The deficit will be reduced, but spending will grow, including expenditures in closed areas
Minister of Finance Anton Siluanov confirmed that the three-year budget parameters approved in December will be adjusted this spring, reducing the deficit by one percentage point and affecting revenue indicators. He also lamented that spending will have to be increased to some degree. In several cases, this will include spending in closed areas.
The present three-year budget has set the price of oil at $40 per barrel and the plan is to reduce the deficit to 1.2% of GDP from the current 3.2% by 2019. The budget is based on the macroeconomic forecast (which the Ministry of Economic Development changed three times in October under pressure from the Ministry of Finance) which predicts that the economy will grow by 0.6% of GDP in 2017, 1.7% in 2018 and 2.1% in 2019. The government has agreed to fix budgetary expenditures at around 15% of GDP and no higher. The deficit is expected to be around 2% of GDP in 2017 as a result of this adjustment.
But in late December, Siluanov stated that economic growth would be around 1.5%, meaning that the budget would need to be adjusted. The price of oil has not dropped below $50 per barrel over the past two months. The Ministry of Finance uses the additional revenue from the sale of oil and gas to acquire foreign currency for its reserves, using the Central Bank as an intermediary. However, revenues from sources other than oil and gas are also growing.
According to a federal official who talked to Vedomosti in late December, around 1% of GDP (around 800 billion roubles) could be used for the additional spending. Siluanov did not confirm the size of the increased spending.
In 2016, the Ministry of Finance convinced the government to freeze 10% of spending, instructed the treasury to provide budget oversight and imposed strict rules on paying back unused subsidies. All this was supposed to lead to budgetary savings. However, this past autumn, the government decided to pay off its defence contract debts, which led to increased spending of 800 billion roubles.
Alfa-Bank analyst Natalia Orlova expects the government to increase spending by 5% in 2017 from the 2016 level instead of reducing the figure to 16.2 trillion roubles from 16.4 trillion roubles (according to updated budget spending reports published by the Ministry of Finance, spending for 2016 could be as high as 16.6 trillion roubles – Vedomosti). According to Vladimir Tikhomirov, chief economist at BKS, rising oil prices in the run-up to the presidential elections could compel the authorities to increase pensions and salaries for state employees.