What threatens the economy with the growing treasury deficit
The topic of the federal treasury deficit, which by the end of the first quarter of 2023 amounted to almost 4 trillion rubles annually, today clearly dominates the domestic Russian economic agenda . Analysts assess the situation as extremely difficult, while others see in it all the signs of a «budget catastrophe» fraught with incalculable troubles for citizens, businesses and the country. However, how justified is this alarmist attitude?
At first glance, it is not justified. For the reason that the state spent more money from the treasury at the beginning of the year, and not at the end. Previously, the Ministry of Finance adhered to the “seasonality” in the distribution of expenses: most of them were carried out in December. In addition, in January, the transition to an updated system of paying taxes through the UNS (single tax account) was implemented.
But in the strategic, long-term plan, everything is extremely unsteady and alarming. Few people expected that commodity revenues in the first months of 2023 would collapse so sharply in annual terms — almost by half, to 946.7 billion rubles. And now it is clear that the sanctions against our energy sector, which came into force in December and February (the price ceiling for Russian oil at $60 per barrel and the embargo on the supply of oil and petroleum products by sea), are doing their job, creating a layer cake of problems for the Russian budget. . According to the official portal «Electronic Budget», expenses as of March 28 amounted to 7.50 trillion rubles, revenues — 3.49 trillion. And the current deficit of 4 trillion quite decently exceeded the planned for the year 2.92 trillion. In Russian realities, such a shortage is comparable to profuse blood loss in a person as a result of injury or injury. The country is potentially short of «donor blood», namely the money needed to replenish the resource.
The deficit is not so terrible when the state has sources of its financing. In countries with developed economies, it is covered by domestic and foreign loans. In Russia, which is under sanctions, the situation is fundamentally different. Since the external borrowing markets are 100% closed for us, it remains to look for money within ourselves. But even here there is a whole range of obstacles. For example, you can impose an additional tax on exporters on the extraction of minerals. But then these companies, firstly, will lose funds for investment in development, and secondly, they will earn less profit if they do not go negative. In this case, the budget will simultaneously miss income tax and dividends.
Or you can proportionally reduce the cost of the treasury. But this will slow down economic growth and hit the social sphere, public sector salaries, social benefits, healthcare and education. Finally, you can devalue the ruble by resorting to emission (launching a «printing press»), which will cause a sharp jump in inflation.
And yet, what is the degree of threat in reality, are those who predict Russia's budgetary catastrophe? The experts interviewed by MK differed in their assessments of what was happening.
TeleTrade analyst Aleksey Fedorov does not intend to immediately dismiss the definition of «budget catastrophe», suggesting to clarify this concept first. If this is a remake of one of the crises in the recent history of the country (1998, 2008 or 2016), then a deficit of 4-7% of GDP, or about 6-10.7 trillion rubles in current conditions. To implement such a scenario, there should be very good reasons in the form, first of all, of a collapse in oil prices to $40-45 per barrel of Brent. The price of the domestic grade Urals may go up to $30, while the planned level of $70.2 is fixed in the budget.
“The cyclical crisis of 2008-2009 led to a steady 6-8% reduction in energy demand and a truly devastating effect on global GDP,” recalls Fedorov. For Russia, a repetition of these events would be the most dangerous option. Unfortunately, judging by the huge number of coincidences (bank failures in the US and the EU, increased geopolitical confrontation, rising world food prices), this is the most likely scenario today, and not a relatively favorable inertial one. The economic consequences for Russia may look something like this: a decline in GDP by 4-6%, inflation above 15% due to the depreciation of the ruble to 90-100 per dollar, a drop in real incomes of citizens by 1-2%, and finally, a budget deficit in 5–6% of GDP, or 7.5–9 trillion rubles.”
And then the Ministry of Finance will have to take several unpleasant steps at the same time — borrow at high interest rates, use the funds of the National Wealth Fund (NWF), and finally sequester the budget, cutting the indexation of social benefits and at the same time weakening the ruble. Taken together, withdrawing money from the economy, reducing government spending, depreciating the national currency and the inevitable increase in interest rates form a very bad combination. Especially in an economic downturn, Fedorov argues. If we proceed from the inertial scenario, in which the situation on the energy market remains close to the current values of $75–85 per barrel of Brent, then the growth rate of the deficit will steadily decrease, and by the end of the year it will amount to 4–4.5 trillion rubles, or 3% from GDP. With such a “soft” development of events, the Russian economy will gradually emerge from the sanctions crisis in 2022 with a fairly high, but not catastrophic, budget deficit.
According to preliminary estimates, by the end of the year, the budget hole will grow to at least 5-6 trillion, notes financial analyst and private investor Fedor Sidorov. According to him, all that is happening would not cause concern if the sources of deficit compensation were clear. For example, an increase in prices and demand for oil would be expected. But there is nothing of the kind: with the current discount on Russian oil and difficulties with exports, the treasury will lose a lot. The costs associated with the military-industrial complex are also likely to remain high.
“The liquid part of the NWF is only 6.4 trillion rubles, due to these volumes it is possible only to a small extent and for a very short time to compensate for the loss of income,” says Sidorov. — The Ministry of Finance intends to use mainly OFZs to cover the deficit, offering higher rates on them. With foreign investment, everything is difficult, given the sanctions and the withdrawal of Western businesses from the country. There are not so many tools left — this is, first of all, increasing the tax burden and weakening the ruble. Taxes for the oil and gas sector have already been increased since the New Year (MET, for example), excises are growing every year, devaluation is also inevitable: at current prices for Russian Urals oil, the dollar should cost more than 80 rubles to balance the budget. The consequences of all this are obvious: rising prices (mainly for imported products), a drop in purchasing power and real incomes of the population, a contraction in effective demand, and a reduction in GDP as a whole.”
Events are developing according to an openly crisis scenario, Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences, echoes his colleagues. The budget must certainly be equalized, but it is not clear how. Russia is cut off from external sources of borrowing, revenues from raw material exports have collapsed by almost half. To borrow on the domestic market means to bleed the economy and the real sector even more. Obviously, the incomes of both enterprises, and the population, and the state treasury will be reduced. And although the country is far from default, as it was in 1998, we should not forget that sad experience.
However, not all experts predict a catastrophic development of events. According to Vladislav Inozemtsev, director of the Center for Post-Industrial Society Studies, the budget deficit clearly does not deserve the status of “problem No. 1” for modern Russia. In his opinion, money is far from the most important thing in a country whose industry has lost almost all foreign components, and the labor force has lost a significant part of qualified personnel. Panic moods related to the state of the treasury are formed on the basis of data for the first months of 2023, and they are not indicative. First of all, because in January-February, a considerable share of the state defense order was advanced, Inozemtsev believes. Accordingly, according to his forecast, by the end of the year the dynamics will improve: for the 2nd–4th quarters, the total deficit will be less than for the 1st one, as a result, it will be formed by the end of 2023 in the amount of 5.5–6.5 trillion rubles against the planned 2.9 trillion. “But even this amount is not catastrophic: it can be covered by 2–2.5 trillion from the NWF (its authorities will not spend “to zero” either this year or next year), by 1.5–2 trillion — by internal borrowing and for the remaining 2 trillion by emission. It is for this that the Central Bank introduces a “digital ruble” from April 1, the issue and circulation of which is practically impossible to control, our interlocutor argues. — Covering the deficit in the amount of about 6 trillion rubles will not cause high inflation (maximum 9–10.5%) due to weak effective demand and will not unbalance the financial system.”
For the economy, Inozemtsev sees only one danger: in search of additional sources of replenishment of the treasury, the government will raise taxes: this year — as «voluntary donations», from the next — quite officially, and knock money out of the population. In particular, domestic tariffs (for example, for housing and communal services) will seriously increase, designed to compensate for the losses of raw material exporters. As for the financing of the main items of expenditure, both this year and in the first two quarters of 2024, it will be carried out in full, and in the case of social spending, even in excess of what was planned, given the factor of the presidential elections, which are just around the corner.
Leading expert of the Center for Political Technologies Nikita Maslennikov agrees: there is no need to be afraid of the indicators of the first three months of the year. The system of the Unified Tax Account has not yet reached its design capacity, and all those “counting” factors that “inflated” the budget deficit during this period will definitely return to normal. However, this does not mean that the budget is risk-free. The situation with oil and gas revenues remains extremely unstable: exporters receive less of them, although the shortage is partly compensated by the lower exchange rate of the ruble (compared to what was drawn up for 2023 and the budget three-year period).
“According to the calculations of the Ministry of Finance, the deficit at the end of the year will not exceed 2.5% of GDP,” reminds Maslennikov. — I think it will be in the range from 2.5% to 3%. This is not too critical if it starts to decline steadily in 2024-2025. This year is largely a transitional year: not all sanctions risks have manifested themselves in full, and mechanisms to counter them have not yet been developed. In conditions of high economic and socio-political uncertainty, government spending will almost certainly exceed the planned figures. From what sources to cover them? Almost 1.5 trillion rubles will go out of the National Wealth Fund, some part will be compensated by government borrowings. Social articles will not be affected, since this is a priority for the government. The paradox is that the budget is becoming the main channel of inflationary risks: its financing is associated with emission pumping.»
…Macroeconomics is only at first glance boring and divorced from the concerns of ordinary people. In reality, it is her condition that determines the daily life of Russians. In turn, this life directly affects the economic processes reflected in large numbers and complex graphs. The history of the budget deficit is also a question of our future existence. This is a question of what our monthly income and daily expenses will be, what we will eat, whether we will be fired or not. For example, if the authorities raise the rates of personal income tax, VAT, income tax for businesses, this fiscal tightening of the screws will be felt by everyone. The losses of companies will increase, which will begin to get rid of “extra” workers more and more actively. And the growing hole in the budget greatly reduces the ability of the authorities to future indexation of pensions, salaries of state employees and social benefits, which tens of millions of our fellow citizens rely on.
Whether the authorities will be able to prevent a truly catastrophic hole in their treasury is one of the main economic intrigues today. If he fails, the devaluation of the ruble will accelerate, and the prices of absolutely everything will skyrocket. First of all — for ordinary food: buckwheat, butter, flour. Since these are also export goods, it will be more profitable for manufacturers to sell them to conditional India than to ship them to our chain stores. Imported clothing and footwear, household appliances and electronics will sharply rise in price. And then, probably, the state will have to reduce the cost of maintaining hospitals, schools, shelters, nursing homes, abandon infrastructure projects, for example, to develop public transport, roads in small towns. So problems with the budget deficit are not abstract figures of economic calculations. These are our problems.
