The Ministry of Economic Development of the Russian Federation (MEDT of Russia) has presented a draft budget for the next three years. The document was immediately criticized by the Accounting Chamber. According to its experts, the budget may fall short of 700 or more billion rubles, and the economic growth rate specified by MEDT looks unrealistic.
Auditing Chamber Dissatisfied With Budget
The Auditing Chamber has made public its opinion on the draft Federal Law “On the Federal Budget for 2020 and the Planning Period of 2021 and 2022”. It was more than just critical. Most of the Ministry's conclusions and parameters laid down in all the three forecasts (basic, conservative and targeted) do not satisfy the Chamber’s experts. Moreover, analysts are dissatisfied with all the submitted forecasts.
For instance, the conclusions the Chamber published on its website state that the assessment of the MEDT may be overblown as regards the expected contribution to GDP from the implementation of the structural measures of economic policy at the level of 1.5 percentage points. It creates the risks of failure to achieve the announced growth rates in Russian economy. Initially, the MEDT drew up only the basic and conservative scenarios, submitting the target scenario at the government’s decision. Essentially, they are all targeted towards the goals identified in the May decrees of President Vladimir Putin but at a varying pace.
Experts are criticizing the economic growth rates submitted by MEDT as well as the growth of investments and poverty reduction. Thus, the Ministry forecasts that the global economy will slow down to 2.7% by 2024, while expecting a drastic acceleration of the Russian economy to 3.1% in 2021. But it is unlikely. There is a risk that the GDP growth rate will remain within the range of 1.5-2.0% from 2021 to 2024, the Auditing Chamber experts say.
The basic forecast assumes a growth rate of investments in fixed capital at the level of 5% in 2020, with a peak of 6.5% in 2021. Investments will further slow down to 5.3% in 2023. According to the Auditing Chamber, the growth rates of investments in fixed capital and gross fixed capital formation included in the basic scenario are not coordinated with the output growth rates of fund-creating industries (machinery and equipment production, construction), as well as with the growth rates of exports and imports of investment goods.
According to the forecast, the growth rate of the real disposable income of the population will accelerate from 0.1% in 2019 to 2.3% in 2022 and to 2.4% in 2024, as the debt burden will decrease and the income components will increase thanks to social and economic policy measures.
Along with it, the forecast suggests that the interest paid by people for loans is expected to grow faster than mandatory payments in general (in 1.86 times from 2019 to 2024 and 1.58 times, respectively), and their share in incomes will rise (3.4% of incomes of population in 2018 and 4.4% in 2024). According to the Auditing Chamber, the measures of the state policy aimed at ensuring sustainable growth of real incomes of citizens, cannot ensure the announced pace to the full extent, too.
“In order to improve the quality of forecasting, a thorough elaboration of all versions of the forecast is needed, and each of them should present its own scenario of events. In doing so, all three forecasts should be considered, including the targeted one.
“Forecasting focused on demonstration of target achievements in every version compromises its quality and reduces the benefits of developing multiple scenarios. Also, the alternative forecasts should provide for the probability of external shocks, such as the slumps of or hikes in oil prices, the imposition of sanctions, geopolitical conflicts, and trade wars, affecting the growth of world economy,” the Auditing Chamber said.
Outlook Not Bright
Until the draft of the federal budget for 2020-2022 is approved, it can be interpreted and discussed in unlimited and different ways, Alexey Antonov, an analyst at Alor Group, told Wek, as he commented on the opinion of the Auditing Chamber. According to him, the Ministry of Economic Development certainly has a certain task to get improvement of all key indicators. Therefore, it pins hopes on national projects to accelerate both economic growth and inflow of investments. In recent years, the Auditing Chamber has earned a reputation as a crucial critic of government institutions. Thus, this time it has made an objective assessment of the published forecasts.
In general, the expert agrees with the position of the Auditing Chamber. There can be no fast economic growth under conditions of strict sectoral sanctions and hibernation of small and medium businesses. As the head of the Auditing Chamber and other economists have said repeatedly, small business is one of the pillars of the economy in the EU and other countries, while in the Russian regions the number of small and medium businesses has been falling sharply. Even government benefits such as tax holidays do not help.
As regards specific reasons preventing the target scenario, they are the level of poverty that remains high, backwardness in infrastructure and technology, as well as a high percentage of bureaucratic barriers, Antonov said. The general slowdown in global economy will certainly smooth the effect of untapped economic growth in Russia, but in fact, developed countries will remain unattainable in terms of economic growth.
In general, the economic outlook is not bright, Antonov said. In these scenarios, the Ministry of Economic Development expects to replenish the budget through dividends from big businesses, the increases of tax revenues and other civil payments, without taking into account the risks of how much money might stay off the books. And the amount will be big, as usual. The Ministry of Economic Development reminds us that the government goes on lessening its attention to the important areas of public responsibility, such as health and education. Expenses for them will be reduced in the future budget unlike, for example, the expenditures for defense and the salaries of officials.
The scenario of the Ministry of Economic Development, in which the economy grows by 3.1% year on year, while the world economy grows by 2.7 to 3.0% and the annual average oil prices by 2.3%, does not contradict the long-term comparative statistics of Russia’s GDP and external factors, Alexander Osin, the analyst of operations management in the Russian stock market Freedom Finance Investment Company, said. According to him, with the rates of increase of oil prices and global GDP submitted by MEDT, it can be expected that during the period 2020-2024 the GDP growth in Russia will be with 60% probability in the range of 2.0% to 8.0% year on year with the central scenario of growth of 3.6% - 3.8%.
As a comparison, for the 2000 – 2011 biennium, with an average growth of global GDP of three percent and an annual average of oil prices by 18.7%, the average growth rate of real GDP in Russia was 5.3%. That is 1.7 times higher than the target level of the Ministry of Economic Development for 2020 - 2024. At the same time, for most of this period the GDP growth was in the range of six to eight percent year on year. From 2010 through 2012, the GDP growth in terms of oil prices and world GDP ranged between 0.0% and 6.0% at a target range, the average GDP growth of the Russian Federation was only two percent, stably at the lower limit of this fair range.
Is It Really Bad?
The Auditing Chamber’s comments are focused only on external factors and do not take into account the capabilities of the Russian economy related to the internal stimulation of growth, Osin claims. Particularly, remonetization of the economy might lead to a decline in inflation in the future and rates from two to five percent year on year, relevant to the minimums reached due to various measures on the emerging markets, not only in China, but also in South Africa and Saudi Arabia.
The analyst is confident that the tax shift from consumption to production, the abolition of the pension reform and the reforming of the system of statistical funds can adjust the fiscal conditions for the Russian product segment in comparison with the European and Asian markets.
“Auditing Chamber’s comments should contain proposals of this kind and not only criticism, the result of which brings up doubts about the possibility of generating fiscal revenues and tentative pressure on expenses and potential restrictions in the necessary, long-pending measures of centralized macro support,” Osin said.
However, it should be taken into account, that the Russian economy has so far shown growth approximately twice as high as the average growth of the world economy, Vladimir Rozhankovsky, an expert at the International Financial Center, said in an interview with Wek. Taking his observation as a basis, the Russian GDP should show a growth from 1.3 to 1.35 percent with the planned growth of global GDP by 2.7%.
As long as there are no well-known negative factors such as another round of oil price reduction and external sanctions.
According to the Rozhankovsky, neither the first nor the second can not be reliably judged, but talking about the draft of a document like the Federal Budget, the customary practice in the past was to proceed from the most pessimistic scenario. It is explained by the fact that, all other things being equal, it is easier to distribute subsidiary incomes than to urgently look for means for patching the hole. If this time the legislators decided to take the most optimistic scenario as a base, then, as they say, it is up to them. Afterwards they are very likely to have hard and stressful times, to Rozhankovsky’s mind.
Time Will Show
The main claims to the federal budget for 2020-2022 years consist in its discrepancy with the key indices of fundamental parameters of the economy, Anton Bykov, the chief analyst of the Center for Analytics and Financial Technologies, said.
It applies to the GDP and investment growths, poverty reduction and a number of other indicators. Bykov told Wek that it seemed that at first a “conservative” federal budget was drawn up, based on the deterioration of external conditions, and then it was adjusted to the goals outlined President Putin’s decrees. Clearly, that there are a lot of inconsistencies in such an unnatural process, which were discussed in the Auditing Chamber.
For example, with the expected slowdown in global economic growth, Russia’s economy should not go slower, but vice versa, should accelerate, surpassing the world's average growth rates. It turns out that in such a negative external environment, our export-oriented economy must somehow reorient itself to the domestic market in order to achieve the desired acceleration. However, the “killed” consumer demand is unlikely to recover so quickly in Russia, and the planned state investment will be clearly insufficient.
Of course, it would be possible to rely on private investments. The government does it in its forecasts but, firstly, it is difficult to imagine that, in terms of “investment climate”, it will be possible to do so in a few years if it has not been possible in the past decade, according to Bykov. Secondly, as the Auditing Chamber writes, “in the basic forecast, the growth rates of investment in fixed capital and gross fixed capital formation are not coordinated with the growth rates of output of fund-forming industries (machinery and equipment production, and construction), as well as with the growth rates of exports and imports of investment goods. In this regard positive forecasts look “far-fetched”.
Probably, the government’s approach based on economic forecasts and budgetary frameworks can be generally characterized in the following terms. The government expects a severe deterioration in the global economy, from 2020 to early 2021, then the rebound and recovery. This means a standard V-shaped decline with a rapid drop and rebound as in the 2008-2009 crisis. Hence, the conservative budget for 2020, the safety cushion, the budget surplus, and the expectation that the world's recovery in 2021 will result in the growth of the Russian economy exceeding three percent.
According to Bykov, the Auditing Chamber experts apparently expect that the forthcoming decline will not be V-shaped, but L-shaped, with a fast drop and an extremely slow and painful recovery. This so-called structural crisis sooner or later might happen, judging by the problems of the world financial system and structural problems in the economy of the eurozone, China, the United States. In this case there percent of the growth is out of the question.
Speaking of the forecasts of the Ministry of Finance, it is probably the least important thing in terms of the budget question, because the “dividend confrontation” how much the state-owned companies have to pay to the federal budget takes place annually. The Ministry of Finance as the main guardian of public finance requires all 50% of the net profit of the state companies, and they, in their turn, want to pay less.
The final decision, as always, hinges on the public finance and the external environment, Bykov said. So if the government's forecasts come true, then, the Accounting Chamber’s opinion will likely to be correct, and state companies will be allowed to pay less dividends to the budget than the Ministry of Finance expects.