Tough negotiations over Russia’s 2016 federal budget continue

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/40

President Vladimir Putin last week declared that the federal budget deficit next year should not exceed 3 % of GDP. Putin’s target matches the forecasted deficit for this year. Under the finance ministry’s budget proposal, a deficit under 3 % is achievable if budget spending in nominal rubles remains at the same level as this year. Assumptions used in next year’s budget revenue prediction include an average crude oil (Urals) price of $50 a barrel and a ruble exchange rate slightly weaker than 60 rubles to the dollar. In the final two weeks of September, the ruble rate averaged 65–66 to the dollar.

Over the past two weeks, the government has gone through intense discussions on limiting budget spending and increasing revenues. The biggest differences over 2016 budget expenditures have to do with pensions. The finance ministry has proposed restarting contributions to pension savings that had been frozen during 2014–15. Prime minister Dmitri Medvedev this week made an initial decision to continue the freeze next year (i.e. channel all moneys to the pay-as-you-go arrangement), which would increase available budget funds for spending by nearly 0.5 % of GDP. The second point of contention regards the pension indexation. Under the finance ministry’s proposal, next year’s pension increases would no longer be indexed to actual inflation but to a level even below the forecast inflation rate, i.e. down from 12 % to just 4 %. Ministers in charge of social affairs have reiterated their starting point that the current indexation scheme should continue. The finance ministry calculates that its approach would save the government well over 0.5 % of GDP. The cabinet now seeks a compromise.

The biggest question in the budget revenue forecast is taxation of increased profits of large export firms, given that the profit growth was basically generated by the ruble’s depreciation. President Putin asked the cabinet to solve the matter. The finance ministry wanted a hike in the oil production tax, which, if implemented, would have increased budget revenues by close to 1 % of GDP. Prime minister Medvedev, however, rejected the proposal this week. The cabinet and the finance ministry are now considering slowing down the earlier-approved reduction in oil export duties, hikes on production taxes on natural gas and some metallic ores, as well as raising the share of central bank surplus channelled to the budget. The financial markets are following the turns with uncertain sentiments.

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