Pros and cons of 'frozen' budget

The Russian Finance Ministry’s proposal to freeze the federal budget spending in nominal terms for 3 years was approved yesterday at the meeting with the Prime Minister Dmitry Medvedev. The ministry proposed to set the budget spending at 15.78 trillion rubles ($246.28 bln) per year, the Vedomosti newspaper reports.

The Ministry's proposal to set the budget spending at 15.78 trillion rubles was made public last week. "This is the risk-free level of spending that we can afford in the current situation, taking into account all the risks," RBC cited a representative of the Ministry of Finance as saying.

Everyone agreed with the Finance Ministry's approach and it was approved, "however each minister complained that they do not have enough money to cover all the expenses. These comments will be taken into consideration and the decision will be ready on Thursday," a source noted.

Another federal official noted that in general, the approach was adopted, but the redistribution within the program expenditure articles is possible and specific figures will be adjusted. He noted that the Russian President Vladimir Putin agrees with the need to freeze the budget spending.

Vestnik Kavkaza asked our expert, professor of the RANEPA Chair of Economics and Finance of the Public Sector, Lyudmila Pronina, what are the pros and cons of the 'frozen' budget and how it will affect the well-being of the population.

In the first place, the expert drew attention to the fact that it is too early to talk about the approval of the Finance Ministry's proposals, since this information was denied today by the spokesman for the Russian prime minister, Natalia Timakova.

"However, when it comes to the 'frozen' budget, there are still more cons, because it is not about just 1-2 months. Now expenses are being established for a certain period, but the fact is that they have already been constantly decreasing, especially the programs of territorial nature. Firstly, all the 39 programs were cut by 10%. Now, the Ministry of Finance plans to reduce costs for the Far East and Crimea. As for the pensions issue, the Ministry of Finance plans to index the pensions, but so far it is only a plan. Therefore, if we talk about the stabilization of costs, they are set at the lowest level. The budget 'freeze' for 2017-2019 is a huge time perspective. Now it is unclear what happens with the global economy during this time, not to mention the geopolitical aspect," the expert noted.

At the same time, she pointed out that if the most important part of macroeconomic indicators of the federal budget remains at a constant level, it will technically mean rejecting the budget planning. "In real terms, the expenditure part will decline, as the inflation rate is unlikely to amount to 4% in 2017. We assume revenues will grow due to the exchange rate difference. Therefore, the ruble stabilization is disadvantageous, because we are get more nominal money. In this case it will be easier to form a budget considering its shortage. In addition, according to rumors the Ministry of Finance plans to raise the VAT to 25%," the professor of the RANEPA Chair of Economics and Finance of the Public Sector said.

"I believe that if the Ministry of Finance is successful in decreasing the regional programs in Crimea and in particular in the Far East by 30%, it is a bad thing. And what will happen with intergovernmental transfers, if we reduce the expenditures of the federal budget? Our intergovernmental transfers in the regions are at least 40%. We have only 71 regions. They will have nothing to invest. Therefore, the investment aspect is being greatly reduced," the expert believes.

The financial expert is also confident that there will be a budget sequestration like in 2015.

Answering the question of how it will affect the well-being of ordinary people, the professor of the RANEPA Chair of Economics and Finance of the Public Sector gave a short and disappointing answer: it will be bad from all aspects. "We are reducing territorial programs, reducing the program, which is linked to the financial assistance to the regions. If the program is not executed, then the local budgets will not receive these funds. And all these social services, which are provided either by the federation subjects or the municipalities, will not be realized. Therefore, we will have only those social measures, which are regulated at the federal level: pensions, maternity capital, public social authority at the federal level. Of course, the Pension Fund and the social insurance funds, the fund of mandatory medical insurance are also very important, and they will also be affected," the economist concluded.

According to the Russian Finance Ministry's proposal, spending on 36 out of 43 state programs (roughly half of the budget) are being cut, except for retirement expenditures, economic development and the management of public finances (the national debt).

If the proposal is approved, the funding of the state program on development of physical culture and sports will be reduced as much as possible. The funding of social and economic development of Crimea will be cut from 149.3 billion rubles in 2016 to 65.98 billion in 2019. The closed part of the state programs, in particular, the defense spending can be reduced by 15% over three years.