according to Prime Minister Dmitry Medvedev: “When we started working, it was higher, but now it has gone down.” On Monday, Urals oil closed at $38.93 per barrel, and by Thursday it had risen to $42.72 per barrel (Thomson Reuters data). “If prices go up, we will naturally discuss how to use the additional income in the interests of our country and our citizens,” the prime minister promised at a meeting with the United Russia faction.

An increase in government spending due to additional oil and gas revenues could lead to inflation, argues a Finance Ministry official, and if the price of oil falls sharply, we will return to the situation of 2014–2015. Oil excess revenues should be saved in reserves, he believes.

Until 2015, Russia had a budget rule that limited spending and required oil surpluses to be sent to a reserve fund. But after the sharp decline in oil prices in the fall of 2015, the Finance Ministry itself asked for the rule to be suspended.

Now the fate of additional revenues will be linked to the new budget rule, says a federal official. The new version of the rule proposed by the Ministry of Finance was sent back by the government for revision. It is very difficult to link budget balance and stimulation of economic development, so the budget rule will require serious development, and not behind-the-scenes calculations, he explains. Not all expenses lead to inflation, notes the official from the financial and economic block: additional revenues could be useful, and not just lie around for a rainy day. There may not be much of it, but these funds can be used effectively, he believes. At budget meetings with the Prime Minister, proposals were made to increase investments now, the return would be if not in 2017, then in 2018, recalls a third federal official, but the Ministry of Finance was adamant: "There will be no additional revenues, there is no money, expenses must be cut." “As a result, we have a poor expenditure structure, and it is not a fact that the next ‘credit scheme’ will not lead to their growth in 2017, as was the case in 2016,” he is categorical.

If the average oil price for the year turns out to be higher than $40 and the budget receives additional income, then it will spend less reserves, a representative of the Ministry of Finance describes its position. However, in the conditions of unpredictable prices and volatility of raw materials markets, when oil was cheaper to $25, one can only forecast conservatively, he points out.

The Ministry of Finance begins the fight for additional revenues that have not yet appeared