Regional budgets imbalance is growing. FBK Business Report

Social spending in budgets and non-budgetary funds of the constituent entities of Russia increased from 60,9% in 2010-2011 to 66,5% in 2014 and to 69,5% as of 1 September 2015, whereas investment spending (capital investments spending) decreased from 14,6% in 2010 to 11,0% in 2014.

As explained by Igor Nikolaev, Director at FBK Strategic Consultancy, this is highly suggestive of a structural imbalance in the regions’ budgetary systems. Social obligations set forth primarily in the presidential Executive Orders announced in May 2012 have triggered higher-than-anticipated growth of social spending and given the budgetary limitations with respect to cutting other parts of the regions’ spending items this commitment is blowing up the budget deficit.

In 2010, the budgets of 20 regions ran surplus, whereas in 2014, only 9 regions remained in surplus. In 2010, the total budget deficit across the Russian regions equaled RUB 99 bn, whereas in 2014, it snowballed into RUB 469 bn. 

The North Caucasian region saw the highest social spending in 2013-2015, with the region’s average of 78% as of 1 September 2015. The Central Federal District saw the lowest social spending with the region’s average of 64% as of 1 September 2015. The Far Eastern region saw a slightly higher share of social spending of 65% (in 2014 the region’s social spending accounted for 58% which was the lowest share across the federal districts). The Far Eastern region also stands out for the share of investment spending in 2014 which accounted for the highest 15,2% of the region’s budget.

The imbalance between social and investment spending (i.e. by how many times social spending exceeds investment spending) across the regions is dramatically huge and continues to grow. The imbalance increased from 4,2 times in 2010 to 5,8 times in 2014 countrywide. This translates into a 6-time excess of social spending in 2014 over the spending on the development of the regions which could pay off in the long term and improve the economic environment. The Saratov Region saw the highest imbalance between social and investment spending in 2014, with social expenditures exceeding investment spending by 26,4 times(!), whereas in the Sakhalin Region social expenditures exceeded investment spending by only 1,4 times.

Priority of social spending over investment expenditures, according to Igor Nikolaev, does not necessarily result in explicit imbalance in the regional budgets. This imbalance, however, has become evident over the last few years. Given a structural nature of the current economic recession this pressing issue cannot be overestimated and remedial measures need to be taken to this effect.

Appendix

Table 1. Ratio of social and investment budgetary and non-budgetary spending of the Russian constituent entities to total spending, %

* Note: Mass Media figure for 2010 is incorporated into Culture and cinematography item, Physical culture and sport figure for 2010 is incorporated into Healthcare item.

**Note: 2015 figures are effective of 1 September

Source data: Treasury of Russia, Ministry of Finance of Russia

Table 2. Ratio of social spending to total budgetary and non-budgetary spending of the Russian constituent entities, average ratio across the federal districts, %

*Note: 2015 figures are effective of 1 September

Source data: Treasury of Russia, FBK findings

Table 3.  Ratio of investment spending to total budgetary and non-budgetary spending of the Russian constituent entities, average ratio across the federal districts, %

Source data: Treasury of Russia, FBK findings

Table 4. Excess of budgetary and non-budgetary social spending over investment spending across the Russian constituent entities, quotient figures

Source data: Treasury of Russia, Ministry of Finance of Russia, FBK findings