HomeMediaLatest NewsCentral Bank must meet the Ministry of Finance halfway to finance economic growth

Central Bank must meet the Ministry of Finance halfway to finance economic growth

19 November 2020

Ershov Mikhail V. Principal Director on Financial Studies, Head of the Financial analysis Department

The newspaper "Vedomosti" published an article by Mikhail Ershov, Principal Director on Financial Studies on the budget problems.

Central Bank must meet the Ministry of Finance halfway to finance economic growth

In many countries, there namely the central banks are the main buyers of government bonds.

The State Duma is discussing the draft budget for 2021–2023. The budget is difficult - uncertainty and risks are high, stagnation and new waves of coronavirus are likely. And although a total lockdown may be avoided, the restriction of economic activity will obviously slow down economic growth and affect the budget parameters. And they are not sutisfied anyway.

The budget will be in deficit in 2020 and in the next three years. This is normal, especially in times of crisis. But the deficit will shrink, from 4.4% of GDP in 2020 to 1% of GDP in 2023. Reducing the deficit in the face of economic stagnation, limiting income growth, means reduced funding and narrowing opportunities for development. Indeed, even at the micro level, in order to produce products and make a profit, you first need to buy raw materials, hire workers, rent premises, etc., that is, initially spend money, create a deficit. And only after the sale of products, it will be covered by income, ensuring growth. In this sense, the current deficit is, in fact, an investment in future economic growth.

It is planned that the budget deficit will be financed by increasing public debt, mainly domestic - its share will exceed 80% of the total. In general, the volume of public debt will increase from 12.3% of GDP in 2019 to 21.4% by 2024.

State debt bonds are important funding mechanisms for the budget. Their placement expands the financial market, increases its diversification and lowers rates, providing investors with a relatively risk-free income. At the same time, large-scale placement of government bonds on the domestic market (their annual volumes will be several times higher than before the pandemic) will draw away liquidity.

Therefore, it is very important to what extent the Bank of Russia will take part in financing the state debt, and it, in turn, said that it was not planning to buy federal loan bonds (OFZ).

At the same time, in many countries, the central banks are the main buyers of public bonds of the ministries of finance, which ensures the flow of targeted liquidity into the economy. For example, in Japan, 50% of all issued government securities are on the balance sheet of the Bank of Japan (about 470 trillion yen from its total volume of more than 900 trillion yen). In the United States, almost 20% of treasury bonds (about $ 4 trillion) are on the Fed's balance sheet. In the Eurozone and Great Britain, the volume of national state bonds on the balance sheets of its central banks is at least 20-30%. In the context of the crisis, such approaches began to be applied in other countries - in Hungary, Poland, the Czech Republic, etc.

Thus, these countries are talking about fundamentally different mechanisms for financing the budget and economic growth. The purchase of national state bonds by central banks largely removes the problems of optimizing the budget and finding sources of funds from the state budget. It makes possible not to increase the tax burden on the economy, which is extremely important, especially when overcoming the crisis. Moreover, it allows companies and the economy as a whole to keep their resources.

The Russian budget continues to be amended to redirect funds to support industry and other priority areas. However, the total cost does not increase. At the same time, some taxes are raised (for example, the MET for metallurgists), which narrows the opportunities for growth of companies. Meanwhile, the approach, when state bonds are bought by the national central bank, allows for growth for everyone, and not the growth of some directions at the expense of others.

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