BOFIT Viikkokatsaus / BOFIT Weekly 2017/50

Federal budget spending is set to contract slightly next year in nominal ruble terms, which means a real decline of several per cent. The budget assumes inflation will average just under 4 % next year. Transfers to the pension fund (20 % of federal budget expenditures) will fall considerably from this year's peak. Transfers to regional budgets, which have increased in recent years, will remain unchanged in nominal rubles (10 % of expenditures). Other federal budget spending will remain about the same. Spending marked for defence will drop sharply from current levels. Homeland security spending will see a slight increase.

Federal budget revenues are expected to increase at the pace of projected 2018 inflation. Oil & gas tax revenues, however, should fall notably if the price of Urals-grade crude remains at the assumed average of slightly below 44 dollars a barrel. Other budget revenues should continue to rise briskly. For that, the budget assumptions include projected GDP growth of over 2 %, growth in the tax base higher than GDP growth, improved tax collection, some tax increases in smaller tax categories, and also increased dividend requirements for state-owned enterprises (50 % of profits), which, however, are subject to case-by-case negotiations that will continue next year.

Federal budget spending for next year is set following the new budget rule in force from Jan. 1, 2018. Starting next year, oil & gas tax revenues calculated for that purpose are based on the Urals price of 40 dollars a barrel and other budget revenues are those in the budget's estimate. The budget rule limits the budget deficit before interest payments on debt to 1 % of GDP next year. The actual overall budget deficit is to contract to around 1.3 % of GDP, which is within the budget rule framework.

The deficit will be financed with domestic debt and withdrawals from the government's reserve fund, i.e. the National Wealth Fund (the two current funds will be combined on Jan. 1, 2018). The fund will be replenished with oil & gas tax revenues exceeding the calculated revenues. The fund's liquid assets should correspond to about 2 % of GDP at the end of next year. State debt is expected to reach about 15 % of GDP. Besides borrowing, an increase in debt occurs because the government is aiming at putting up large forex-denominated guarantees (1.3 % of GDP) for the Russian Export and Investment Guarantee Agency.

Growth in state pension fund expenditures will come to a halt next year. Growth in mandatory social taxes to the fund will remain strong and should be sufficient to cover the decline of federal transfers to the fund. In contrast, health insurance fund spending will continue its brisk rise with the development of Russia's insurance system. Health insurance fund revenues from social taxes should also increase rapidly, partly due to a tax increase.