Russian ministry proposes balancing budget in 2014-2016 by cutting transfers, spending

(Interfax – MOSCOW, June 25, 2013) Russia’s Finance Ministry is proposing three maneuvers to balance the federal budget in 2014-2016 – reduce transfers to the Pension Fund of Russia (PFR), cut budget earmarks for government procurements and postpone some spending on the government arms program until after 2016, Finance Minister Anton Siluanov told reporters on Monday.

“Right now the situation is such that with the slowdown in growth of the economy, macroeconomic indicators, budget revenues are not increasing, but on the contrary shrinking compared to the parameters that we approved in the budget. While before for ten years we increased revenues and spending , now the rate of economic growth is declining, consequently revenues are also falling and we need to lower spending,” Siluanov said, commenting on a meeting of the government commission for planning the budget for 2014-2016.

“The budget parameters proposed by the Finance Ministry were approved. We calculated expenditures based on the fiscal rule. Of course, not all decisions fit in there, and in order to determine the priorities we proposed a number of maneuvers,” Siluanov said.

The main maneuver, he said, is reducing transfers to the PFR by carrying out pension reforms. The second is to reduce budget earmarks for government procurements by 5%, and the third is to postpone some spending on the arms program until after 2016.

“These kinds of decisions should give us additional resources for new challenges that we face. Due to three new major projects that we have – the program to develop the Far East and the Baikal region, the construction of the Moscow-Kazan high-speed railway and the 2018 World Cup football tournament,” Siluanov said.

He said the decisions to redistribute funds within the budget are difficult to make. “This is perceived as a sequester, as spending cuts. In actual fact, this is not cutting spending, this is choosing priorities taking into account new laws. Things don’t happen that way – to always run budget surpluses,” Siluanov said.

He said that the Finance Ministry believes transfers to the PFR could be reduced by eliminating breaks on insurance contributions and thanks to remaining balances and the forecast for contributions to funds, which is higher than initially planned.

“All this provides 470 billion rubles in additional resources in 2014, 672 billion rubles in 2015 and 624 billion rubles in 2016 across all funds,” referring to the PFRS, Federal Mandatory Medical Insurance Fund and the Social Insurance Fund. The PFR accounts for most of this, he added.

“Spending on valorization is decreasing, as there is less need, as well as a number of measures to reform the pension system, which also provide savings in 2015-2016,” Siluanov said.

The reduction of budget allocations for government procurements will provide an additional 115 billion rubles in 2014 and 120 billion rubles in both 2015 and 2016. The amount saved by postponing some spending on the arms program has not been specified yet.

Siluanov also said that it was decided at the budget planning commission meeting to continue work on the budget at meetings with the prime minister on key blocks, and to hold meetings with ministers and deputy prime ministers on each budget position.

“The main work within the process of disagreements will take place in August. A government meeting will be held on July 4 on the main parameters of the budget, on the basis of which we will bring the maximum amounts for budget earmarks to the main administrators of budget funds, they will get limits and see for what they have enough and for what not. They will come to the Finance Ministry to work out disagreements, then to the budget commission,” Siluanov said.

“These are unusual times for our ministries and agencies. Everyone is used to living the old way, when there are resources and they are distributed among new programs and decisions. Each ministry has its own budget, no one is proposing to particularly redistribute it and direct it toward new objectives, everyone wants additional (funds). But the budget is not rubber. The parameters are such that expenditures are increasing by 460 billion rubles in 2014 compared to 2013, by 1.388 trillion rubles in 2015 compared to 2014, by 1.053 trillion rubles in 2016. There is substantial growth of spending, but it is being eaten up by already made decisions on purchases of arms and military hardware, cash allowances, on government programs. There are no particular maneuvers on additional expenditures, there are only maneuvers within the budget,” Siluanov said.

He also said that as a percentage of GDP budget revenues and spending are shrinking in the next three years, but in absolute terms they will increase. In 2014 and 2015, revenues and spending are expected to shrink compared to the parameters currently approved by the law on the budget for these years.

Budget revenues will drop from 19.3% of GDP in 2013 to 18.2% of GDP in 2014, 17.9% in 2015 and 17.3% in 2016. Compared to targets approved by the law, revenues will drop by 628.6 billion rubles to 13.434 trillion rubles from 14.063 trillion rubles, but compared to 2013 they will increase by 569 billion rubles. In 2015, they will drop by 923.4 billion rubles compared to the budget law but increase by 1.258 trillion rubles compared to 2014, to 14.692 trillion rubles. In 2016, revenues will increase by 1.047 trillion rubles from the previous year to 15.739 trillion rubles.

Spending will decrease by 360 billion rubles in 2014 compared to the targets approved by the law (primarily by cutting tentatively approved expenditures of 355.2 billion rubles), to 13.847 trillion rubles from 14.207 trillion rubles, but compared to 2013 they will not change. In 2015, they will be reduced by 390.6 billion rubles compared to the budget law (by cutting tentatively approved expenditures of 400.4 billion rubles), but increase by 1.388 trillion rubles compared to 2014 to 15.235 trillion rubles. In 2016, spending will increase by 1.053 trillion rubles compared to the previous year, to 16.288 trillion rubles.

The budget deficit is targeted at 412.2 billion rubles or 0.56% of GDP in 2014, 543 billion rubles of 0.7% of GDP in 2015, and 549 billion rubles or 0.6% of GDP in 2016.