By Vestnik Kavkaza
The Ministry of Finance submitted a report called "13 Tips to Putin" by experts. The document provides a significant reduction in social spending, in particular, the abolition of maternity capital and the increase in the retirement age. The report was written on the request of the President by the Ministry of Economic Development and Ministry of Finance, together with experts from the Higher School of Economics and the Academy of National Economy and Public Administration under the President.
“Indeed, the effectiveness of budget expenditure is a household name”, Natalya Akindinova, head of the Institute “The Center of Development” of the National Research University - Higher School of Economics, admits. “Everybody knows that much expenditure is ineffective, excessive, and should be cut. Moreover, it should be done in the context of the worsening economic situation – the budget doesn't have huge sums, as it used to”.
The group of experts faced the dilemma.
They could choose the concept of the so-called “budget manoeuvre”, i.e. assume that some spheres of budget expenditure are top-priority while others are not, and some redistribution of resources is possible between them. In fact it was suggested in the Strategy-2020 that the top-priorities are education, healthcare, and infrastructure, while less important are defense, law-enforcement activity, subsidiaries to enterprises, and so on.
The second concept means searching for ways to save in all spheres. “Considering the result which we have, the second concept seems to win because the suggested means of saving touched on almost all spheres. And to a large extent the cuts will touch on the spheres which were thought to be top-priorities by the authors of Strategy-2020. So there are rather developed measures in education and healthcare; they will reduce expenditure on social security, even though this sphere has suffered the least; and of course the pension system”, Akindinova said.
According to her, the majority of measures suggested in the report are aimed at development of legislation, improvement of order and transparency, searching for internal reserves, but it doesn’t say exactly which reserves. “In general the report has few moments on increasing expenditure, except for two investment projects – construction of the Central Ring Road and the road between Moscow and Kazan – there are certain sums allocated to these projects. It becomes clear that cutting social expenditure is needed to improve the situation in the budget and financing such projects”, she said.
“The report is not a done deal”, Vladislav Onishchenko, first deputy head of the Analytical Center under the Russian government, said. “It is one of positioning, but nobody says that the decisions which will be made will correspond to the suggested draft. They partially correspond to the goal which the authors of the report had. The authors tried to show certain opportunities and support or oppose them. Two issues should be separated. The issue of improvement of effectiveness of budget money is one problem. The issue of lacking money for plans of the budget in 2014 is another problem. We can try to solve them by the same means or by different means”.
Onishchenko mentioned the example of budget for 2014: “We have no resources to finance the budget we want, as we lack money - according to the forecasts for economic growth, we don't have so many tax-payments and other revenues. Alright. So we should find an opportunity to finance expenditure which we cannot finance today or we should cut them. One possible variant is an increase in loans. It is a possible option. The volume of state debt is not so big – a part of expenditure, for instance, investments could be financed using loans. Why should they be financed using current revenues at the expense of social expenditure or any other current expenditure? Investment is a thing which will be used by future generations; and a part of them could be financed by revenues of future periods, i.e. by the debt service.
Secondly, the budget consists of a certain volume of current liabilities which have already been adopted and of additional expenditures which departments ask for doing something. For instance, they reconsider their plans, and it appears that for some reasons they lack money – this is called additional financing. One of the simplest ways which was usually implemented in the past and probably would be implemented in the future is to state that there would be no extra expenditure in a situation of saving the economy. It reduces tension from the budget in the next year and also is the simplest and most obvious measure. It doesn’t cut any adopted social liabilities, investment liabilities, defense liabilities, and so on. The question on improvement of effectiveness of current expenditure is another thing. We can discuss why the authors of the report point at these directions. I don’t exclude that it is a provocation for discussing issues which are not usually discussed”.
Yevsey Gurvich, head of the Economic Expert Group, reminds that “it is clearly explained in the budget message of President, which says that we have reached the limit of increasing expenditures for settlement of certain tasks and now we should turn to searching for reserves and saving. Why is it important? According to our analysis, state revenues will fall quickly in GDP percentage in a long-term prospect. The reason for this is that our oil-and-gas sector is not developed, but its tax load is heavier because of the environmental rent; that is why oil-and-gas revenues will soon decrease in percentage. We predict that in general revenues of the state, budget revenues will grow in real terms by 3-3.5% per year; while in the pre-crisis period they grew in 3-3.5 times faster”.
At the same time, there are inertness and expectations of citizens that social expenditures will grow as fast as it has been in recent years. “If our revenues continue to fall as fast as they used to grow, “scissors” will appear. It means we will take the Greek course. A nearest foreign shock will lead to a very serious crisis; the shock can be not like in 2008, but like in 1998 which appears once in a decade”, Gurvich said. “It will decrease investment attractiveness of Russian economy. The effect will be great. Even today we can see a huge outflow of capital. And macroeconomic stability is the last stand which supports remains of investment attractiveness of Russian economy. The rest has no grounds for investments, there are no reasons for investing into Russia. We will break this last stand, if not change the policy. Without changing the budget policy, without turning to improvement of budget expenditures’ effectiveness we won’t solve the main goal of overcoming stagnation”.
According to the expert, “one of reasons for the stagnation is continuation of the wasteful budget policy. The mains reason is reduction of investments in recent times. It is easier for regional budgets to compensate orders by the government on increasing teachers and health workers’ salaries by reduction of investments. Other expenditures cannot be reduced so quickly. There is also a long-term, strategic aspect. Our only opportunity to return to the economic growth is to shift from an extensive to an intensive model of development. In the pre-crisis period we established a clear extensive model, when internal demand was growing rapidly; and the main task of business was to provide a part of the demand; so, nobody thought about expenditures. The state made the same thing – it solved all problems by allocation of extra sums, accumulating expenditures. It was possible due to growing oil prices and, as the result of it, growing economy. Today the model doesn’t work, as we can see it. If a state turns from accumulating of expenditures to improvements of effectiveness, it shows business where it should move. A state becomes a leader in establishing a new model which is based on intensive development”.
Gurvich thinks that we have obvious disbalance: “Our defense expenditures are one of the biggest in the world, as well as for law-enforcement activity; the number of soldiers and policemen per a person is one of the biggest in the world. I can’t say the effect is better, that our live is the safest. At the same time, we have rather low expenditures on healthcare. I think we should move toward improvement of productive expenditures. Our structure is deformed; moreover, we develop against international trends. For instance, defense expenditures of low- and medium-income countries in 1980 were 2.5% GDP; in 2000 – 1.2%. They double reduced in 20 years. In developed countries in 1980 they were 2.8%; in 2000 – 2.1%. We have an absolutely different trend: in 2004 – 2.1%, in 2012 – 3%, in 2015 – 3.7%. We doubled defense expenditures, while other countries reduced it”.
