Download 250 KB New Realia of Russian State Finances

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New Realities of Russian Public Finances
Аpril 23, 2015
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Serious deterioration in macroeconomic conditions in 2015 required a major
adjustment of the budget, but its priorities remain the same
Loss of income will amount to 2.5 trillion rubles. (at a price of oil on average $
50/bbl), mainly due to the loss of oil and gas revenues
Loss of oil and gas revenues may increase due to the strengthening of the
ruble, but the additional revenues from the VAT are very likely
Redistribution on the expenditure side is not always valid, especially the
reduction of expenditure on education and health
Total reduction amounted to 298 billion rubles, which is considerably less
than the original plans. Reduction moderation should be the cause of
effectiveness for the budget in the economy
At the same time additional costs should not be ruled out due to increased
transfers to the regions because of the loss of income tax
Expansion of the budget deficit to 3.7% of GDP seems very modest, sources of
finance are available
But new budget revisions are likely to be due to the rapidly changing
conditions and serious budgetary risks
Two-thirds of available funds of the Reserve Fund will be allocated at the
deficit financing, which will reduce its ability to 2016-2017
But overall stability of public finances seems certain in 2015-2017
Budget Revenues
Reduced
Will
Be
Dramatically
New Federal budget
parameters
The significant deterioration in the external economic and political factors in the
second half of 2014 led to necessity for changes of the Federal budget.
Challenges, such as the terms of trade shock due to falling oil prices, the economy
going into a recession, a devaluation of the ruble, a sharp acceleration of inflation
– led to the need for a radical revision of the revenue and expenditure sides of the
budget. Anti-crisis measures are needed to integrate into the budget without
excessive inflation of costs due to reduced revenues.
The project is based on
conservative
macroeconomic
forecasts
This week the President signed adjusted project budget for 2015, which entered
into force. Amendments to the budget developed by the Ministry of Finance in the
new conservative assumptions of the forecast of the Ministry of Economic
Development. According to the forecast, the average price of Urals crude oil will
be $ 50/bbl in 2015 and GDP will decrease by 3% yoy in real terms, which will
lead to an adjustment of the volume of nominal GDP in 2015 to -5.4% compared
© Macroeconomic Research Center of Sberbank of Russia
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SBERBANK OF RUSSIA
New parameters of the
Federal budget
with the budget adopted in December 2014. Higher inflation (15.8% yoy on
average in 2015 and 12.2% at the year-end) and the devaluation of ruble (the
average exchange. rate of 61.5 rubles/$) will sustain the ruble tax revenue, but
the effect of the fall in prices oil and deep recession will not be fully compensated.
The macroeconomic situation is changing rapidly, that is why the government
needs some flexibility. A new revision of the macroeconomic parameters in the
coming months and the corresponding budget adjustments cannot be excluded.
Expected Reduction in Oil and Gas Revenues
Lost revenues of 2.5
trillion rubles.
In these circumstances, the Ministry of Finance estimates the loss of revenue of
2.54 trillion rubles. Most of the losses occur in the loss of oil and gas revenues (2
trillion rubles.). In our analysis we came to a similar conclusion. There is nothing
special about it: the big shocks in oil and gas production are not expected,
calculation formula of oil and gas revenues is transparent and the
macroeconomic assumptions are not very different.
Non-oil and Gas Revenues Can Hatch a Surprise
Non-oil and gas fiscal
revenues will be
reduced by 512 billion
rubles…
… of which 390 billion
will come from the VAT
reduction …
… but revenues may be
higher
Budgeted tax increase
on income seems
unlikely ...…
But non-oil and gas revenues loss calculations are somewhat unexpected.
According to the amendments, non-oil and gas revenues will be reduced by 512
billion rubles with respect to the budget law adopted in December.
The main reduction is the loss of VAT revenues, which will diminish by 389.8
billion rubles. This reduction is largely due to overly optimistic assumptions
about the growth of VAT revenue in the December version of the budget law.
Then it was assumed that the VAT revenues would amount to 4.1 trillion rubles
and it would exceed the level of 2014 by 175 billion rubles. Now, however,
estimation revenue appears too low, even taking into account the provision of tax
relief (for instance, air carriers by 25 billion rubles). According to our estimates,
revenues from the VAT related to the import, will remain almost at the level of
2014, as the drop of the ruble fully compensates the effect of the reduction in
dollar import. And accelerate inflation can be the reason of decreasing of internal
VAT revenues. That means additional revenue from this tax, estimated by 200
billion rubles, cannot be excluded.
But it is hard to believe in the growth of tax revenues on income which increased
by 6.2 billion rubles in the Federal budget in the new version of the law. Income
tax is one of the main sources of incomes of regional budgets. 2pp ascribed in the
Federal budget, the other part, up to 18pp, goes to the regional. Although in the
Basic parameters changing of the economic projection
The main characteristics changing of the budget
Federal law
on the
Amendments
budget (Dec. to the budget
2014)
(April. 2015)
The price of URALS oil, $/bbl
Ruble exchange rate (average
per year), rub./$
Economic growth, %
GDP, trillion rub.
CPI (at period’s end),%
100
50
37.7
1.2
77.3
5.5
61.5
-3.0
73.1
12.2
Источник:
Минфин, МЭРResearch Center of Sberbank of Russia
© Macroeconomic
Revenues
Oil and gas
revenues
Non-oil and gas
revenues
Expenses
VAT
СальдоМинфин,
бюджета
Источник:
МЭР
Federal law
on the
budget (Dec.
2014)
15082
Amendments
to the budget
(April. 2015)
12540
7717
5687
7365
15513
4105
-431 2
6853
15215
3715
-2675
SBERBANK OF RUSSIA
first two months there was a positive trend for revenues of this tax, but soon it is
likely to change significantly. Revenues from income tax in the consolidated
budget decreased by 39% yoy in 2009 in the event of significant ruble
devaluation and greater reduction in GDP (7.8% yoy). However, only part of the
effect can be attributed to the reduction of the tax rate from 24 to 20%.
Accumulated losses of the previous period, which reduced the estimated tax base,
were the main reason for the decrease revenues. There were also accumulated
losses amounted to 3.7 trillion rubles (+ 93% yoy) in 2014.
.. We forecast a
reduction of the
federal tax on 100
billion.
It is very likely that the dynamics of receipts of income tax in 2015 will be closer
to the dynamics of 2009 than the government believes. According to our
calculations, the decline of income can reach 25%. Thus, the revenue lost in
income for income tax will reach 590 billion rubles in 2015 (-25% yoy), of which
100 billion rubles will have shortfall in profits by the Federal budget.
Reduced revenues
from personal income
tax in the consolidated
budget is also very
likely
Consolidated budget may receive less income tax and personal income. We
estimate that these losses are 130 billion rubles. Indeed, inherent payroll growth
(+ 4% yoy) seems overly optimistic in terms of the actual non-indexation of
public sector wages. Since October 1, 2015 indexing has been canceled for most
groups, including doctors and teachers. We believe that the payroll rather fall to
0.5-0.6% due to rising unemployment and informal employment, which will
cause a reduction in tax revenues.
…and regions will
recognize it first
We are not accidentally identified further shortfall in income not only federal, but
also of the consolidated budget. Its fall (about 650 billion rubles.) is needed to be
taken into account due to the fact that ultimately the problem of financing of the
regional budgets would be a new overhang/issue of the Federal budget.
Reduction and Redistribution of Expenses
Structure of Budget Expenditures
The priority of the
Federal budget is
defense spending
Regional budgets
handle social
expenditures
We consider that the structure of the Federal budget and before decision on the
budget sequestration in recent years has not been optimal. The share of expenses
of the Federal budget, directed to national defense, increased rapidly, rising from
13.9% in 2011 to 16.7% in 2014. It should be noted that the national defense is
the only item of expenditure with sustainable growth. Even within the
framework of the consolidated budget the share of expenses for national defense
increased from 7.6% in 2011 to 9.1% in 2014. It describes the government's
priorities. In contrast, during the same time expenses of the Federal budget on
education fell from 5.1% to 4.3%, health care from 4.6% to 3.6%, housing and
communal services from 2.6% to 0.8%.
Regional budgets “tried” to make up for the part of the financing loss of human
capital. Total funding for these items is still able to maintain almost unchanged,
although trend on a slight increase in their funding was observed in 2011-2012.
© Macroeconomic Research Center of Sberbank of Russia
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Amendments
Between Items
Strengthened
Disproportion
The reduction and
redistribution of
expenditures increase
the disproportion
The usual anti-crisis measure is increasing budget expenditures. But the current
challenges cannot be limited to one year, therefore, the decision was announced
on the annual 5% reduction of budget expenditures in real terms 2015-17. In
2015 reduction is accompanied by a significant redistribution of expenditure
items, and, unfortunately, it did not diminish the disproportion in the structure of
expenditures.
The planned
expenditure reduction
of 10% turned out to
be impossible
Initially all unprotected budget items were planned to reduce evenly by 10%,
which was impossible to do. Defense expenditures decreased by only 4.8%
compared to the budget law, approved in December. However, their growth was
still impressive 26%. On the same 4.9% against the previous plans for 2015
expenditures on education have been reduced, but compared to 2014 they
decreased by 5.7% yoy in 2015. But public health article has been reduced much
more drastically - by 8.2% compared to the previous law on the budget and 28%
yoy with respect to 2014. Of course, part of this reduction was possible by the
sectoral reform which is gaining momentum. But this reform is extremely
unpopular among the population, and in general there is no certainty that the
growth of the use of resources corresponds to the reduction in funding. Article of
housing and utilities services was reduced by 10.8% relative to the sample
budget in December 2014, but relative to 2014 expenditure will increase by 7.9%
yoy.
Expenditures
decreased by 298
billion compared to
the previous version of
the budget
Share of defense
expenditures will
increase by 20.5% in
2015
As a result of the reduction of items and reinvesting funds between items
expenditure portion has been reduced by 298 billion rubles against the budget
law adopted in December 2014.
How is the structure of budget expenditures affected? The share of defense
expenditure will increase by 20.5% of the Federal budget, while the share of
expenditure on education and health is 4% and 2.5%. All this make the country
avoid the expenditure structure, which is typical for developed countries, where
the priorities are just on health and education expenditures. We believe that the
cost optimization by reducing investments in health and education, with an
Expenditure structure of the Federal budget in 2011 and 2015
Source: The Central Bank of the Russian Federation, MRC settlements
© Macroeconomic Research Center of Sberbank of Russia
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increase in defense expenditure is not the right way to achieve budgetary
savings.
Refusal of indexation
of wages reduces GDP
growth by 0.1 pp
Reducing some items may be resonant. For example, non-indexation of public
sector wages and pensions of servicemen (saving 87.6 billion rubles.), and an
additional blow to consumption - lost 0,7pp growth in the 4th quarter of 2015
(the period of the planned indexation). For the whole 2015 this represents a loss
of 0.2 pp for consumption and about 0.1 pp for economic growth.
Investments in
infrastructure are not
sufficient - only 4% of
expenditures
The share of infrastructure investment expenditures does not seem sufficient and
it will be only 4% of the expenditures. Although the growth of these expenditures
nominally looks very impressive (17.7% yoy), extreme degree of underinvestment in infrastructure requires a more serious investment. These
expenditures of productive group can lead to a medium-term acceleration of
economic growth.
Budget Revision Risks Remain
Reducing of oil
revenues due to ruble
strengthening is the
risk for the budget
There are risks of
expenditure growth
and transfer of
regions
Additional
capitalization of
banks did not
eliminate the system
risks
Reducing of oil revenues due to ruble strengthening. A significant
increase in the ruble exchange rate cannot be ruled out in 2015, even with a
relatively low oil prices in $ 50/bbl. This may be due to the strengthening of the
geopolitical situation stabilization. However, such dynamics are generally
positive for consumer demand, will lead to a further reduction in oil and gas
revenues. For example, the strengthening of the ruble to 55 rubles/$ will reduce
the price of a barrel of oil in rubles to 3075 rubles, included into the budget
estimates, up to 2750 rubles per barrel. Simple estimations show that in this case
the reduction in oil and gas revenues will increase by another 600 billion rubles
and the financial gap funding will be on the reserve fund.
Transfer of the regions may be increased. From our point of view, the
formation of the expenditure side of some risks did not take into consideration.
For example, the transfer of the regions is likely to have increased due to falling
revenues from income tax and personal income tax. The transfer is reduced to
619.4 billion rubles in the new version of the budget, but the loss of revenues of
regional budgets may reach 650 billion rubles, as it was mentioned above. It is
difficult to expect that the regions will be able to fund additional loss of income
due to market sources. First, the bond market cannot provide the required
volumes to the regions: in the past year, the regions were able to place securities
for 111 billion rubles when refinancing of repayments is needed in the amount of
121 billion. Net debt banks of regions has increased rapidly in recent years and
reached a record 1.076 trillion rubles in 2014. Providing budget loans to regions
have been sharply increased: + 300% in 2014. Therefore, the Federal budget will
have to increase support of regional budgets - through the budget credits and
through transfers. It is possible that part of the region will also require the
support of accumulated debts service, which may extend the need for support.
That means that in 2015 the transfer of regions can easily increase from 619.4
billion rubles to 1.2-1.3 trillion.
State Support of Banks and Companies. Although the situation in the
banking sector returned to normal in comparison with the end of the acute phase
of the 2014 crisis, it may need additional support from the state for
recapitalization. In December of 2014 series of prudential measures was urgently
adopted, the amount of the security deposit was increased and bank
recapitalization program is approved through the Federal Loan Bond. 1 trillion
© Macroeconomic Research Center of Sberbank of Russia
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rubles were planned to send on the program and to allow banks only with the
capital exceeding 50 billion rubles. By February of 2015 830 billion rubles have
been reserved for the 27 largest banks, while the remaining 170 billion rubles
were planned to be used for additional capitalization of regional banks or in the
event of a new aggravation of the situation in 2015. However, in March 2015 it
became clear that the banking sector is still coping with challenges. At the same
time other problems became more urgent. A number of companies required
additional funding for the development of import substitution. Of the remaining
for additional capitalization of banks of 170 billion rubles United Aircraft
Corporation will receive 100 billion rubles on the civil aviation development.
Considering the low domestic demand and the low competitiveness of domestic
products in foreign markets, we expect the growth of applications for state
support. The list of strategic enterprises of the Economic Development Ministry
includes 199 organizations.
The experience of 2009
confirms that the actual
expenditure may be
higher than it was
planned
Financing of Crisis Bailout Plan. Current crisis bailout plan has been
developed by analogy with the anti-crisis program in 2009. During that period
the amount of additional expenditure of the budget on economy support
amounted to 2.2 trillion rubles, of which 495 billion rubles were sent to maintain
the stability of the financial system (and another 900 billion rubles were on
additional capitalization of banks by the Central Bank and VEB). That is all the
support in 2009 has cost somewhere 3.1 trillion rubles. Thus, the current version
of the anti-crisis plan will provide the much fewer resources to support the
economy and overcome the crisis (2.3 billion rubles.). But the current crisis has a
more underlying reason. In addition to the external factor the accumulated
structural problems have an adverse effect on the economy. There is every
reason to believe that the crisis will be protracted, while the recovery began in
the second half of the year in 2009. That means that the additional expenditure
on support of the economy cannot be denied.
Net debt of regions for the banking sector has substantially increased
at the beginning of the year (billion rubles)
Source: The Central Bank of the Russian Federation, MRC settlements
© Macroeconomic Research Center of Sberbank of Russia
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Financing the Deficit: the Reserve Fund
The Reserve Fund is
the main financing
source
Plan to attract
domestic debt market
appears very
optimistic
It is difficult to expect the maintaining of a low budget deficit in the new
economic environment. The Ministry of Finance sees its expansion with the
previously planned 0.6% of GDP to 3.7% of GDP. In the context of difficult access
to external financing and limited capacity of the internal debt financing the
majority share of the budget deficit financing (3.1 trillion rubles.) will be given
from the Reserve Fund. On April 1 of 2015 its size was 4.4 trillion rubles. The
weakening of the euro against the dollar and the strengthening of the ruble led to
a decrease in the ruble equivalent fund of 545 billion rubles since the beginning
of the year. The ruble equivalent of the Fund may continue the weakening in the
coming months if oil prices start to rise faster, and the ruble will continue to
strengthen. Thus, more than 2/3 of the fund will be used in 2015.
From our point of view, there are risks and a much greater use of the Reserve
Fund in the structure of the budget deficit financing. We have no doubt that will
be able to fully implement the plan to raise funds from the market of domestic
debt. It was left unchanged at 1 trillion rubles. Probably, this plan will have to be
adjusted down so as not to displace from the market of corporate borrowers. And
past experience says that placement plans never carried out: in 2011-2013
layouts were 58%, 54% and 20% respectively from the planned law on the
budget. In 2014, placement for financing the deficit amounted to 300 billion
rubles from 1025 billion of planned volume with amendments for capitalization
of banks through the Federal Loan Bond. Nevertheless, the great attraction of the
Ministry of Finance can be achieved through the use of new tools. If plans of issue
bonds with inflation revenue will be implemented, these securities will be in
demand among institutional investors. In this case, the placement volume can
increase substantially relative to volume in 2014.
The cost of implementation of anti-crisis programs in 2009 and 2015 (billion rubles)
Source: The Central Bank of the Russian Federation, MRC settlements
© Macroeconomic Research Center of Sberbank of Russia
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SBERBANK OF RUSSIA
There is the reserve of
economic strength for
the next two years
As a result, even budget expenditures financing of the budget deficit will be
reduced it will require more than half of the Reserve Fund in 2015. However,
there is the reserve of economic strength in the budget and the Reserve fund (at
the end of the year the fund will be about 1.5 trillion rubles at the equivalent),
ensuring fiscal stability in 2015-2015 and allow the government to ensure the
implementation of anti-crisis measures.
Dynamics of the planned and actual drawings of the Russian Federation on the domestic market
(billion rubles)
Source: The Central Bank of the Russian Federation, MRC settlements
© Macroeconomic Research Center of Sberbank of Russia
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The Review Is Created By
Yulia Tseplyaeva
The director of Macroeconomic
Research Center
[email protected]
Yulia Sonina
[email protected]
Aleksandra Philippova
[email protected]
Danir Zulkarnaev
[email protected]
For all questions related to sections of this review you can contact us by the telephone of MRC (495) 747-38-79 or by email.
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