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In 2010, Israels defense spending accounted for 6.7% of GDP. However, in contrast to the RF budget, that section included both defense expenditures per se along with costs of pensions to, and social rehabilitation programs for, the military and their family members, the border infrastructure maintenance costs, and costs of purchasing weaponry from the US at the expense of the latters military aid. So, it may well happen that in reality Israels military spending does not exceed Russias. Source: http://www.inss.org.il The US started cutting down its national defense spending back in the Cold War era from 14.2% of GDP in 1953 to 9.2% of GDP in 1962, 6.7% in 1972, 5.7% in 1982. The defense spending shrank sizably since the collapse of the USSR: from 5.2% of GDP in 1990 to 3.0% of GDP in 2001 (except for 1992 4.8% of GDP due to the War in the Gulf). The figures have been on the rise ever since 2002: from 3.3% of GDP up to 4.0% of GDP in 2005 and further to 4.7% of GDP in 2009 and 5.1% of GDP in 2011, due to financing of military operations in Iraq and Afghanistan. It is planned to scale back on military expenditures post-2011 and bring them down to 3.4% of GDP by 2016. Source: www.whitehouse.gov On the basis of data provided by the Accounting Chamber of RF in its conclusions on draft budget acts.

Section The Monetary and Budget Spheres Expenditures on the section Education have been in decline since 2009. In 2010, they shrank by 0.4 p.p. of GDP and in 2011 by 0.1p.p. of GDP on a year-on-year basis. The proportion of spending on education in the enlarged government budget accounted for 11.1%, or up 0.3 p.p. vs. the 2010 level.

Since 2008, the volume of financing by the item Education has been in decline: in 2010 by 0.4 p.p. of GDP and in 2011 by 0.1 p.p. of GDP on a year-on-year basis. The proportion of spending on educationin the aggregate volume of the enlarged government expenditures stood at 11.1%, or up 0.3 p.p. vs. the 2010 figures.

The volume of financing by the item Housing and utilities sector likewise has been in decline since 2008 by 0.2 p.p. per annum. In 2011, the enlarged government expenditures were cut practically across all the items, except for expenditures on settlements development (up 0.1 p.p. of GDP thanks to the respective increase in regional budgets expenditures) relative to GDP on a year-on-year basis. The cuts are associated with a gradual completion of such measures as provision of housing to veterans of WWII and individual categories of residents. Meanwhile, reserves for further cuts in the sector are unlikely to be huge, despite the fact that Russia on average spends on the housing and utilities sector twice as much as OECD member states. More specifically, at end-year 2011, as many as 99.4m of housing in the country fell under the category of slum and dangerous structures (up 1.5 times over the decade). As it is, as a rule, regions with poor socio-economic performance indicators or those classified as the Northern ones (where climatic conditions predetermine high housing deterioration rates) it is inappropriate to cut down the state financing, as availability of adequate housing is a critical component of residents living standards. At the same time, given the magnitude of the challenge, development at the federal level of new approaches to assessment of the need in, and provision of, social housing, perhaps, appears justifiable1.

In 2011, the item Culture, the motion picture industry and mass media saw cuts amount to 0.1 p.p. of GDP compared with 2010; however the share of expenditures on culture in the enlarged government budget remained at the level of 2%.

As to the item Environment protection, the respective expenditures have remained unchanged since 2009 and accounted for 0.06 - 0.07% of GDP. In its absolute terms (Rb 38bn, or up 10.3bn vis--vis 2010) the 2011 spending on environmental programs is comparable to the enlarged government revenues generated by payments for adverse impact on environment (Rb 22.1bn in 2011).

It should be noted that the volume of budget outlays for environmental measures rose 3.5 times between 2009 and 2011 in nominal terms, but shrank more than twice in the shares of GDP equivalent (from 0.16% of GDP in 2000 to 0.07% of GDP in 2011). Individual moves in this area (eg. implementation of a countrywide energy-saving program in the frame of the energy strategy) does bring about some positive effects, but still appear incapable of reversing the destructive trends in the environmental area.

The 2011 appropriations on the section Social policy appear impressive 12.0% of GDP (Rb 6,512.3bn), including those on pensions provision (8.0% of GDP, or Rb. 4,379.6bn), albeit down 1.3 p.p. on a year-on-year basis. The share of the expenditure item in the aggregate volume of the enlarged government expenditure was likewise down 2.5 p.p. compared with Expenditures are incurred both by the federal budget and RF Subjects budgets; however the procedure of provision of social housing is established at the latter level. The federal budget does not finance provision of housing; rather, social payments, eg. to young academics, in compliance with Resolution of the RF Government of 17.12.2010 No. 1050.

RUSSIAN ECONOMY IN trends and outlooks the prior year. In the RF Subjects consolidated budget, the 2011 social spending was cut down in absolute terms by 28.5% (1.5 p.p. of GDP) relative to 2010, because of cuts in expenditures on the social provision of the population totaling 0.4 p.p. of GDP.

During last three years, the 2011 enlarged government budget expenditures on servicing the public debt remained at a level of 0.6% of GDP; the RF Subjects consolidated budget expenditures on this section were down 0.1 p.p. of GDP on a year-on-year basis.

An analysis of recent changes in the structure of the enlarged government budget expenditures allows identification of two negative tendencies:

1. Boosting expenditures on financing public goods (social policy, defense and law enforcement and public order) against cuts in expenditures on ensuring economic growth. So, despite the political leaderships declarations about the budgets modernization nature, actual expenditures encourage public and individual consumption, rather than economic development. At this point, emphasis should be made on government support of backbone national infrastructure objects (meaning investment projects and programs in the innovation development area, such as education, research, technoparks, business incubators, special economic zones, technology transfer centers) and upgrade of the production infrastructure (transport, communications, the FEC infrastructure), which would bolster economic stability, fuel innovation, breakthroughs in the technological sphere and environmental safety. That said, the government should scale back on its participation in business and semi-business investment.

2. A notable surge in the number of public and municipal servants1 and public employees, which, first, evidences an excessive presence of the state in the economy and the social sphere. The volume and the number of public functions and services in tandem with antiquated procedures of their delivery exhibit current defects in their organization and, therefore, preserve the problem of huge public costs in the said areas. Second, it must be admitted that in contrast to temporary effects from boosting the financing of individual directions, which serves just as a temporary remedy, it is a funding of institutional transformations that gives a fillip to entrepreneurial activity and attraction of capital into an economy, and its structural diversification on the basis of innovation-driven technological development2. Thirdly, a high proportion of public employees evidences that by hiring an insufficiently qualified workforce to carry out public functions, a state exercise the social sponsorship function. As a result, the state budget is engaged in an implicit subsidizing of the populace (ie. the government pays salaries for an inefficient exercise of public functions).

2.2.4. Analysis of main Parameters o f the Federal Budget of RF in 2011 and for the Period of 20122014.

The budget Act for the upcoming three years does not suggest maintaining the 2011 federal budget revenue increase rates (see Table 13): the federal budget revenues should contract by 0.8 p.p. in 2012 and further by 1.3 p.p. in 2013 and 1.5 p.p. in 2014 vs. their 2011 level, with projections of oil-and-gas revenues suggesting their even greater decline from 10.2% of GDP in 2011 to 7.2% of GDP in 2014.

The 2010 data suggest that in Russia the number of public employees per capita (108 per 1,000 residents) is greater than across OECD and emerging economies (eg. the average figure across 22 OECD nations is 75, Brazil 45, South Korea 29 per 1,000 residents).

According to development priorities established by the Long-Term Development Concept approved by Resolution of the RF Government of 17 November 2008 No. 1662-r.

Section The Monetary and Budget Spheres Table Main Characteristics of the Federal Budget in 20082014, as% GDP Actual The budget Act 2008 2009 2010 2011 2012 2013 Revenues 22.5 18.9 18.4 20.9 20.1 19.6 19. Including oil-and-gas 10.6 7.7 8.5 10.2 7.7 7.1 7.Expenditures 18.3 24.9 22.4 20.1 21.6 21.2 20.Including provisionally approbated 0.5 1.Deficit () /Surplus (+) +4.1 6.0 4.0 +0.8 1.5 1.6 0.Non-oil-and-gas deficit 6.4 13.7 12.5 9.4 9.2 8.7 7.For reference: GDP 41277 38809 45166 54369 58683 64803 Source: the RF Ministry of Finance.

The 2012 federal budget expenditures should surge by 1.5 p.p. of GDP vs. 2011 and subsequently slide back to the 2011 level again. So, the federal budget for the upcoming three years should be executed with a deficit oscillating within the range of 0.7 1.5% of GDP.

That said, the value of the basic oil price which ensures a balanced federal budget has been increased for the medium term: while in 2011 the value matching the budget balance was an oil price of USD 115/b1, already in 2012-13, according to MinFins estimates, the balance would be secured by a price not lower than USD 120-125/b. So, the budget will become yet more prone to price fluctuations on the global market for carbohydrates.

It should be noted that while crafting main parameters of the 2012-14 federal budget, its authors employed optimistic forecasts of macroeconomic indicators: thus, the forecast with regard to the volume of GDP for 2012 was increased by more than Rb 5bn vs. the figure used while shaping up the 2011-13 federal budget.

Meanwhile, projections of the value of oil-and-gas revenues in the 2012-14 federal budget were based upon a more conservative scenario. On the one hand, that would allow rejecting the need to sequester expenditures during a fiscal year, should budget revenues decline; on the other hand, extra revenues, particularly due to exercising caution while planning them, allow revision of the expenditure part towards increases in individual items, which does not add accuracy to the medium-term budget planning.

Should the 2012 oil-and-gas revenues prove greater than planned, the Budget Act for 2012-14 comprises a clause which holds that extra revenues should be spent on replacement of public borrowings and/or revenues from sales of equity or other form of participation in capital owned by Russian Federation.

In the medium term, main sources of the federal budget revenues should remain collection of indirect taxes, the mineral tax, and customs duties (see Table 14).

The data in Table 14 evidence that the proportion of revenues from main taxes and duties in the aggregate volume of revenues to the federal budget in the shares of GDP equivalent is going to be in decline in the period of 2012-14, because of falling revenues from the mineral tax and export customs duties, which is going to be caused by a downfall in international oil prices and slowdown of growth rate in taxable volumes of oil and oil products.

The budgets reliance on the foreign economic situation can be lowered by stabilizing nonoil-and-gas revenue growth rates. This necessitates maintaining economic growth in the first place, including, in particular, at the expense of reallocation of federal budget revenues from In 20052007, the federal budget surplus was secured under average annual nominal oil prices as follows: in 2005 USD 50/b ( surplus equivalent to 7.5% of GDP); in 2006 USD 61/b (7.4% of GDP),; in 2007 USD 69/b (5.5% of GDP).

RUSSIAN ECONOMY IN trends and outlooks defense and domestic security in favor of economy restructuring programs, providing there are efforts in place to bolster the efficacy of their implementation.

Table Actual and Envisaged Revenues from Main Taxes to the Federal Budget of Russian Federation in 20082014 (% of GDP) Actual The Budget Act 2008 2009 2010 2011 2012 2013 Corporate profit tax 1.8 0.5 0.6 0.6 0.6 0.6 0.VAT total: 5.2 5.3 5.5 6.0 6.3 6.4 6. On domestic produce 2.4 3.0 2.9 3.2 3.2 3.2 3. On imports 2.7 2.3 2.6 2.8 3.1 3.2 3.Excise taxes, total: 0.4 0.3 0.6 0.5 0.7 0.9 1. On domestic produce 0.3 0.2 0.5 0.4 0.6 0.8 0. On imports 0.1 0.1 0.1 0.1 0.1 0.1 0.Mineral tax 3.9 2.5 3.0 3.8 3.6 3.4 3.Customs duties, total: 8.4 6.5 6.8 8.2 7.4 6.8 6. Import 1.5 1.2 1.2 1.4 1.4 1.4 1. Export 6.9 5.3 5.6 6.8 6.0 5.4 5.Proportion of aforementioned taxes and duties 93.3 86.5 89.6 91.4 89.4 92.3 93.in the federal budget revenues, % Source: the RF Ministry of Finance.

Modernization and restructuring of Russias economy in the medium- and longer-run are closely associated with abrogation of export duties whose presence means subsidizing domestic consumers of minerals and energy sources at the expense of the rent from the use of stateowned natural resources. Preserving, throughout the new Russias history, lowered domestic prices of carbohydrates, and export duties on oil products at a level below the one of export duties on crudes has failed to ensure a qualitative modernization of its economy, nor it boosted its competitiveness.

Recent moves to encourage the volume of domestic oil refining and increase exportation of oil products by setting respective export duties at a level lower than the ones on crudes did not help bolster intensity of oil processing which made up just 71.2%, or matched the level. That is to say, the index in question has posted practically no growth over the past decade (for reference, in developed economies, the oil refining intensity rate is 90-95%).

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