BOFIT Viikkokatsaus / BOFIT Weekly Review 2019/40

The finance ministry’s three-year fiscal framework covers the entire consolidated budget. That includes the federal budget and the budgets of the state’s three social funds, for which (all four) the government has just submitted drafts to the Duma, and also projections for regional and municipal budgets.

In nominal terms, government-sector revenues are expected to increase annually by 4−5 % this year and in the next coming years. The role of the government budget sector in the economy overall is stimulative. The estimated growth in spending could still accelerate this year to a degree that growth for the entire year would reach about 8 %. Growth will average around 6 % a year in the closest years ahead, i.e. about two percentage points above the projected inflation rate. The consolidated budget surplus, which was almost 3 % of GDP in 2018, is expected to fall below 2 % of GDP this year and go down to 0.7 % of GDP next year.

The consolidated budget revenues are constrained by the assumption of a moderate drop in the price of Urals crude oil from its current level to around 56 dollars a barrel for the next few years. In that case, oil & gas tax revenues would decline substantially this year and next year before levelling off in 2021. On the other hand, the estimate of the budget’s other revenues is based on the economy ministry’s forecast that GDP growth accelerates from about 1.5 % this year and next year to over 3 % from 2021 onwards. Thus, the growth of other revenues, which has remained high for the past two years, will continue in the next few years at 6−7 % a year.

Other revenues are expected to increase at about that pace for the federal, regional and social fund budgets. VAT revenues to the federal budget will rise well, and dividend pay-outs from state-owned companies are expected to increase notably. The flow of money to social funds will be due to revenue increases from mandated social taxes from wages. Regional budget revenue estimates are not broken out.

Consolidated budget spending on healthcare and public order and domestic security will grow this year and next by over 10 %. Public administration will also receive tangible increases. After increases this year, the various branches of the economy and the housing sector must wait at least a year for new budget impulses. The education sector will have to wait longer. Increases of spending on social benefits and defence are to slightly outpace inflation in the next coming years. General increases in government-sector wages are scheduled roughly in line with inflation. Pension increases are to exceed 6 % a year based on the decision of summer 2018.

As the base oil price set under the federal budget rule is low compared to the oil price assumption of the revenue calculations in the federal budget, the National Welfare Fund (NWF), which serves as the government’s reserve fund, is expected to swell by the end of next year to a level corresponding to 10 % of GDP. The finance ministry’s technical assumption is that NWF assets will not be invested in anything other than central bank accounts. Thus, the NWF’s liquid assets at the end of next year would amount to 8.5 % of GDP.

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