Due to the understated forecast of the crude price and inflation, budget expenditures in % of GDP could be restrained for the entire period of the 2000’es. But beginning from 2007, due to abnormally high prices on crude and the mitigated budget policy, the curbing effect of the conservative macro-economic forecasts could not further prevent a budget expenditures growth (in % of GDP).
The budget policy has been relaxing since 2007; this was related to adoption by the government of additional social obligations to the national community, also within the framework of implementation of national projects of priority; and to the approval of new investment programs connected with the election of President. The year of 2007 actually made a start of a “soft” budget policy when the growth of expenditures at all the budget levels in Russia outpaced the growth rates of budget revenues; as a result the budget surplus of the enlarged government reduced for the first time in the last five years, regardless of favorable internal and external environment.
In 2008, the dynamic trend of the main parameters of the Russia’s budget system strikingly differed from those in the previous year. Based on the 2007 year end results, all budget expenditures and revenues grew considerably vs the same indicators of 2006, however, in changes were multidirectional: in the context of emerging economic crisis and fall of prices on energy carriers, the federal budget revenues reduced by 0.9 % of GDP; simultaneously the revenues of the consolidated budgets of the RF subjects increased by 0.4 % of GDP. This may suggest that a crisis mostly hit financial stability of the federal budget, leading to reduction of oil and gas revenues and indirect taxes revenues.
While the financial crisis was hitting economies of many countries, functioning of the Russian economy radically changed in the 2H of 2008. This period was characterized mainly by relatively low prices and demand on Russian exported goods, by a sharp fall in output and unemployment growth. By the beginning of 2009, the Russian economy entered a recession period, with devaluation of the national currency (Ruble) and cuts in investment programs.
Such aggravation of the economy affected the national budget system: given considerable reduction of revenues in the budgets of all the levels and the growth of expenditure obligations, in 2009 the budget of the enlarged government showed a deficit for the first time in the last decade (see Table 6). The imbalance of the budget system and the lengthy world crisis created risks of expanding the scale of debt borrowings in the near future.
The largest fall of revenues and growth of expenditures was observed at the federal level which relied largely on market revenues. The revenues of the federal budget reduced by 23 p.p. in real terms while the expenditures increased almost by 25 p.p.; in 2008 the budget surplus of 4.1p.p. of GDP was replaced by a deficit at 5.9 p.p. of GDP in 2009.
The Federal Government managed to implement, under a very tight schedule, a wide range of anti-crisis actions, unprecedented both in terms of a number of forms and directions of the government impact on the economy and the volume of tapped resources. If in the fall of 2008, the measures of “pin-point” responses were implemented under extremely tight time restrictions and by using mainly “manual management tools”, by March 2009 a comprehensive Program of Anti-Crisis Actions of the RF Government for 2009 was developed.
To finance the priority areas of this Anti-Crisis Program, changes in the Federal Budget Law were to be made. As a result, the budget acquired a clear recessional character: the earSection 2.
Monetary-Credit and Budgetary Spheres lier approved budget allocations were cut down by 2.4% of GDP; and 4.1% of GDP including the released funds were allocated mainly to support financial stability and maintain strategic sectors and enterprises, and to a lesser extent, to support vulnerable groups of the population.
The anti-crisis actions were funded both from the federal budget and off-budget sources which share was estimated at 2/3 of the respective expenditures.
The 2008 anti-crisis package, according to our estimates, valued RUR1.1 trillion (2.7% of GDP) and included mainly investments to support the financial system. In 2009, RUR2.4 trillion (6.2% of GDP) of the budget and off-budget funds were allocated to support the anticrisis actions.
In Russia, the macroeconomic risks of the Anti-Crisis Program were partially mitigated by using the Reserve Fund: about RUR3 trillion (7.7% of GDP) of the Reserve Fund were allocated to balance the federal budget. There are three aspects specifically related to the “reserve” nature of these allocations.
Firstly, the use of the Reserve Fund to liquidate the budget deficit was a standard issuance of money by the RF Central Bank since practically such transaction means moving the Central Bank liabilities from the special account of the RF Government and including them in the monetary base (using the current account of the Government). Such transaction could not have been considered an emission if the Russia’s Bank simultaneously sold the currency received during the period of the Reserve Fund acruals; however the international reserves of the Russia’s Bank having reduced to minimal in January 2009 continued growing steadily in future. If the formation of the Reserve Fund were not accompanied by the reduction of the monetary base (its funds would have been accrued not at the Government accounts in the Central Bank but at the accounts of commercial banks), then its reserves and spending would not be associated with the emission. Thus, in terms of the monetary policy, the Fund is not a reserve but a separate channel of money inputs into the national economy.
Secondly, the described emission effect in using deposits from a budget account is observed every time when the government spends money in the current Treasury system that keeps its budget accounts in the Bank of Russia. Within this system, the funds received at a budget account are drawn outside the monetary stock. The monetary stock is fluctuating constantly during a year. There is a sharp growth of monetary aggregates in December when the budget implements its expenditure items, or there is a reduction of the monetary base in the last days of a month when taxes are remitted to the budget.
However, in view of the adopted budget period which is a budget year, in terms of the budget policy, only the final impact of budget transactions on the monetary stock is normally considered. If to extend the term of budget planning to up, e.g. five years, then the use of the Reserve Fund money will stop being a pure emission since the accrued funds during such period can be viewed as temporally drawn from (similar to fluctuations of the monetary base caused by a time asymmetry of implementation of the revenue and expenditure budget items) and returned to the national economy.
Thirdly, in the budget and debt policies perspective, the Reserve Fund deposits can be absolutely considered as a reserve of the RF Government since its availability helps financing the budget shortage with no market borrowings and with no increase of the government debts.
This can be done by emission and simultaneous “sterilization” of the monetary stock at the expense of currency interventions and using external reserves accumulated as a counter-part of the Reserve Fund. The practices of such countries as the EU countries, the USA, Japan, Great Britain and others show that it is the growth of the national debt used to finance anti RUSSIAN ECONOMY IN trends and outlooks recession actions that becomes a key issue at the stage of economic recovery. Therefore the Reserve Fund in Russia is a factor that prevents debt burden to increase and to carry the current budget expenditure load over to the next period (generations).
Simultaneously with the growth of expenditures, tax benefits of anti-crisis nature were adopted: a Profit Tax rate was reduced, a new procedure for non-linear depreciation introduced, a bonus depreciation increased, MET non-taxable price exemption increased, etc. In 2009, the “tax package” overall cost was about 1.5 p.p. of GDP.
The list of the budget anti-crisis actions taken in Russia in 2008 – 2009 is very like similar international programs: unemployment benefits, support of the retired, assistance to strategic enterprises in various sectors of economy, financial rehabilitation of banks, support to small and mid-size businesses. The actions differed by scope of allocations dependent on emergency and scale of problems faced by the governments.
In general, the anti-crisis policy in Russia was quite successful though with some deficiencies:
– in implementation of the Anti-Crisis program decisions were often delayed;
– the actions of government support had low transparency, in particular, there were no fixed rules of allocations among the enterprises;
– at the initial stage of the crises, insufficient focus was made on giving support to the community, thus reducing effectiveness of the government measures;
– cash execution of the expenditure obligations was irregular and therefore impeding efficient and timely spend of the budget allocations.
Main developments of the budget policy in the 2000’es In the 2000’es, regular efforts were taken in Russia to assure stability of the budget system, efficiency of budget allocations and their spending. The budget policy of that period was characterized by the following:
In 1998, Budget Code was adopted and made effective since January 1, 2000, manifesting a considerable success in the area of the budget reform. The new law established legal foundations of the budget system of the Russian Federation, the position of the subjects of the budget legal relations, the procedure for regulating inter-budget relations, the foundations of the budget process in the Russian Federation, and accountability for violation of the RF budget laws.
The Reserve Fund was established in 2004 as a tool of accumulating some of the revenues generated by customs duties imposed on oil and from the Mineral Extraction Tax (oil) when the Urals price exceeded the base price1. The purpose of the Reserve Fund was to assure the balance of the federal budget in cases where the oil price was lower than the base price and to neutralize extra liquidity by offsetting interventions of the Central Bank caused by increase of external reserves. Thus the expenditure obligations were maintained at a predictable and stable level and did not depend on uncontrolled external situation. As a result of growing prices on oil in 2004–2007, the Stabilization Fund could accumulate sufficient funds that allowed Since 01.01.2004, the base price was established at $20/bbl for Urals (Federal Law No 184-FZ of 23.12.2003, while since January 1, 2006 this threshold price was raised to $27 (Federal Law of 12.10.2005 No 127-FZ). Regardless of that the oil prices continued growing, further increase of the “cut-off price” likewise the use of funds of the Stabilization Fund inside the country was stopped due to a risk of inflation and larger dependency of the budget on external economic environment.
Monetary-Credit and Budgetary Spheres the Fund to perform a priority task of maintaining stability of the Russian state finance and in addition to early repay some of the national external debts. Moreover, due to the application of the Stabilization Fund tool, the budget policy of 2004–2007 acquired features of a countercycle. The Stabilization Fund starting February 2008 was split into Reserve Fund and National Welfare Fund. In 2009 – 2010 it was the Reserve Fund that functioned as a main source of financing the federal budget deficit;
In 2003–2004, the introduction of results-oriented budgeting (ROB) began as a tool to improve quality of managing budget funds and allowing distribution of budget funds not by the budget items but by strategic targets and tactical objectives aimed at reaching certain end results. As complex management procedures and processes including target programming and results-oriented budgeting were implemented in the environment where such fundamental budget issues as reforming of the budget network, improvement of incentives at the bottom level to use budget funds more efficiently remained unsettled, no breakthrough in the effective management of the budget funds could be expected. A low quality of the institutional environment considerably discredited the very idea of ROB in Russia regardless of its good potential. As a result, the application of the programmed and targeted planning was actually limited to planning, analysis and monitoring for assessment of efficient use of the budget funds while those mechanisms were designed to become inherent elements of the budget process substantiating the needs of the ministries and departments declared in the Budget Law.
Improvement of the legal foundations for procurement to meet federal and municipal demands was prompted by Federal Law No 94-FZ effective of July 21, 2005 “On placement of orders for supplies of goods, execution of works and rendering services for federal and municipal needs” and a number of amendments thereto. The new procurement system had a lot of advantages vs the previous one: application of direct legal regulation of the procedures for placing orders at all the levels of the budget system, limitation of corruption risks by narrowing the area of application of non-competing procedures (close bids, placement of orders with a sole supplier), introduction of more transparent ways of order placement (auctions, procurement at commodity exchanges, etc.) At the same time these innovations having failed to ensure a considerable reduction of the corruption scope, created certain problems for “fair” providers.
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