The Federal budget for 2017-2019: what they say, its basic parameters

Scenarios and predictions

The draft law “On the Federal budget for 2017 and the planning period of 2018 and 2019” the year 2016 is characterized as the period of adaptation to external economic challenges. It is planned that on change to it will come the output stage on the parameters for balanced development of the economy. That, however, would require, among other things, certain changes in the volume and structure of expenses of the budget for the fiscal consolidation and the achievement of targets on the size of the budget deficit.

October 13, 2016 at the meeting of the Government of the Russian Federation considered the draft law “On the Federal budget for 2017 and the planning period of 2018 and 2019” (hereinafter the bill). The bill set out preliminary estimates of the Federal budget for 2016 1, and main parameters and conceptual changes of the budget system, planned for the next three years.

The Ministry of Finance and the government return to a three-year budget planning: the project includes options not only for 2017, but the planning period of 2018-2019, However, remains an important question: how will be able to follow laid down parameters for the entire three-year period, whether this be not a nominal, but a real signal for the public and for business, in terms of stability of fiscal policy?

This year the Main directions of budget and tax and customs tariff policy (NBP, NNP, HTTP) was first discussed at a government meeting in may-June as in previous years, and a week prior to the consideration of the draft Federal budget with a detailed explanatory note to it that actually devalues the importance of their presentation as documents on the basis of which should be developed the draft law on the Federal budget.

The bill generated based on the basic variant of the forecast socially-economic development of the Russian Federation in 2017 and 2018 and 2019, the main parameters of which are presented in table. 1.

External and internal factors and conditions

From the point of view of external conditions for the development of the national economy, projections imply a continuing slowdown in global economic growth, resulting in expected improved market prices and demand for Russian exports. It is also expected the preservation of the sanctions regime throughout the period under review. According to preliminary estimates, in 2016 the average price of Urals oil will be $ 41/barrel. in the 2017-2019 biennium. she is projected to be stable at $ 40./Barr.

Table 1.

The main parameters of the base variant of the forecast socially-economic development of the Russian Federation in 2017-2019

<tbody>

</tbody>

2015
2016
2017
2018
2019

GDP, billion rubles
80804,0
82815,0
86806,0
92296,0
98860,0

The rate of growth of GDP, % change. year
-3,7
-0,6
0,6
1,7
2,1

The average price of Urals oil, $ /Barr.
51,2
41,0
40,0
40,0
40,0

The average annual exchange rate of the ruble to US dollar, rubles per us$.
60,7
67,5
67,5
68,7
71,1

The consumer price index in annual terms, %
12,9
5,8
4,0
4,0
4,0

Source: 2015 – actual values. 2016-2019 – explanatory note to the draft Federal law “On the Federal budget for 2017 and the planning period of 2018 and 2019”.

As for internal factors, it is expected to resume growth after two years of decline: growth rate of GDP in the 2017-2019 biennium. reaches of 0.6, 1.7 and 2.1%, respectively. With moderate nominal growth in domestic demand and a relatively stable exchange rate dynamics of the inflation slowing to 4% per year should have a favourable impact on economic development. The national currency rate will fluctuate in the range of 67.5–71.1 ruble per dollar.

Overall the year 2016 in the budget bill is characterized as the period of adaptation to external economic challenges in 2014-2015, it is Planned that it should be replaced the period on the parameters of balanced development of the economy.

The main characteristics of the Federal budget formed in accordance with the basic variant of the forecast socially-economic development (see table. 2).

Income

In the 2017-2019 biennium. projected decrease of Federal budget revenues from 16.1% of GDP in 2016 to 15.0% of GDP by 2019, which will be due on the first dynamics oil and gas revenues, which are reduced from 5.8% of GDP in 2016-2017 to 5.4% of GDP by 2019 the Volume of non-oil revenues will be sustainable and in accordance with budget projections will not fall below 9.6% of GDP, which corresponds to 2015

Table 2.

The main characteristics of the Federal budget

<tbody>

</tbody>

billion rubles

% Of GDP

2015

(fact)

2016

(est)

2017

(draft)

2018

(draft)

2019

(draft)

2015

(fact)

2016

(est)

2017

(draft)

2018

(draft)

2019

(draft)

Income
13659
13369
13437
13989
14825
16,9
16,1
15,5
15,2
15,0

Including

Neftegaz-

pink

5863
4778
5029
5133
5370
7,3
5,8
5,8
5,5
5,4

Nanette-

gas

7797
8591
8408
8856
9455
9,6
10,4
9,6
9,6
9,6

Costs
15620
16403
16181
15978
15964
19,3
19,8
18,6
17,3
16,1

Deficit (-/)

surplus (+)

-1961
-3034
-2744
-1989
-1139
-2,4
-3,7
-3,02
-2,2
-1,2

Nanette-

gas

the deficit

-7823
-7812
-7773
-7122
-6509
-9,7
-9,4
-9,0
-7,7
-6,5

* Parameters are given, a preliminary assessment of the Federal budget implementation in 2016 take into account the receipt of funds related to the sale of 19.5% of shares of PJSC “Rosneft”. It is expected that the transaction will be held until the end of 2016

Source: 2015 – actual values. 2016-2019 – explanatory note to the draft Federal law “On the Federal budget for 2017 and the planning period of 2018 and 2019”.

The noticeable growth of non-oil revenues in 2016 (up to 10.4% of GDP) is a consequence of the expected additional revenue from the partial privatization of PJSC “Rosneft”.

Revenues in all respects non-oil revenues (in addition to import duties, the reduction of which is expected at 0.1 p. p. of GDP), in the 2017-2019 biennium. projected at or above their estimates, 2016 (approximately 0.1 p. p. of GDP). The most notable growth in revenue is expected in VAT (for goods sold on the territory of the Russian Federation): +0.4 PP. of GDP by 2019 (see table. 3).

Table 3.

Federal budget revenues in the 2017-2019 biennium.

<tbody>

</tbody>

Billion

% GDP

2015
2016
2017
2018
2019
2015
2016
2017
2018
2019

Revenues total
13659
13369
13437
13989
14825
16,9
16,1
15,5
15,2
15,0

Oil

gas

5863
4778
5029
5133
5370
7,3
5,8
5,8
5,6
5,4

of them

Met
3160
2819
3278
3386
3527
3,9
3,4
3,8
3.7 V
3,6

export duties
2703
1959
1750
1746
1843
3,3
2,4
2,0
1,9
1,9

Nanette-

gas

7797
8591
8408
8856
9455
9,6
10,4
9,7
9,6
9,6

of them

tax on profit of organizations
491
465
599
635
686
0,6
0,6
0,7
0,7
0,7

VAT on goods sold on
Russia
2448
2637
2888
3205
3559
3,0
3,2
3,3
3,5
3,6

VAT on goods imported into
the territory of the Russian Federation
1785
1910
2001
2119
2265
2,2
2,3
2,3
2,3
2,3

excise taxes on products
Russia
528
623
791
854
894
0,7
0,8
0,9
0,9
0,9

the excise tax on goods imported into
the territory of the Russian Federation
54
57
51
50
52
0,1
0,1
0,1
0,1
0,1

import duties
560
542
529
538
558
0,7
0,7
0,6
0,6
0,6

Source: 2015 – actual values. 2016-2019 – explanatory note to the draft Federal law “On the Federal budget for 2017 and the planning period of 2018 and 2019”.

The stability of the non-oil tax revenues, as well as partial compensation of the fall of oil revenues in the medium term will be supported by measures to mobilize additional revenues to the budget. The most significant measures include:

1) is planned for 2018-2020 completion of the “tax maneuver,” which will entail the growth rate of the severance tax on oil and oil products with the simultaneous abolition of export duties on them and change the system of collection of excises on petroleum products. Also in pilot mode and expected to begin implementation added tax income (JPM). In General, in the taxation of oil and gas production in the medium term plan to balance the tax burden on the oil and gas industry;

2) increase the minimum standard of dividends on state shares and state – owned companies with 25 to 50%.

3) the creation of a unified system of administration of revenues of the budget system by implementing a unified methodological framework. It is expected that this initiative will lead to increased revenue collection and contribute to the reduction of administrative burden.

However, in our opinion, the expected effects from the implementation of the latter measures is clearly overrated. First, the expected improvement in the quality of administration of imports due to the integration of information systems (is) FCS and FTS can enhance the tax base of VAT on imports, however, given the fact that a large part retained when the customs Declaration of tax is subsequently accepted to a deduction for “domestic” VAT, the total effect on revenues of this tax may be much more modest.

Second, ceteris paribus the increase of the customs value will lead to an increase of customs duties, which in turn will increase the costs of suppliers, and will cause either rising prices (inflation) or lower profits (falling revenues from income tax).

Thirdly, with regard to the ask VAT-2 (information system FTS), launched in 2015, it identifies those companies that do not show the implementation, although carry out procurement operations, thereby narrowing the sample of control and audit activities on. The fiscal impact in 2015 is estimated at 150 billion rubles, but taking into account the complexity of “cashing out” funds in General and the fact that the actions of ask the VAT-2-2015 fiscal effect mainly was realized in the year of commissioning of the system and hardly can manifest later in the form of significant additional annual income.

Spending and budget rule

Federal spending in the 2017-2019 biennium. formed in the framework of the budget rules. In the medium term is expected to resume the implementation of fiscal rules to weaken the sensitivity of the budget system to the volatility of world oil prices. According to preliminary estimates, the new edition of the budget rules in full will be effective from 2020, while the 2017-2019 biennium. announced a transition period because of the need to avoid too rapid compression costs up to the level envisaged by the concept of the new budgetary rules.

In accordance with the proposals of the Ministry of Finance, limiting expenditures of the Federal budget is planned in 2020 to determine as a sum of three components: 1) a basic quantity of oil and gas revenues calculated at basic price of oil is constant at $ 40./Barr. Urals and the underlying exchange rate of the ruble; 2) volume of non-oil revenues, calculated in accordance with the baseline medium-term forecast of economic development of Russia; 3) debt servicing costs. In the case when the estimated amount of the contingency Fund on 1 January of the first year of the plan period falls below the level of 5% of GDP, limiting the amount of use of the Reserve Fund for the next budget year may not exceed 1% of GDP and, on this basis, the adjusted maximum amount of the cost.

Such design rules focused on reducing the impact of fluctuations of oil prices on domestic prices and the exchange rate, fiscal policy is commensurate with the objectives of monetary regulation. It is obvious that in conditions when the first and third components of the formula will behave acyclic, the second – proteclion and the deficit is not provided, the active fiscal policy, in principle, impossible. Along with the thesis about large-scale privatization and stabilizing the tax burden, this indicates that the introduction of policies to reduce the proportion of direct state involvement in the economy.

The design rules in the long term does not look stable enough, as the preservation of binding of charges to the price of oil only makes sense if the budgetary rules are based on more or less plausible hypothesis describing patterns of movement in oil prices. Otherwise the credibility of the rules may be undermined, and then the inevitable revision, as it was with their version from 2004

Also the budget rule 2020 plans to limit the underlying level of borrowing costs debt service (of 0.8–1.0% of GDP per year). In principle, it is true, as critical not so much the size of the debt, how much expenditure on maintenance. However, it is necessary to consider the following points: in 2018 the cost of servicing the debt, the hypothesis that the deficit will shrink, fit to the upper limit (0.93% GDP); annual target of attracting domestic borrowing over $ 1 trillion; challenges persist with growing debt of the regions and the imbalance in the Pension Fund of the Russian Federation. All of the above together indicates a small realistic this restriction.

The task of the transition to the new budget rules from 2020 predetermines the need for fiscal consolidation, which is scheduled for transition period 2017-2019 biennium. the Forthcoming fiscal consolidation implies a greater degree of compression of the volume of expenditure obligations of the state while increasing their efficiency.

So, in this period, Federal budget expenditures decreased in nominal terms by almost 0.5 trillion RUB to the level of 2016 and as a share of GDP by almost 4 percentage points (from 19.8% of GDP in 2016 to 16.1% in 2019).

It is also important to consider not only the total volume but also the structure of Federal budget expenditure, which has worsened in recent years. As a result, increased costs only in three directions, and they do not refer to the productive – national defense, social policy, debt service. Among the countries that are not at war, Russia is one of the Champions of the magnitude of defense spending. Pension costs are rising steadily, and without pension reform, this trend in the coming years is unlikely to change.

The problem of public debt has escalated at a regional level – in recent years there has been uncontrolled growth of state debt of constituent entities of the Federation. Regions, increasing wages in the public network, do not only refuse public investment, but also building up debts because of increasing deficits of the consolidated budgets. So, if until 2012 many of the subjects of the Russian Federation had a small public debt, by the beginning of 2016 from 14 regions the amount of public debt exceeded 100% of tax and non-tax revenues of regional budgets.

Table 4.

Federal spending on articles of the functional classification for the 2017-2019 biennium.

<tbody>

</tbody>

Billion

% Of GDP

2015
2016
2017
2018
2019
2015
2016
2017
2018
2019

Expenses, total, including:
15620
16403
16181
15978
15964
19,3
19,8
18,6
17,3
16,1

The state.

questions

1118
1098
1170
1126
1115
1,4
1,3
1,3
1,2
1,1

NAT. defense
3181
3889
2840
2728
2856
3,9
4,7
3,3
3,0
2,9

NAT. safety and
will legally protected. activities
1966
1943
1968
1945
2007
2,4
2,3
2,3
2,1
2,0

NAT. economy
2324
2166
2292
2247
2054
2,9
2,6
2,6
2,4
2,1

Utilities
144
57
60
30
27
0,2
0,1
0,1
0,0
0,0

Protection env. environment
50
65
76
78
80
0,1
0,1
0,1
0,1
0,1

Obrazo-

tion

611
558
568
589
586
0,8
0,7
0,7
0,6
0,6

Culture and cinemato-

graphy

90
92
94
88
80
0,1
0,1
0,1
0,1
0,1

Health sector.
516
466
377
394
360
0,6
0,6
0,4
0,4
0,4

SOC. policy
4265
4631
5080
4962
5054
5,3
5,6
5,9
5,4
5,1

Physical culture and sport
73
66
86
55
34
0,1
0,1
0,1
0,1
0,0

Media
82
76
74
68
67
0,1
0,1
0,1
0,1
0,1

Service

tion of the national debt

519
640
729
848
870
0,6
0,8
0,8
0,9
0,9

Mirbud-

budgetary transfers

682
656,4
768
770
776
0,8
0,8
0,9
0,8
0,8

Source: 2015 – actual values. 2016-2019 – explanatory note to the draft Federal law “On the Federal budget for 2017 and the planning period of 2018 and 2019”.

Moreover, in the crisis situation of recent years the adaptation of Federal and regional budgets to the new reality occurred mainly due to the reduction of expenses in determining the future of the country and regions, investment expenses.

Budget estimates for the 2017-2019 biennium. although not break previously formed tendencies, still contain certain positive shifts in the structure of expenditures (table. 4). In particular, reduced defense spending, the planned cuts in social expenditure, although it is rather inertial motion with a total budget of consolidation, rather than a conscious change in the nature of fiscal policy. The last point can be illustrated by the fact that expenditure on health and education is also somewhat reduced as a share of GDP.

Why fiscal policy may change

There are three prerequisites for a radical review of the nature of fiscal policy:

1. For a long time dependent on commodity revenues, the budget has become a serious limiting factor and even the brake of economic restructuring: guaranteed rental income and a lack of demand from the commodity sector direct budget support discourage measures to change the structure of the economy. Starting from 2015, the amount redistributed through the budget of oil rents are steadily declining, which creates conditions for changing priorities of budget expenditures.

2. One of the goals of the budgetary policy proclaimed deficit reduction, however, the availability of reserves in sovereign funds are not allowed to seek answers to the challenges facing the budget challenges the long-term equilibrium (aging of the population, inertial and inflexible expenditure structure with skewed social and power direction change in the structure of revenues, the informal sector and the low stability of the banking system). Now it is obvious that the Reserve Fund is completely exhausted in 2017, and liquidity of the Fund’s assets (not hosted in the infrastructure projects) is hardly enough to balance the Federal budget during the planning period. This situation also pushes them to rethink approaches to fiscal policy.

3. Self-perpetuating debt of consolidated budgets of the constituent entities of the Russian Federation in pedantic performance of “specified” indicators will finally bring the problems of the balance of regional budgets on Federal level, which already has its own reserves to maintain the stability of not only the budget system in General, but also the Federal budget. The ongoing fiscal policy leads to growing fiscal gap and worsening long-term fiscal sustainability, which actually means postponing the crisis in public finances on the not already distant future.

The deficit and budget strategy

It is expected that the measures of fiscal consolidation should lead to a considerable reduction of the Federal budget deficit at a rate equal to approximately 1% of GDP per year (table. 2). So, by the end of 2019, the total deficit should be around 1% of GDP relative to its expected value of 3.7% of GDP in 2016 (4.5% of GDP excluding revenues from the partial privatization of the shares of PJSC “Rosneft”). During this period, non-oil deficit has also significantly reduced to 6.5% of GDP in 2019 (nearly 3 p. p. of GDP relative to the level of 2016).

Table 5.

Sources of funding the Federal budget deficit in 2017-2019, billion rubles

<tbody>

</tbody>

2016
2017
2018
2019

The sources of financing the deficit
3034
2744
1989
1139

The use of the Reserve Fund and national welfare Fund
2144
1812
1140
137

Not involving the use of
The reserve Fund and national welfare Fund
890
932
849
1002

Sources of internal
deficit financing
897
1136
1078
1130

government securities
449
1050
1050
1050

privatization
382*
138
14
14

budgetary loans and credits
provided within the country
-183
29
133
155

other
249
-81
-119
-89

The sources of external financing
deficit
-7
-203
-229
-127

* Amount includes proceeds from the sale of shares of JSC “Bashneft”.

Source: 2016 2017-2019 2017-2019 biennium. OBP from the explanatory note to the draft Federal law “On the Federal budget for 2017 and the planning period of 2018 and 2019”.

On the background of General reduction in the deficit during the planning period will significantly change the balance of sources of financing (tab. 5). While in 2016, about 70% of the deficit was covered by funds and sovereign wealth funds, by 2019, to 90% of the total deficit will be offset by the sources of internal financing of the deficit, mainly government securities. This structure of sources of financing the deficit takes into account the depletion of the Reserve Fund already in 2017 and preservation by the end of 2019, of NWF, in the amount of 3.1% of GDP.

At the same time, we must recognize that the current structure of budget expenditures and the current trend changes do not meet the requirements for long-term fiscal sustainability and long-term sustainable economic growth.

In the face of declining state revenues, the fiscal maneuver in favor of productive spending faces major constraints: it must be implemented by a decline in the total expenditure of the extended government budget. In order to 2019-2020 budget deficit was not more than 1-1. 5% of GDP and limiting expenditure of the extended government budget did not exceed 33-34% of GDP, can be a time to use the “inflationary expansion” of the economy: keeping up on the current nominal level of overhead costs, indexed at the rate of inflation or higher productivity. However, you will then go to the policy of the “debt brake” (a zero fiscal balance in real terms, calculated over the period) by implementing the necessary changes in the fiscal rules and adopting a medium-term programme of fiscal consolidation.