Three budget trap: how the Russian authorities have forgotten about the economy

The logic by which the actions of the Kremlin, the government and the Central Bank, suppresses the only remaining factor of economic growth — domestic demand

The layout of the budget for the election in 2017 as a whole is completed. The wheel of the budget process at this time, rotate slowly and with all possible theatricality: in the spring the Ministry of Finance frightened colleagues in the Cabinet to the impending end of the world in the form of exhaustion of the reserves in the summer, wringing her hands, chopped off pieces of social obligations, but so that not too much harm to the Duma elections. Then came the moment of truth: the Finance Ministry went on the offensive and did everything that was planned. Costs will be frozen for three years, the priority is to keep the deficit and a gradual substitution of part of the reserves which funded the deficit, the borrowing of funds.

The main feature and economic policy and the budget process this year was the final transformation of GDP growth in technical parameter of balancing expenses and revenues. Suffice it to recall the speed with which change the forecasts. According to the published “statements” table, from 16 September to 17 October forecast about GDP growth did a strange somersault. First, expectations for the next three years was as follows: 0.6 percent, 1.7 percent and 2.1 percent. Then the forecast was lowered to 0.2%, 0.9% and of 1.2%. But after a series of spirited meetings, the President returned to more optimistic versions. What was the bout of pessimism and how it managed to overcome, it is not clear. The table shows that officials “tweak” the forecasts for real wages and real income (they were a bit older for a month) and the forecast of the ruble: for some reason, while maintaining oil prices $40 per barrel for three years he should be reduced almost to 69 rubles per $1 in 2018 and up to 71 rubles in 2019.

These manipulations allow to conclude that growth is not a priority for the President, the government and the Central Bank. Growth today just a figure in a table, which can be changed depending on the evaluation of deficits and spending. Why did it happen? Leaving aside the question of political responsibility for excessive optimism or excessive alarmism of specific officials or departments, as well as the lack of “big” economic strategy, one can identify three political problems that suppress seems to be the only neskondensirovannyh growth factor was domestic demand. Each of these issues is recognized by the officials in some sense inevitable, but not critical. However, they don’t leave much room for demand growth. For simplicity, let’s call each of these problems a “trap” and add the name of the politician, whose diligence this “trap” to inhibit demand.

“The Trap” Medvedev

Prime Minister Dmitry Medvedev is a consistent advocate of fiscal consolidation, paradoxically, not less, and perhaps more effective than Alexei Kudrin. Even before the epic with the sanctions and falling oil prices the cause of the crisis was called Prime Minister and his team: they are in 2013, pushing too hard in the budget and “hlopnul” unsustainable growth. “Cocktail Medvedev” looked and still looks like the defense costs are rising, social benefits are stagnating, real spending on education and healthcare are reduced. On paper money for public sector wages, pensions and social benefits are growing. But in reality the government because of the “may decrees” to spend more on wage growth and less on social benefits. The same, of course, is happening in the regions.

The result is the following. According to the analytical center under the government, the number of recipients of cash benefits in the regions increased during the ten years four times — from 6.6 million to 25.4 million people. The number of programmes of material support have increased almost threefold from eight to 21. The amount of social payments all this time growing at the expense of “targeting” (less payments larger), and by increasing the number of recipients. In 2013, the government began to cut spending by raising funds on the “may decrees” of the President. Regions also ceased to increase payments. Teachers and doctors poor were not, and to “the may decrees” anyway, they ranked as middle class, even in the broadest sense. But the recipients of benefits from just the poor became beggars. Today, according to the Institute for social policy studies, almost 70% of families who consider themselves poor or extremely poor receive social benefits, pensions or allowances. The government thus raised the General standard of living of citizens, and destroyed has created lifestyles “sotsialschikov”. Before the start of the struggle with the budget deficit, “the may decrees” and the militarization of the budget, these 25 million people was a strategic reserve in consumer demand: the growth of their standard of living, even a slow, dispersed, or at least supported this demand. But now they are thrown back into poverty, and that is another economic behavior and other priorities.

“The Trap” Siluanov

The Ministry of Finance is fighting for a balanced budget, keeping in mind that the budget is a sort of virtual equilibrium point in the triangle “provisions — defense spending — social obligations”. Following each budget is the result of an increasingly virtual: on paper all have, albeit with difficulty, in life, money is less and less. The Ministry of Finance does not refuse from the construction of the Budget code, which were designed in other contexts if not in another country. What happens? Municipalities across Russia lacks funds for infrastructure and social facilities. But the budget rules do not allow them to problem solve together: work together to build a school or repair a hospital, which can be calculated in several villages to chip in on the road or boiler. The situation comes to the absurd: several municipalities bordering each other for a long time form the agglomeration, but not together, for example to build a plant for the incineration of garbage. The construction of such a plant in each settlement there is no economic sense, but together they could pull of the project. But it’s impossible. Blind territorial planning of Moscow, turning the country into a set of isolated units which do not have the right to economic cooperation. That right there is, you need to write a new Budget code, the Ministry of Finance but frankly not up to it.

The same happens with projects whose life cycle extends beyond the calendar year. It is pointless to ask for money on the road you need to build two or three years. You need to cut the project at annual intervals. It is clear that no planning does not work: the three-year budget has some political importance in Moscow, but not on the ground, living there from 1 January until 31 December. This is one of the reasons for the poor state of municipal infrastructure: it’s not just about money and theft. Rules suppress any initiative and destroy the ability to maneuver. Municipal authorities like the father of the family, which makes the small house repair works in the principle, “then remake it”. This “later” never comes. In this case tax benefits, exemptions generously showered on the heads of the Federal skilled lobbyists. Municipalities have lobbyists there. If their initiative were not constrained, they would become a significant driver of domestic demand. But to mess with them at the Ministry of Finance no time and desire.

“The Trap” Nabiullina

The Bank of Russia consistently struggling with inflation, analysts say that target — 4% — may be reached already in 2017. But there was an unexpected obstacle: a dramatic reduction of the Russian middle class, which, on the one hand, sensitive to changes in interest rates, with another due to “weight” the economy is forcing businesses to consider their consumer preferences. The smaller the middle class, the harder it is to influence inflation through rates, write economists of the Central Bank. The question “where is the middle class?” ask pointless, but makes sense is another question: “what did the Bank of Russia to support it”? At least, nothing. As a maximum, much below this average decreased. The Central Bank started in 2013, the fight against “overheating” in the market of consumer lending, while bankers said then that “overheating” is not and will not be long, in many developing countries a financial burden on the citizens is much higher than ours. The middle class in Russia at that time was “middle” in advance: the level of consumption relative to other groups in Russian society, and not developed countries. The credit crunch, and then a consistent fight against inflation, which is even more pulled up stakes, and destroyed the advance. The middle class is rapidly poorer, and not having airbags in the form of a Bank loan, started to create the pillow itself — in the form of dollar, and then ruble savings. Consumer demand, therefore, has been undermined twice: first in 2013 and then in 2015.

Now these funds are the problem: the Bank of Russia said that the main risk in 2017, the structural surplus of liquidity, which emerged in particular due to the reluctance of citizens and business to spend and invest. Surplus can lead to lower interest rates on loans (primarily to citizens) and to accelerate inflation. Banks have too much money, so the Central Bank and the Ministry of Finance through the agreed action will be to absorb their surplus. Inflation may be down to 4%, but without a loan no consumer demand will not. Subdued inflation is certainly an achievement, but if consumer demand does not recover, the use of this achievement will be little. Investment constrains not only (perhaps not so much) high inflation, how much uncertainty in the economy, which arises in particular due to depressed domestic demand. Whether to rest against the indicator of 4% and to keep the artificially high interest rates on consumer loans if a stable inflation not only prevents the surplus liquidity but also high and growing inequality, which is, in particular resulting from the policy of the Bank of Russia?

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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