The Phantom of Sequestration
In the fight against the growing shortage of public funds, the Ministry of Finance is ready to take a super-radical measure — sequestration. We are talking about a forced reduction by 10% of budget expenditures on the so-called unprotected items that are not related to the fulfillment of social obligations. And here two conclusions arise: the first is that the situation with filling the treasury is frankly bad, if not critical; second, this step could mean a permanent return to a practice that the Russian monetary authorities previously resorted to only as a last resort.
At a recent meeting of the budget commission, Finance Minister Anton Siluanov presented a program for a “frontal reduction” in government spending in the 2024 budget, substantiating this formidable formulation with a growing gap between income and spending of the treasury. According to sources close to the discussion, the participants reacted to it generally negatively. However, they did not offer any alternatives, agreeing with the general idea of the financial department — the costs should be optimized. The key question is how?
On paper, expenses for the next year are expected to amount to 29.4 trillion rubles. In reality, they will be more. This year, in comparison with the law on the budget, the amount has already increased by 900 billion rubles, and by the end of the year this gap with the planned parameters will increase even more.
We also note that at the legislative level there is no division of treasury expenses into protected and unprotected. As a rule, the former are understood as social obligations: pensions, benefits, salaries to state employees. Theoretically, expenditures on such items as social policy, healthcare, education, public debt servicing (cutting is fraught with default) and transfers to regions, totaling 12.9 trillion rubles, can also be classified as protected.
All these definitions are very conditional, and one can only assume which specific articles fall under the concept of «protected». It would be more correct to say — at the discretion of the state. There is no doubt about one thing — the sequestration will not affect spending on national defense and state security, in total, 9 trillion rubles are provided for them. The last time the Ministry of Finance cut unprotected spending items in the pandemic year of 2020 was to ensure a balanced budget for 2021-2023. As a result, 927 billion rubles were saved in 2021, 970 billion in 2022, and about 900 billion rubles in 2023. A 10% sequestration of all state programs was also announced in 2016 due to a protracted drop in oil prices. But then the need for it disappeared, as oil quotes went up and revenues from commodity exports recovered.
“Since today the budget of the Russian Federation is clearly behind schedule — its deficit is 3.4 trillion rubles — expenses need to be optimized, this is obvious, — says Artem Deev, head of the analytical department at AMarkets. — And yes, 10% is a huge amount.
At a meeting of the budget commission with the participation of Siluanov, an alternative proposal was made — to increase the volume of borrowing. But the representative of the Central Bank opposed, which is fair. Otherwise, we risk getting a bias in lending to the public sector, as a result, it will be more difficult for commercial companies to receive loans, and the economy will completely crumble. I will add that expenditure items have not been reviewed for quite a long time, and in the case of point optimization, 10-15% can be cut off relatively painlessly.
In Deev’s opinion, the sequestration will affect such items as “national economy”, “security environment”, “culture, cinematography”, “physical culture and sports”. Definitely will not take money from the defense industry and state security. The social sphere, healthcare and education will almost certainly not be touched either.
“According to the results of the first half of the year, there is no positive dynamics in the budget deficit, in connection with which the realities of the 1990s are recalled,” says Andrey Loboda, economist, director of communications at BitRiver. — Then the Russians became more familiar with the concept of «sequestration» — this is a restriction or reduction in the expenditure side of the state treasury.
But if decades ago the social security system suffered the main damage, today it is not in danger, recipients of pensions and benefits do not need worry. The ruble exchange rate remains the key problem: losing positions against the dollar by 10% can accelerate inflation by 15% and make it difficult for the state to solve many problems, including filling the budget.”
According to Alexey Zubts, a professor at the Financial University under the Government of the Russian Federation, the total amount of spending on unprotected items (largely national projects and non-military infrastructure) is about 25-30% of all planned federal budget spending for 2024. Namely, 7.5-8 trillion rubles. Accordingly, cutting this share by 10% can free up about 750–800 billion rubles for redistribution.