Sequestration? FBK Economic Club Experts about Draft Federal Budget for 2015-2017

Within the framework of the Economic Club the FBK experts discussed the draft budget of the Russian Federation for 2015-2017 submitted to the State Duma and adopted in the first reading.

The focus was set on the macroeconomic activities, their equilibrium and feasibility as well as their impact on the country economy. The majority of experts agreed that the sequestration was less likely next year, at the same time serious effort should be taken in the subsequent years for the budget to be implemented in accordance with the parameters stated in the draft.

According to Igor Nikolayev, the FBK Institute of Strategic Analysis Director, the draft budget is not realistic in terms of accuracy of its predictive parameters and cannot be fulfilled.
“Evidently, the reality and the plan will not coincide. See for yourself: according to the budget, one dollar costs 37.7 roubles in 2015, the inflation in annual terms makes 5.5%, the economic growth is not less than 1.2%, and the reference price for oil, based on which the budget expenditures are planned, is $96 per barrel. The situation is already worse than the forecast and there is no visible tendency towards the improvement,” noted the expert.
Then Igor Nikolayev dwelt on the budget revenue and expenditure balance analysis. In his opinion, the average oil price will be 76-80 dollars per barrel in 2015, the shortfall of revenues in this regard will be about 1.4 trillion roubles; instead of the economic growth we are in for the economic downturn by 1.5-2%, therefore the budget revenues will be less by another 450 bn roubles. In total these two factors will reduce the budget by an amount of 1.850 trillion roubles.
Does it mean that the budget cuts are inevitable?
The expert concludes that the Y2015 budget can be executed without cutting down the expenditure articles.
Specifically, in connection with devaluation of the rouble, at an annual average rate of about 50 roubles per one dollar the slipping out “oil revenues” can be compensated for by the nominal increase of the rouble money supply. Besides, the draft budget provides for the Y2015 expense allocations of up to 500 bn roubles from the Reserve Fund.
“With such macroeconomic activities we do not forecast any budget sequestration in 2015. However, due to the increased amount of money in the economy we expect the inflation to rise to 9-12%, and the major problems with the budget implementation will arise in 2016-2017”, said I. Nikolayev.

Vladimir Nazarov, the Research Financial Institute Director, agreed that the predicted oil price in the budget was not realistic and dwelt on the analysis of macroecomic factors affecting it. Pointing out that the “shale gas revolution” and reduction of oil imports from the USA made a signinficant impact on the market of hydrocarbons, the expert mentioned a range of negative factors affecting the price of oil, specifically, possible uncontrollable increase of production on the part of such countries as Libya, Iraq, and some others, as well as the reduction of demand on the part of the economically developed countries due to the crisis.
At the same time, there are some factors that can generate an upward trend in the oil market among which the reduction of investments in the production of shale oil should be specifically mentioned.
“According to the prognosis by our Institute, in 2015 and in the short-range outlook there is an equal chance for oil price to fall down to 60$ per barrel and to rise up to 90$ per barrel. We do not expect the price to go back to the level of early 2014, i.e. 100-110$ per barrel”, noted the expert.
Assessing the balance of budget expenses and revenues Vladimir Nazarov pointed out that the only factor that could currently contribute to the economic growth was the devaluation of the national currency. At the same time, he cautioned the government against using the inflationary mechanisms in the budget expense financing, emphasizing that they create more problems rather then solve them.

Arseniy Mamedov heading the Gaidar Institute laboratory for budgetary policy, analysed the situation with the formation and implementation of the regional budgets.
He believes that cutbacks in the funding of regions from the federal center along with the growth of regional budget expenditures against the background of reducing the gross regional product will lead to the “budget default” in some regions.
In his opinion, some of the budget expenses the regions will not be admittedly able to finance, like, for example, payments to the MHIF for the unemployed, would be reasonable to pay for from the federal budget, as the failure to meet such obligations may cause social tension in the regions.

Evsey Gurvich, head of the group of economic experts under the RF Government, expressed his personal view on the economic situation.
“It should be understood that we have moved to a completely new mode of functioning. If previously the annual growth of budget expenses was by 10%, in the next few years their growth will not exceed 1%. That is a completely new situation for us. There are many expense articles in the budget that cannot be cut back. To finance them the country needs an annual economic growth of about 5%, while the actual growth is three times lower,” noted Evsey Gurvich.
At the same time the expert said he did not deem the situation tragic: there are some measures Government can take to make the budget better balanced, most preferable and most difficult to implement is to cut down the inefficient budget liabilities.
“We are facing many problems, and hopefully we’ll be able to give an appropriate response to these challenges,” he resumed.

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