Russia’s new budget framework does not promise support for fading economic growth

Russia’s economic growth remained sluggish in August. In particular, the slowdown in investments has weighed on economic development. The government’s new draft budget framework submitted to the Duma this week promises little support for economic growth. If this budget plan holds, government spending in real terms would decline for the rest of this year and next year. The new budget framework appears to assume that Russia will achieve its objectives in the Ukraine war in the near future and that an end to the fighting is possible. If this expectation fails to materialise, budget spending would, as in 2023, need to be increased significantly more than planned. Even with current plans, the budget deficit will expand considerably this year and government debt will grow. In the coming years, a growing number of Russians will have to participate in the costs of the war through tax increases. Russia’s new budget framework has also been examined in a recent BOFIT blog (in Finnish, forthcoming in English).

Russia’s economic development remains subdued

Russia’s economic growth was still weak in August. According to a preliminary estimate by the Ministry of Economic Development, GDP grew by only 0.4% y-o-y in August, as in July. In January–June, growth still amounted to 1.2%. Growth was supported by war-related industries and consumer-driven service sectors. The slowdown in investment has weighed on construction and the production of investment goods.

Manufacturing output picked up again in August driven by sectors linked to the war, while other manufacturing output contracted. Growth also continued in retail trade and consumption-driven services. The unemployment rate has remained historically low, and the tight labor market has kept wage growth brisk. In January–July, real wages rose by 4.5% year-on-year. Output in the extractive industries dipped again in August, and transportation decreased. Construction also stagnated.

Forecasts for Russia’s GDP have been revised downward recently. In the latest forecast published by the World Bank, Russia’s GDP is expected to grow by 0.9% this year and 0.8% next year. The EBRD’s latest forecast also expects 1.3% growth for both this year and next. In the latest forecast by the Russian Ministry of Economic Development, which forms the basis for the budget framework, GDP growth is also expected to remain around one percent this year and next. However, the Ministry expects that especially war-related industrial sectors will continue to grow significantly faster than the rest of manufacturing in the coming years. Although the growth figures themselves are subject to considerable uncertainty, the expectations nevertheless reflect the focus of Russia’s economic policy in the years ahead.

The Ministry of Economic Development expects that industrial sectors linked to the war will continue to grow faster than other industries in the coming years

Sources: Russia’s Ministry of Economic Development, BOFIT.

In the new budget framework, revenues will be increased through tax rises, while the growth in expenditures is set to moderate

The Russian government has approved a new preliminary budget framework for the years 2026–2028 and sent it to the Duma for consideration. The revenue estimate for the consolidated budget (comprises federal budget, regional budgets and state funds) was reduced by 3.4 trillion rubles, while the spending estimate with increased by 1.8 trillion rubles. Government spending has grown rapidly already this year. Staying with the limits of the new, higher expenditure limit still means that government spending cannot rise in the final months of this year.

Government revenues are expected to grow by 9 % next year to 81.2 trillion rubles under the budget framework. Most of the growth comes from an increased in the value-added tax (VAT), whereby the VAT would go up by two percentage points next year to 22 %. Oil & gas revenue are expected to grow only slightly next year; the average export price of Russian crude oil is assumed to rise from $58 a barrel this year to $59 next year. For 2027–2028, revenues are expected to rise about 7 % a year.

Government expenditure is set to increase next year by a 4 % to 85.1 trillion rubles. Such low growth in nominal spending translates to a spending cut in real terms. The budget framework provides an overview of budget plans, as well as itemised spending categories. While detailed information on realised spending is no longer published, trends within spending categories can be inferred by comparing them against earlier budget plans. The new budget framework suggests that defence spending will be cut slightly next year, while spending on national security will be increased by nearly the same amount. Spending on the economy (a category that includes, among others, investment in infrastructure projects and corporate subsidies) is set to rise under the budget framework by 13 % next year. Spending on social policy and health care are set to increase in nominal terms, but remain essentially at this year’s level after inflation is taken into account. Consolidated budget expenditures in 2027–2028 would rise by 6–7 % a year. The defence budget is expected to increase slightly in 2027 and remain in 2028 at a level of roughly 13 trillion rubles ($160 billion at the current exchange rate).

The state budget deficit is set to swell in particular this year

In this year’s revised budget estimate, the government deficit swells to 6.9 trillion rubles (3.2 % of GDP), creating the largest deficit since the full-scale invasion of Ukraine in 2022. In coming years, the government plans to reduce the deficit significantly: 3.8 trillion rubles (1.6 % of GDP) in 2026, and slightly less in 2027 and 2028. Government debt is to be used to cover the debt. Although the government plans to take on considerable debt in coming years, Russia’s debt-to-GDP ratio remains quite modest under the budget plan. At the end of 2028, government debt would correspond to about 20 % of GDP. Debt servicing costs are also expected to grow more slowly than before, as interest rates are expected to decline with a looser monetary policy.

The remaining assets in the National Welfare Fund are intended to be saved for unexpected shocks, so they will no longer be used to finance the budget deficit. According to the Ministry of Finance, the fund held 4.2 trillion rubles in liquid assets at the end of September (2% of GDP).

Russian consolidated budget deficit set to increase substantially this year under the latest budget framework proposal

Sources: Russia’s Ministry of Finance, BOFIT.