HomeMediaMedia PublicationsAnalyticsThrifty people: the Russian budget will face a sharp cut in all expenditures in 2021

Thrifty people: the Russian budget will face a sharp cut in all expenditures in 2021

19 December 2020

Salikhov Marcel R. President, Principal Director on Economic Studies, Head of the Economic Department

Marcel Salikhov, President of the Institute published an author's column in Novaya Gazeta on the topic “Thrifty people: the Russian budget will face a sharp cut in all expenditures in 2021”.

On December 8, President Vladimir Putin signed the draft federal budget for the next three years and determined the priorities of budgetary policy. The key word that can be used to designate the budget for the next year is “consolidation”, or in simpler terms, the desire to save.

A return to "normalcy"

As expected, the budget did not undergo any major changes during its consideration in the State Duma. The main parameters of the budget and its structure remained unchanged compared to the government's version. Consolidation-2021 means that budget expenditures next year will decrease by about 1.1 trillion rubles compared to the expected performance this year and will amount to 21.5 trillion rubles.

In a sense, cost reductions were inevitable. In 2020, the government has increased its spending by more than 25% in order to fight the pandemic and the economic crisis. Some of these additional costs - for example, summer one-time payments to citizens, purchases of medical equipment and medicines, targeted measures to support business - were of a one-time nature. Next year they will "automatically" be reduced. Tax holidays also apply this year only.

2020 has been an extraordinary year for the budget, too, so the budget for the next three years should include a return to "normalcy."

Some of the anti-crisis measures become permanent and systematically increase the volume of government spending. In particular, spending on social policy will remain at the level of 5.6–5.7 trillion rubles annually, that is, approximately 0.9–1.0 trillion rubles more than in 2019. This is a consequence of the decisions already made to expand the recipients of maternity capital, to increase the PFR transfer due to a decrease in the rate of social contributions for small and medium-sized businesses, an increase in unemployment benefits and other measures.

Spending on health and education will decrease next year compared to 2020, but will remain significantly higher than in 2019. Next year it is planned to cut defense spending somewhat, but increase spending on law enforcement. It is also planned to consistently reduce the cost of transfers to regional budgets - the federal center considers additional support to the regions in 2020 as temporary.

The government does not plan a targeted budget maneuver in the expenditure side, relying mainly on the inertia of the decisions already made. The National Economic Recovery Plan, which was presented in June and approved by the government in October, is in fact a mixture of past plans from the national projects of 2018 and a generalization of the anti-crisis measures already announced in the spring. No new breakthroughs are expected.

The treasury under protection

The main reason for consolidation from next year is compliance with the fiscal rule. However, despite the coronavirus pandemic and the expected decline of the Russian economy by about 4%, the budget deficit in 2020 will be significantly less than government plans. In September, the Ministry of Finance expected the budget deficit to be 4.7 trillion rubles this year. However, current data indicate that the deficit will be less than 4 trillion rubles.

According to data for January - November, expenses amounted to 19 trillion rubles. The revised budget list (in fact, the current plan) provides for spending in the amount of 23.7 trillion rubles. This means that to fulfill all plans, it is necessary to spend 4.7 trillion rubles in December alone.

Superhigh "utilization" of allocated funds in December is traditional for the Russian budget.

Usually, the last month of the year accounts for 15–20% of the total volume for the year. This is mainly due to the fact that the registration of state purchases and the conclusion of state contracts are almost always delayed and shifted to the end of the year. Therefore, spending on the national economy is usually the most uneven within a year, where most of the costs are associated with large contracts, and not with the payment of salaries to civil servants or benefits to citizens.

However, it will not be possible to spend the remains of this size this year. Moreover, the budget list includes reserve funds that will no longer be used in full. Therefore, we can expect that spending in 2020 will be closer to 22.4-22.6 trillion rubles.

The revenue side also didn’t decline as much as expected. Non-oil and gas revenues did not decline, but even increased by 9.2% in the first 11 months. The positive dynamics is mainly an additional 1 trillion rubles from the Sberbank deal. However, even without taking into account this "scheme", non-oil and gas revenues remain at the last year's level. Receipts from VAT and excise taxes show a positive trend.

Thus, the state “protected” its income even in the face of the economic crisis.

Next year, additional tax increases and the end of the tax holidays will further boost government revenues.

Of course, the oil and gas budget revenues suffered due to the decline in oil prices and the reduction in production. However, the rise in oil prices made it possible to restore them too. If in May-June the monthly volume of oil and gas revenues did not exceed 250 billion rubles, then since September it has been steadily exceeding 450 billion rubles a month. All this means that federal budget revenues will be higher than the official plans (17.8 trillion rubles). All this will allow to get a smaller deficit.

Regional finances have also not been hit as hard as one might expect. In the first 10 months, the own revenues of regional budgets decreased by only 5.2%. Despite the rise in unemployment, income from personal income tax - the key source of the treasury of the subjects - even show a positive trend.

This year, the federal center has increased direct transfers to support the regions, rather than issuing budget loans. This helped to support spending: in the first 10 months, regional spending increased by 17.4% and became a significant source of anti-crisis support for the entire economy.

Fears of a huge budget deficit in 2020, which will require spending cuts and tax hikes, have not materialized. The deficit will be moderate. This means that plans for 2021 could also be adjusted. Tax increases starting next year are not necessary for fiscal stability, but may well have a negative impact on consumer activity. Consolidation of costs could also be extended over a longer period.

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