Financial University under the Government of the Russian Federation
ISSN (печатный вариант): 2073-0071
государственные финансы, налоги, государство, расходы, доходы, public finance, taxes, government, expenditure, revenue
Russian public finances have held up well to the deterioration in the economic environment. However, the situation could worsen from 2018 if oil prices remain low for a long period. Sovereign funds could be exhausted by this point if the government does not dramatically rein in spending. Its room to maneuver is limited given the costs of recapitalising banks and financing pension fund deficits. In this essay, I aim to provide a comprehensive overview of the Russian public finances.
Public finance belongs to the finance in the economic system group. This group also concludes finance of the economic entities. It’s important to mark how the Public finance appeared. This finance field is made by community through taxes. The Government authorities spend the sum of taxes for projects, having local or national benefit. Public finance has several tasks: - provision of the services required; - control of the economy fields; - creation of social policies, which must serve to a society; - support of economic growth and development. The budget, as the most important instrument in the financial system, provides achieving national priorities by reformation of the resources. National income depends on the budget. The process of budget formulation is linked to revenue and expenditure forecasting. Adequate planning of recurrent and capital expenditures is critically reliant on accurate forecasting of revenue availability. The determination of the expected overall deficit in the public sector and therefore the macroeconomic impact of fiscal policy requires accurate forecasting of tax revenues and expenditures. For better understanding of public finance in the Russian Federation, it’s important to tie all kinds of the budget categories to the budget funds. Revenue forecast is the most important step for the budget formulation. A great amount of the budget categories becomes to be more and more autonomous, and governments pay more attention to it. A lot of institutions must be involved in the budget preparation process. One of them is the Ministry of Finance. It cooperates with different economy sectors. The budgetary funds of the Russian Federation must be used effectively. Therefore, it’s important to plan the possible revenues and expenses. The plan must be clear and viable. It may be presented as follows (Fig. 1): Fig. 1. Planned costs and revenues of the state budget (bln rubles). Currently, there is a problem relating to individual entrepreneurs. This problem relates to social contributions. Fixed social contributions are constantly increasing. This obliges employers to pay more. This does not refer to businesses with income of 500 000 and above. But, unfortunately the number of rich businessmen in Russia is not so great. When the tax rate increases, it can affect individual entrepreneurs, who are not ready for such changes. In the most extreme cases, they have to shut down their business. It’s important to emphasize, that entrepreneurship as, for example, insurance premiums, is greatly reliant on public finance. The state, business and the employee must follow the expenditure principles. Unfortunately, there is no balance between business and state interests in Russian Federation. It occurred so, because results from the executive branch dominance over the legislative branch. Pension system and education can serve as example. Economic growth in Russia is especially slow, what makes the problem more difficult. The conclusion can be made on the basis of features of public finance in Russian Federation: • Taxes, related to individual entrepreneurs must be limited by the legislative branch. • Public finance in Russia belongs to such brunch of economy, which should develop along with improvements and reform in a number of legislative acts • Legislative and executive branches must be more counterbalanced. Russia’s public finances are closely linked, both directly and indirectly, to revenue from hydrocarbons. Over the past five years, fiscal receipts from oil and gas activities1 have accounted for nearly 49% of total government receipts. Between 2000 and 2013, the additional government income generated by rising oil prices was of the order of USD 2,100 billion (or 6.5% of GDP). The government has redistributed 85% of this surplus in the form of an increase in public sector wages and massive investment in the economy. The companies that saw a very sharp rise in their profits have done likewise. With the remaining 15%, the government has paid down some of its debt (reducing it from more than USD 161 billion in 2000 to just USD 41 billion by the end of 2008) and, in 2008, created a stabilization fund to address the issue of international oil price volatility. Thanks to substantial revenue from the oil and gas activities, the federal government’s budget deficit has averaged 0.6% of GDP over the past five years, and the primary deficit (excluding interest payments) just 0.1% of GDP. Debt interest accounted for only 2.8% of government receipts, while total debt for the government and all other public sector borrowers remained below 20% of GDP. External public debt is lower still, standing at USD 30 billion dollars, or around 2.2% of GDP, at the end of 2015. Excluding oil and gas revenues, the primary deficit has averaged around 10% of GDP over the past five years. Such a deficit is not sustainable in an environment where oil prices could remain low for a protracted period, unless there were to be drastic cuts in expenditure. In 2015, the 46% fall in oil prices was not fully offset by the 37% fall in the value of the rouble against the dollar. The price denominated in rouble therefore fell by around 15%. Despite changes to the tax rates on exports to reflect oil price changes, fiscal revenues on oil and gas decreased by more than 21%, and federal government revenues slumped by 5%. For the general government, receipts fell by only 1% (by way of comparison, they dropped by nearly 16% in 2009). Non oil and gas revenues remained strong, rising 6.7%, due to higher taxes. Oil prices have been in steep decline, dropping by 25% over the past year. The World Bank and IMF have made sizeable changes to their price forecasts for 2016 and 2017. Unless oil production is reduced, prices are likely to remain low for a long time. This raises the question of whether these conditions pose a threat to Russian public finances. Faced with the sharp drop in oil prices, the Finance Ministry has been forced to revise its budget forecasts for the whole of 2016. A new budget is likely to be presented in April, assuming that the average oil price will be USD 40/barrel with an exchange rate of 68.2 roubles per dollar, putting the projected oil price at 2,728 roubles/barrel, compared to the government’s previous forecast of 3,165 (table 1) Such a downgrading of the expected price in rouble terms could result in a de facto fall in receipts of around 2,400 billion roubles (18% lower than the initial budget). Table 1 Estimates of federal government receipts depending on oil prices and the exchange rate Brent Crude/barrel (USD) RUB/USD Oil & gas receipts (% of GDP) Total receipts (% of GDP) 53 61 7.3% 17.1% 37 72 5.4% 13.8% 40 70 5.6% 14.4% 46 69 6.1% 15.6% 51 63 6.4% 16.4% In the absence of any adjustment to spending, lower receipts would increase the federal government’s budget deficit by more than 3 points of GDP in 2016. To contain the widening of the fiscal deficit, the government has announced a privatisation programme (which the Finance Minister currently expects to reach RUB 873 billion), and increases in the tax on oil products (to take effect from 1 April) raising RUB90 billion, and on mining extraction (raising an estimated RUB 250 billion), together with RUB 818 billion in spending cuts (although some spending could be increased to encourage growth). The government is also counting on an increase of RUB 175 billion in dividends paid by state-owned companies. It therefore appears to be doing everything in its power to contain the deficit at 3% of GDP. It has already demonstrated this by limiting the increase in pension payments for 2016 to 4%, at a time when consumer price inflation could run at over 9%. The government’s ability to finance itself by issuing debt is limited by international sanctions that will remain in place until at least June 2016. Assuming an average oil price of USD 37/barrel and a RUB/USD exchange rate of 72, we estimate that the federal government’s deficit could hit 3.5% of GDP in 2016, from initial estimates of 2.4% in 2015. The figure for the general government is likely to be around 4.8% of GDP, 1.2 points higher than in 2015. This essay set out to overview of the Russian public finances. In addition, I also tried to ascertain problems of public finance in Russia today: oil prices and falling fiscal receipts. Although these problems are not new, they did not seem particularly urgent when the country had the necessary funds in reserve to face a fiscal shock head on. With oil prices falling, however, sovereign funds could be exhausted by 2017, requiring the government to step up the pace of reform. The key question, therefore, is whether or not it can make major changes in a preelection period, without creating a significant risk of instability.
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