Deputy minister paints grim picture of Russian state finances, GDP
Interfax
April 20, 2009
Russian Deputy Finance Minister Tatyana Nesterenko has presented a downbeat view of Russia's public finances for the coming years and suggested that the Finance Ministry's own assumptions were overly optimistic. "Even after revising the budget, we see substantial risks with its implementation," she told journalists on 17 April. According to her, the revenue in 2010 will at best be at the level of that of 2009. "There is a possibility that we would completely use up the Reserve Fund in 2010," Nesterenko said. "For me it is obvious that in 2011 we will not be able to make the budget balance by using the Reserve Fund," she added. Nesterenko also criticized the failure to fight poverty: "One could have eliminated poverty a long time ago if we fought poverty instead of giving a little to everyone." The following is the text of report by corporate-owned Russian news agency Interfax, subheadings are agency's own:
Moscow, 20 April: The Russian Finance Ministry does not rule out that GDP of the Russian Federation in the year 2009 will fall further than forecast while the revenue of the federal budget in the year 2009 will be lower than asserted in the new version of the budget, Russian Deputy Finance Minister Tatyana Nesterenko told journalists.
According to her, this could lead to an increased use of the funds of the Reserve Fund and substantially complicate the budget situation in the year 2010, which will be "tense" as it is in connection with the reform of the single social tax, the revaluation of the rights of pensioners whose years of employment include the Soviet period and the necessity to return to the state corporations the funds taken from them in the year 2009.
The Finance Ministry thinks that the reductions regarding a number of expenditure items in the 2010 budget may amount to 25-30 per cent but even in this case the Reserve Fund may be fully used up as early as by the beginning of the year 2011.
However, it cannot be ruled out that stabilizing mechanisms will start working in the economy - then the budget situation would be more favourable, Nesterenko noted.
Risks of the 2009 budget
"Even after revising the budget, we see substantial risks with its implementation," Russian Deputy Finance Minister Tatyana Nesterenko told journalists last Friday (17 April). The State Duma adopted a new version of the 2009 budget on 15 April.
The revenue of the Russian federal budget in 2009 was reduced by R4,200bn compared with the amount approved earlier and will amount to R6,700bn (16.6 per cent of GDP). The expenditure of the budget increases by R667.3bn to R9,700bn (24 per cent of GDP).
The deficit will amount to R2,980bn (7.4 per cent of GDP) and when taking into account the quasi-fiscal expenditure of R255bn from the National Wealth Fund (the second sovereign fund along with the Stabilization Fund) - it will amount to 8 per cent of GDP. It is planned to cover a large part of the deficit - R2,700bn - from the Reserve Fund, which as of 1 March (before the beginning of its use) amounted to R4,870bn. In addition to this, the net amount to be raised on the domestic market has been planned to amount to R425bn.
Nesterenko noted that the budget risks are connected to the fact that inflation may exceed the planned 13 per cent while economic activity and GDP may fall further than forecast (2.2 per cent), which would lead to a revenue shortfall.
"So far the first quarter indicates that the risk of inflation is falling," she said.
At the same time the risk of shortfall in revenue remains high, based on the amount of overdue wages of organizations, based on the level of unemployment and the level of turnover in various sectors of the economy, Nesterenko said.
According to her, the Federal Tax Service and the Federal Customs Service have estimated the revenue in 2009 as a whole to be R800bn lower than was written into the budget. A source familiar with the calculations of the Federal Tax Service told Interfax-ANI news agency that the tax authorities expect tax revenues to be R500bn lower than the forecast by the Finance Ministry.
Nesterenko does not rule out that the administrators of the revenues may be inclined to be pessimistic in their assessment of revenues. She noted that the Economic Development Ministry, to the contrary, is estimating the receipt of revenues to be R300bn higher than written into the budget.
"Unfortunately, the recent years have shown that the administrators of revenues are very close in their estimates because they operate at the micro-level, work with concrete taxpayers and see what the shortfall is like, what the economic situation is like and what cash flows there are," Nesterenko said.
In addition to this, she said, there is a risk of not being able to raise the planned amount of funds on the domestic market. Nesterenko explained that, first, removing such a large amount of money from the market would be untimely and, secondly, the cost of the funds raised should be acceptable for the budget.
Stabilization mechanisms
The Finance Ministry included in the budget stabilization mechanisms for each of the risks, Nesterenko said.
According to her, the risk of inflation has been countered by the amount of reserve expenditure, which can be directed, in particular, at additional indexation of social payments.
The risk of shortfall of revenues and the risk of not being able to attract sufficient funds on the domestic markets are to be insured against with the additional use of the Reserve Fund. "If we have a greater shortfall of revenue, we will be able to take from the Reserve Fund," Nesterenko noted.
At the same time she stressed that the expenditure could not increase above the parameters put in place in the new budget. "Even crisis does not make it acceptable to go beyond the parameters of expenditure written into the budget," she said.
The only position, on which the government was allowed to exceed expenditure above budget allocations, is transfers to non-budget funds.
Nesterenko thinks it very dangerous to have additional spending of the monies of the Reserve Fund. "If we spend R800bn extra this year, this is very dangerous, including for macroeconomic indicators," she said.
She explained that the spending of the Reserve Fund is connected with the emission of money and therefore its additional use will increase inflationary risks.
The price of balancing
The revenue of the federal budget in the first quarter was R202bn lower than in the same period of 2008 while the expenditure was R447bn higher, Nesterenko said. At the same time in January revenues were received from placing monies of the Reserve Fund and the National Wealth Fund amounting to R269bn. "If one is not taking into account these monies, budget deficit by 1 April would have amounted not to R50bn but to R321bn, which is nearly 3.9 per cent of GDP," the deputy minister noted.
At the same time if the transfer of the monies of the Reserve Fund to the budget accounts of the Treasury had not began in the first quarter (R940bn as at 16 April), the cash reserve on 16 April would have amounted to R123.8bn.
This amount of money of the Reserve Fund has already been spent. "We would have already stopped the fulfilling of the budget," Nesterenko stressed.
"So far, in respect of the federal budget, we do not see problems with the payment of salaries or with the payment of our obligations on contracts," she added. At the same time she admitted that in the constituent ports of the federation the situation is more difficult.
According to her, when preparing a new budget for 2009 the Finance Ministry prepared calculations of deficit at the level of 5 per cent of GDP and 3.5 per cent of GDP and suggested to be harsher on cutting expenditure. However, even deficit a the level of 8 per cent of GDP requires the reduction of expenditure by nearly R1,600bn, she said. At the same time one was able to manage to reduce the expenditure only by R900bn.
"We did not manage to reduce the expenditure to the extent that simultaneously the deficit would have been small and one would have been able to implement anti-crisis measures. One had to support domestic demand somehow," Nesterenko explained.
This required a search for sources of revenue. In particular, non-tax revenues amounting to R358bn were "with administrative smoothness" included in the budget revenues. These included R160.4bn of funds of state corporations, R77.6bn from removal of subsidies and subventions which had been received by the constituent parts of the federation last year but remained on their accounts, R100bn from transfer of accounts of entities involved in foreign economic activities to a single account in the Treasury and R20bn of income from placing temporary free budget funds.
"For the first time we submitted a plan for receiving income from placing budget funds," Nesterenko said. According to her at, at present R105bn have been placed for three months at 15.1 per cent, of which R65bn with VTB (Vneshtorgbank, the Foreign Trade Bank), R10bn with Alfa Bank and R30bn with Rosselkhozbank (Russian Agricultural Bank)
"Based on the task of receiving income of R20bn, we needed to place R600bn over six months. This is a calculated figure based on the interest rates," she explained. At the same time she explained that the Finance Ministry does not plan to make big injections and that the placement would be done in accordance with the recommendations of the Central Bank.
"We have an expectation that not all the expenditure will be used up - then the deficit will be less," she noted. According to Nesterenko, as the participants of the budget process have received the right to conclude contracts within the first three-year budget (2008-2010), many of them already have taken decision on that basis.
"We expect that there will be no serious opportunities for savings this year," Nesterenko said.
Next year will be difficult
Decisions taken to balance the budget in 2009 may be complicate the situation in 2010, Nesterenko thinks.
In addition to the fact that there will be no one-off revenues from moving customs' accounts to the single account of the Treasury and it will be necessary to return funds to state corporations in the housing and utilities sector, Rosnano, Investfond and Olimpstroy. "In the coming year all this needs to be reversed and therefore it will be difficult," Nesterenko noted.
According to her, the revenue in 2010 will at best be at the level of that of 2009. The Finance Ministry proceeds from the premise that there will be no substantial changes to the tax legislation in 2010 and the tax base remains the same.
"The Reserve Fund will be substantially smaller, and the possibility of balancing the budget will be at its limit," Nesterenko suggested.
In 2009, she recalled, R440bn from the Reserve Fund will go to forming oil and gas transfer and R2,700bn is planned to be spent on covering the deficit. At the same time there continues to be a risk of additional spending of the fund if revenues are not received.
"We may use our reserve more than we would want to and this could seriously worsen the situation for the budget in 2010," she said.
In addition to this, she said, the decision taken to reform the pension system will worsen the situation for the federal budget.
First, the budget will not receive the single social tax, it will be replaced by insurance contributions which will go directly into non-budget funds. "Secondly, we will have to continue to finance the deficit of the Pension Fund in connection with the shortfall of revenues and re-valuation, which will cost over R500bn," Nesterenko said.
In addition, it will be necessary to find funds to compensate for the income of the Pension Fund that will disappear because in 2010 the reform of the single social tax will not be applied to taxpayers who are on the simplified scheme or on the single tax on temporary income.
Nesterenko did not provide an estimate of the deficit of the pension system in 2010 and said that the calculation had not been completed as yet.
"If the revenue is predetermined, if the budget deficit must not exceed 5 per cent of GDP and if we are talking of the priority of the expenditure on the pension system, and this has been announced and is not subject to discussion, the reduction of other expenditure as a whole may amount to 25-30 per cent (compared with what was planned - Interfax)," Nesterenko announced. According to her, if any type of expenditure remains untouched then others will be cut further. As a whole, the expenditure of the budget for 2010 may remain at the level of 2009, Nesterenko suggested.
Earlier Russian Deputy Prime Minister and Finance Minister Aleksey Kudrin said that in 2010 it is necessary to reduce the expenditure by at least R1,000bn and redistribute expenditure to the same amount. In accordance with a law adopted earlier, revenues of the federal budget in 2010 were planned at R11,700bn and expenditures at R10,300.
Nesterenko also noted that many participants of the budget process initially ask for more money than they need because they are afraid that otherwise their allocations would be cut in the next year. However, following the adoption of the budget, the Finance Ministry starts receiving letters with requests to allow the transfer of the allocations to the next year. "The motives of the participants of the process are understandable. However, the efficiency of the expenditure could be better," she noted.
"Essentially all experts estimate the inefficiency of the expenditure in the budget sector to be from 10 per cent to 30 per cent and in some areas even up to 35 per cent," she said. "Thus, one needs to make efficiency savings," Nesterenko said.
Prospects
"There is a possibility that we would completely use up the Reserve Fund in 2010," Nesterenko said.
According to her, if the National Wealth Fund is used to finance the deficit of the pension system, a small part of the Reserve Fund will also be left for the year 2011.
"For me it is obvious that in 2011 we will not be able to make the budget balance by using the Reserve Fund," Nesterenko stressed.
She noted that in 2011 the balance of the fund may range between zero and R200bn-R300bn depending on the exchange rate of the rouble. It is expected to reduce the budget deficit to 3 per cent of GDP in 2011.
According to the calculations of the Finance Ministry, it is unlikely that the budget would have a surplus in 2012. "In 2012 we are planning a deficit and at the moment the task is to have it between 1 per cent and 2 per cent of GDP," Nesterenko said.
She also noted that the Finance Ministry is preparing the budget for the years 2010-2012 but so far it is not clear whether it will be approved in a three-year format or a budget for 2010 with the financial plan for 2011-2012 will be adopted. "If there are no amendments to the Budget Code, we will have to submit a three-year budget," Nesterenko said.
Budget "perestroika" is needed
Nesterenko noted that in the view of a number of experts, we are entering a very long phase of the crisis, which could last not one to two years but 10 or even 50 years. Other experts, in particularly in the Economic Development Ministry, think that the economy will recover at the end of the year, the built-in stabilizing mechanisms, including anti-crisis mechanisms will start working.
However, it is impossible to predict whose forecast will come true and therefore it is necessary to carry out budget "perestroika".
"It is obvious that we must review our long-term attitude to the budget and expenditure obligations in general. The lesson of the crisis, which shows that a budget system which is very dependent on external market conditions, should lead us to us having to conceptually review some of our obligations," Nesterenko announced.
In her view, it is possibly necessary to develop new elements of the social policy and to achieve the goals that were set when forming a social policy by using more effective ways. For example, she thinks that one should fight poverty not by increasing payments to all categories of people entitled to benefits but through targeted assistance to the needy.
"Almost the entire population of ours comes under some categories of benefit entitlement. You live either in the north or in the south or you live in the mountains or in a desert but you are certainly entitled to benefits of some sort. Everyone is receiving pennies while some do not need assistance," she said.
"We mainly distribute money to categories and not on the basis whether a person needs it or not but one should help those who due their life situation are indeed in a need of help in their poverty. One could have eliminated poverty a long time ago if we fought poverty instead of giving a little to everyone," Nesterenko thought.
In her view, it will be necessary to define in the budget these expenditure items that cannot be reduced and all other allocations should be presented to ministries in the reduced form which the budget can afford. The ministries, within their remit, should choose concrete areas of spending these resources.
In addition to this, Nesterenko thinks that as many powers and establishments of the social sphere as possible should be given to the regions because in the regions reforms happen faster. "This is natural. It is impossible to conduct in Moscow at the federal level a reform ranging from Chukotka to Kaliningrad," she noted.
At the same time it is necessary to hand over to the regions their tax revenues. In particular, Nesterenko thinks that one could hand over 2 per cent of the tax on profits, which at present is received by the federal budget. The regional budgets receive 18 per cent of this tax.
Russian Deputy Finance Minister Anton Siluanov expressed an opinion when speaking to journalists on Friday that when handing over the remainder of the profit tax, money should be given first of all to the regions which have a taxation basis. "We have 10-15 regions that would gain while others would make insignificant gains," he told journalists. At the same time the reduction of subsidies that are currently allocated to regions for the implementation of individual tasks would be a sensitive issue for the constituent parts where the tax base is small.
In his view, it is necessary to hand over taxes that have an even distribution. It is possible that one of these taxes could be the property tax, which is to be introduced from 2011, Siluanov, suggested.
Nesterenko also noted that it is necessary to build a budget based on the aims and to move on to programme-based and targeted financing. At the same time the distributors of budget funds must receive more rights within their expenditure. "One should give less detail and not split up the budget, perhaps they should be given aggregated sums with concrete aims," she thinks.