«We'll have to cut spending on social articles»
The story of the federal budget deficit is increasingly reminiscent of a classic thriller with a lot of plot twists and a completely unpredictable ending. The Ministry of Finance announced a shortage in the amount of 2.58 trillion rubles in January-February: the annual plan of 2.92 trillion is within easy reach. And there are still ten months to go. In any case, the state will have to plug this hole, or at least try to restrain the pace of its expansion. But I would like to understand where the money will come from in the treasury, given that oil and gas revenues continue to fall, and that the funds of the NWF are clearly not enough for a long time.
The good news is that the February deficit was halved compared to January, amounting to about 820 billion rubles. The improvement in dynamics in the Ministry of Finance is explained by the normalization of turnover tax revenues (in particular, domestic VAT) after a temporary decline in the previous month, which occurred due to the introduction in the spring of 2022 of an accelerated procedure for VAT refunds. But this is a tactical and technical moment, so to speak. But the long-term circumstances clearly do not inspire optimism.
In particular, the total revenues of the treasury for two months (3.16 trillion rubles) turned out to be 25% lower than the figure for the same period last year. And oil and gas revenues lagged behind the level of January-February 2022 by as much as 46%, amounting to 947 billion rubles. The Ministry of Finance cites the reduction in the cost of oil of the domestic brand Urals and the reduction in natural gas exports as the root cause. Oil and gas revenues in January-February amounted to 2.21 trillion rubles, down 9% year-on-year. As for budget expenditures, they reached an impressive mark of 5.74 trillion rubles in two months, exceeding last year's January-February value by 52%.
“The situation cannot but cause concern,” says TeleTrade analyst Alexei Fedorov. — With the forecast indicator of the Ministry of Finance of 2.9 trillion rubles (2% of GDP) for the entire current year, such a high deficit for January-February is fraught with a significant excess over the planned income indicators. If the dynamics of the first two months continue until the end of the year, the shortfall in the state treasury could be from 6 to 9 trillion rubles (4-6% of GDP). 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 Welfare Fund (NWF), and finally sequester the budget, cutting the indexation of social benefits and, together with the Central Bank, weakening the ruble.
Taken together, the withdrawal of funds from the economy, the reduction of government spending, the weakening of the ruble and the inevitable increase in interest rates form a very bad combination. Especially in an economic downturn. Will it be possible to keep the federal budget deficit at least within 3% of GDP (about 4.5 trillion rubles)? According to Fedorov, this largely depends on the pace of the global economic slowdown in 2023. Under the «soft scenario», which assumes annual growth of global GDP by 2.9% and a fairly high demand for energy resources, the situation for the federal treasury will be relatively favorable. Under the “medium severity” scenario (global GDP growth by 1.7%, according to the World Bank forecast), the Russian budget deficit will approach 4% of GDP, or 6 trillion rubles. Finally, in the event of an extremely severe scenario, when the global economic slowdown turns into a global crisis, as in 2008-2009, the deficit will reach 5-6% of GDP, which is about 7.5-9 trillion rubles.
“To finance the budget deficit, funds from the National Welfare Fund will be needed, which will last for one and a half to two years at the current level of Urals oil prices and Russian production of 10 million barrels per day,” said Artem Deev, head of the analytical department at AMarkets. — Now, to compensate for the shortfall in oil and gas revenues, the Ministry of Finance is selling yuan and gold, which allows us to hope for an improvement in dynamics. But there are plenty of risks too. First, already in March, the price ceiling for Urals oil could be reduced from the current $60 per barrel to $50, as Washington announced earlier. In this case, Russian raw materials will be sold at an average of $40, which obviously will not benefit the treasury. Secondly, the EU embargo on oil products from Russia, which came into force in February, will also have a negative impact on the dynamics of exports and the country's income. Thirdly, a lot depends on spending, which grew until mid-February, but has seriously decreased in the last two weeks. A significant part of them is classified, so this is already a matter of the geopolitical choice of our government.”
If the situation with raw material exports worsens, the authorities will have to start consolidating the budget for 2024. That is, cut spending on social items, and these are pensions, various subsidies and other measures to support the population. In addition to the NWF, there are other sources of borrowing. There is no talk about external investments yet, but the internal mechanism is now in use: in particular, investors are attracted to OFZs due to increased coupon yields. As Deev recalls, the state is also revising tax rates, for example, for a number of industries, the severance tax and the mineral extraction tax have been increased.