Corresponding author: Ilya Sokolov ( sokolov@iep.ru ) © 2017 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Kudrin A, Sokolov I (2017) Fiscal maneuver and restructuring of the Russian economy. Russian Journal of Economics 3(3): 221-239. https://doi.org/10.1016/j.ruje.2017.09.001
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The paper discusses fiscal policy parameters through 2024. The suggested way to ensure long-term fiscal stability is stabilizing both the general government revenues and expenditures as percentages of GDP at levels differing by the public debt service payments and then applying a new version of the fiscal rule. The redistribution of fiscal spending from unproductive to productive areas (primarily investment in human and physical capital) is considered to boost economic growth. The possible use of additional spending on education, public health, and transport systems is presented, as is the optimization of expenditures in nonproductive areas.
fiscal policy, fiscal maneuver, state budget, productive expenditures, budget expenditures structure, structural reforms, economic growth
The Russian economy has faced serious problems in the past few years. The physical GDP was lower during Q1 2017 than at the beginning of 2012. In other words, the production is in a state of long-term stagnation. Of course, this situation can be partially attributed to negative external factors: the sharp drop in oil prices in 2014 and foreign sanctions. However, Russia's economic problems are mostly internal in nature. This is evidenced by the fact that the deceleration started as early as 2013, when GDP growth was at a low rate of 1.3%, and continued to slow down during the first half of 2014. The situation is aggravated by the emergence of new but entirely expected challenges. For example, in 2017, Russia entered a long period of deteriorating demographic performance; the workforce will decline by 0.5%–0.7% per year over the next 10 years, threatening an additional deceleration of economic growth to 0.5 percentage points (“p.p.”) during the period (
Dramatic problems have arisen in the state budget system as well. Thus, due to falling oil prices, oil and gas revenues declined almost by half in real terms
Budgetary problems also appeared prior to the latest drop in oil prices. Per
An increase in the budget deficit will be caused by a reduction in state revenues (their long-term estimate is 27.8% of GDP, compared with an average of 32.8% in 2015 and 2016) and an increase in governmental expenditures (the average long-term value is estimated at 41.5% of GDP, compared to 36.4% over the past two years). If the current fiscal regime is maintained over the long-term, the current deficit in the general government budget at 3.5% of GDP (the average over the past two years) will increase by another 10 p.p. of GDP, of which 5 p.p. will be attributable to decreasing budget revenues, and the remaining 5 p.p. will be attributable to the unavoidable growth in expenditures. This may lead to a drastic increase in the national debt, which could snowball into a debt crisis.
To avoid this scenario, the basic provisions of current fiscal policy must be thoroughly revised. Changes must be directed towards three correlated tasks:
To solve the first problem, we must overcome the consequences of sharply lower oil prices, which have resulted not only in a larger budget deficit but also an almost complete depletion of the Reserve Fund. To ensure the reliable performance of budget obligations, we need, on the one hand, to bring budgetary expenditures in line with revenues as soon as possible, and on the other hand, to replenish the Reserve Fund, which has been depleted over the past several years. Presumably, the minimum asset reserve adequacy ratio is determined by the Budget Code during the creation of the Reserve Fund (it is 7% of the GDP).
The government is taking active steps to adapt fiscal policy parameters to the new reality. Federal budget expenditures for 2017–2019 should be reduced by 13% in real terms, while expenditures in the state budget system should be reduced by 14% (in both cases, deflation is calculated based on the CPI), allowing fiscal policy parameters to be adapted to low oil prices by 2020. Combining the National Welfare Fund with the Reserve Fund will provide temporary protection for the federal budget from external shocks, while the new fiscal rule will create the conditions required to accumulate additional reserve assets if oil prices rise above conservative predictions (USD 40 per bbl, indexed at 2% per year, beginning in 2018).
However, in our opinion, the new fiscal rule proposed by the government is excessively harsh, and it should have accounted for the need to finance structural transformations. As a compromise (interim) version of the fiscal rule, the base oil price can be set at USD 45 per bbl, to be indexed by the value of USD inflation, and marginal expenditures can be increased by the value of proceeds from privatization over the next three years up to 0.5% of GDP. This softening of the fiscal rule will not increase fiscal risks, as both prices (USD 40 and USD 45 per bbl) are close to the lower limit of the current consensus near-term forecast of oil prices (USD 50–60 per bbl) per international organizations (IMF, World Bank, International Energy Agency, U.S. Energy Information Administration, and OPEC). At the same time, as reserves are accumulated, and for fiscal policy to take on a more pronounced counter-cyclical nature, a certain tightening of the fiscal rule is quite justified. In particular, it is expedient to forego the “privatization premium” on expenditures afterwards and to switch to a zero initial balance.
Of course, the goal of fine tuning fiscal rules is not only to reduce government expenditures but to do so without damaging the direct and indirect beneficiaries of budget payments (i.e., individuals, budget-funded organizations, and businesses). To this end, we must systematically identify the reserves of the budget economy, eliminate inefficient expenditures, and improve financing mechanisms in the budgetary network and public sector of the economy. The main areas of these efforts are formulated in the report by the Russian Ministry of Finance (
The greatest potential for reducing expenditures without significant negative consequences lies with structural reforms. Accordingly, to successfully address the first task, transformations are required in budget-funded sectors that improve the ratio of government expenditures to results achieved.
The second task is to stabilize the budget balance after achieving short-term balance. In other words, the huge deficit between future revenues and expenditures must be quickly reduced. The downward trend of future budget revenues (as a percentage of GDP) is caused first by comparatively low hydrocarbon production and export. The global demand for hydrocarbons is rising considerably slower than the global economy as a whole, which leads to the fundamental weakness of the commodity-based model that is characteristic of Russia. However, the worst part is that our country is gradually losing its position in the natural gas market: Russia's share of global production fell from 22.0% in 2000 to 16.3% in 2016, and continues to fall (gas production in Russia grew by 0.6% per year on average during the period). Oil production in Russia also demonstrates a slow trend; for the past 10 years, the average annual rate of production growth was only 1.3%, compared with 4.8% during the preceding decade. According to a forecast by the International Energy Agency, production will begin to decline by 2020.
As for growing expenditures, the main driver is the aging population. This trend is common in all countries. However, Russia is far behind in recognizing the seriousness of the problem and has not yet initiated measures to protect the budget system from its consequences (
Thus, the second task is related to the need to mitigate the consequences of accumulated structural problems. It can be solved in many ways, differing in the set of measures for increasing revenues and cutting expenditures and in the specific content of those measures. It should be noted that the first two tasks are important not only in terms of the fiscal policy itself; we cannot expect an acceleration in economic growth. The growing gap between the government's revenues and expenditures from an investors’ point of view points to a possible tax increase, which may devalue the investments made. Thus, ensuring short-term and long- term budget stability is an essential condition for overcoming uncertainty with respect to the country's future fiscal regime and, accordingly, for winning investor confidence, without which it will be impossible to activate the capital accumulation process.
The third task (i.e., supporting economic growth) has been attracting an increasing amount of attention lately. Amid stagnation following the international financial crisis of 2008 and 2009, many countries agreed, for example, to increase public investments in infrastructure to revitalize economic activity (IMF,
As shown in the study conducted by the
It should be noted that Russian economists have posed a question regarding the expediency of a budget maneuver on multiple occasions, and most systematically in the Strategy-2020 (Mau and Kuzminov,
Contemporary theoretical concepts regarding the correlation between the overall fiscal policy parameter and economic development are based mostly on the works of R. Barro, within the framework of the endogenous growth theory (
In the baseline model, expenditures are divided into productive (increasing potential output) and non-productive (other). Productive expenditures include investments in human and physical capital, expenses for fundamental research, and other related expenses. Non-productive expenditures traditionally include expenses for social security, national defense, law enforcement, and partly for public administration, which, from an economic point of view, all represent a redistribution of resources between population groups without having a significant positive effect on economic growth. On the whole, productive expenditures can be said to contribute to development for stable future economic growth, while non-productive expenditures are attributed to the daily functions of the state or current consumption.
Taxes are also divided into two main types: non-distorting and distorting. Nondistorting taxes include lump sum taxes, which do not vary based on the actual results of a firm's operations. It should be considered that all taxes actually used in an economy distort the actions of its participants in one way or another, thereby slowing economic growth.
The main conclusions from Barro's model can be formulated as follows:
By combining these provisions and discarding the purely speculative opportunity to generate revenues by levying only lump sum taxes, it can be concluded that: increased non-productive expenditures decrease long-term economic growth and (b) the dependence of long-term economic growth rates on the amount of productive expenditures has a certain threshold value— increasing those expenditures up to a certain limit accelerates growth, but once that limit is exceeded, growth decelerates. For every country, there is an optimal level of productive expenditures, at which the expenditures’ positive effect is balanced by the negative impact of taxes. The expediency of non-productive expenditures should be discussed based on other considerations (e.g., in the case of social policy, the importance of fighting poverty). However, from an economic development point of view, they are associated with a net loss in the GDP growth rate.
The general conclusion from the endogenous growth models is that fiscal policy may have a considerable effect not only on production volumes but also on the rate of economic growth; however, opportunities for this effect are limited by the “price” to be paid in the form of an additional tax burden. Another important finding from theoretical analysis should be noted (i.e., that any discussion of fiscal policy effects should always consider the structure of public expenditures— the extent to which they are aimed at maintaining growth — and the taxes from which expenditures are funded).
In the long run, to which Barro's models are oriented, the reduced value of total budget revenues and expenditures for all years cannot differ significantly. However, during certain periods a considerable budget deficit may be realized, which does not allow the negative consequences of distorting taxes to be avoided. For example,
The negative effect of a budget deficit on the economy (especially in developing countries) is caused by accelerated inflation and respective negative consequences for savings rates, interest rates, and subsequent consequences of these factors. The empirical proof of a significant connection between budget deficits and inflation are presented, in particular, in
The first theory about the connection between budget expenditures and economic growth was voiced by A.
Another mechanism of correlation between the level of economic activity and public expenditures was proposed by J. M. Keynes: they stimulate production when demand reduces. As a result, budget expenditures are also related to the size of GDP; however, the logic is of a contrary nature — the causal direction runs from expenditures to production.
Finally, the third hypothesis is that increasing expenditures creates the need to raise taxes and borrow more, which slows down economic growth.
Thus, different concepts about the connection between public expenditures and the level of economic activity point to its differing quantitative and qualitative properties. Of course, Keynes's theory speaks mostly about short-term and mediumterm effects, while other concepts point to long-term effects. However, in any case, the principal divergence between the versions is evident: according to Keynes, budget expenditures act as an indicator controlled by the government; according to Wagner, budget expenditures follow public demand, which, in turn, depends on the size of GDP; in the third concept, the connection is rather bi-directional.
Attempts to validate Wagner's law lead to ambiguous results. By comparing constructed models, economists became convinced that the findings were not sufficiently stable and changed depending on the choice of country, period analyzed, and econometric analysis method.
A new approach has become common in recent years, which studies the longterm co-integrational relationship between budget expenditures and the GDP (see, e.g., Lamartina and Zaghin,
Below we consider the results of an empirical analysis of the impact individual types of taxes and budget expenditures have on the economy. The positive effects of increasing productive expenditures and the negative effects from distorting taxes, predicted by economic models, find convincing evidence. Research demonstrates that increasing productive expenditures has the greatest impact on production growth when it is balanced by reducing other expenditures or raising non-distorting taxes. In this case, an increase in productive expenditures by 1 p.p. of GDP considerably accelerates economic growth, raising its annual rate by 0.26 p.p. (
As evidenced by a multi-country analysis, an improvement in the budget expenditure structure produces a positive effect only if certain additional conditions are met (i.e., ensuring macroeconomic stability, pursuing an open economy policy, and creating favorable conditions for private investments). The effect of a budget maneuver is intensified considerably if accompanied by several structural reforms.
Budget system parameters (% of GDP).
Sources: IMF; Russian Ministry of Finance; authors’ calculations.
The socioeconomic development strategy for the period through 2035, developed by the CSR (hereinafter, the Strategy), contains two versions of the macroeconomic forecast. The first (baseline) version, used mainly for comparison, proposes maintaining current institutional conditions (i.e., in fact, inertial development). The second version (target) allows for the implementation of a wide range of structural and institutional reforms. Both scenarios assume that prices for Urals oil will be USD 50 per bbl in 2017, and USD 52 to USD 55 per bbl in 2018 and 2019, remaining practically unchanged in terms of constant USD prices thereafter, signifying growth in nominal prices by roughly 2% per year. They will reach USD 62 per bbl by 2024 and USD 77 per bbl by 2035.
In the baseline scenario, all key indicators grow comparatively slowly — GDP growth rates in the most “successful” years do not exceed 2.5%, amounting to 2.1% on average. Overall, by 2035, GDP will increase by only 50% compared to 2016.
In the target scenario, significantly better results are expected. The reforms undertaken should consistently ensure increased labor productivity. Forecasted average annual GDP growth rates will reach 2.4% from 2017 to 2020, 3.7% from 2021 to 2025, and 4.0% from 2026 to 2030. Afterwards, due to the achievement of a higher GDP, production growth will slow down slightly to 3.7% from 2031 to 2035. Overall, during the period from 2017 to 2035, the physical GDP will double under this scenario.
In both scenarios, budget system revenues lag the GDP trend considerably. For example, in the baseline scenario, the average rate of budget revenue growth was estimated at 1.7% per year in real terms, while overall they will increase by only 37% over the forecast period. Simultaneously, the ratio of public expenditures to GDP will decrease to 30.8% by 2035 (compared with 32.2% in 2016).
In the target scenario, public expenditures as a percentage of GDP decline even further by the end of the period (to 30.4%); however, in real terms, this growth turns out to be much higher (70%). In both scenarios, oil and gas revenues fall quickly (to approximately 3.5% of GDP by 2035), while non-oil and gas revenues grow slightly faster than GDP (due to a smaller share of the oil and gas sector, the base for other taxes increases).
According to our estimates, maintaining the government spending policy pursued in recent years will force budget expenditures to increase to 41.5% of GDP by 2035 (compared to 35.9% of GDP in 2016). This increase will be driven mainly by increased social spending, plus spending on health care and on servicing national debt (growing budget expenditures will require constantly increasing borrowing). The estimates obtained may seem exaggerated. However, they are extrapolating the trends observed in recent years. Specifically, the ratio of social policy expenditures to GDP increased from 8.8% in 2006 to 12.7% of GDP in 2016 (i.e., nearly 50%). Over the long-term, the main challenge for the budget will be the aging population, which drives inevitable spending increases for pension and medical services. According to IMF estimates, this will require Russia (unless the necessary reforms are carried out) to increase social expenditures for pension services and health care by 4.5 p.p. of GDP from 2022 to 2050 (
When the inertial scenario leads to an excessive widening of the gap between budget system revenues and expenditures, the second of the three problems outlined above (i.e., ensuring long-term budget stability) becomes quite difficult to solve. To achieve this goal, it appears expedient to stabilize the level of revenues and expenditures as a percentage of GDP. This is a compromise between the anticipated rise in demand for social services, public investments, and so forth, following economic growth and the predicted fall in revenues (as a percentage of GDP). Stabilizing revenues and expenditures will yield great advantages; this approach is significantly more stable in the long run than the other options, which, eventually, face natural limitations. For example, a gradual increase in revenues as expenditures grow will cause the economy to slow down due to the excessive tax burden, while budget consolidation in response to a stable reduction in budget revenues, as global experience shows, cannot last long (let alone contradict Wagner's law).
Choosing a level at which maintaining budget revenues and expenditures is expedient is not a trivial challenge. Global experience offers no easy answer, as levels of revenues and expenditures differ considerably between country groups.
However, the dispersion of values is extremely wide, even within a single group with similar GDP per capita. For example, from 2012 to 2016, average budget expenditures were 42% of GDP in Poland, but only 26% in Malaysia, which is similar to Poland in terms of level of economic development. In Brazil, public expenditures were 39% of GDP, while they totaled 27% in Mexico, located in the same region and falling within the same per capita income range.
Budget expenditures and GDP per capita on average, 2012–2016.
Sources: IMF; authors’ calculations.
In choosing a long-term expenditure level, we followed the assumption that, in 2019, budget consolidation would be mostly complete (i.e., current revenues and expenditures will be brought in line with each other). By that time, according to the government's forecast, consolidated budget expenditures should decrease to 33% of GDP. Subsequently, according to the Strategy, the next stage of reform should start, at which point expenditures will even out around 34% of GDP. One condition for long-term stability is the consistency of revenues with primary expenditures (33.0%–33.2% of GDP). It is vital that the reforms not allow a further increase in expenditures and make it possible to earn the stated amount of revenues within a business cycle on average.
A moderate increase in certain taxes is possible here, while having a minimal distorting effect on the economy. First, it is advisable to complete the tax changes initiated in the oil and gas sector in 2015 by reducing the export duty on oil and petroleum products to zero, to be fully offset by raising the mineral extraction tax on oil. Another possible step is a gradual discontinuation of unreasonable tax benefits to mitigate the inequality in economic conditions for different companies, which distorts fair competition. Tangible results can be produced by further improving tax administration by simplifying and accelerating procedures, reducing the administrative burden on taxpayers during tax audits, and adapting tax legislation to new business realities (improving laws on taxing e-commerce and hybrid instruments).
The level of budget expenditures can be stabilized concurrently with structural improvements. The general approach is that productive expenditures should be increased, while others should be reduced, to offset and stabilize expenditures. The parameters of budget changes are reviewed in detail in the next section.
The areas for changing expenditures and the amount of change should account for several criteria, such as the impact of expenditures on economic growth, comparable levels relative to countries with similar budget sector organization and social services quality, the opportunity to carry out structural transformations within an industry, and so forth. The prerequisites for increasing the specific weight of specific budget expenditures (determined by functional or economic classification) are represented by the following conditions:
It is expedient to estimate the impact of expenditures on economic growth based on a combination of theoretical findings and empirical analysis. Below are some of the most relevant results from recent multi-country studies.
Judging by the results of the empirical analysis, public investments in developing social infrastructure offer the highest potential for accelerating economic growth. Developing transportation or water supply systems will lead to reduced production costs (i.e., an improvement in the economy's competitive performance). One important condition for achieving a positive impact from public investments is that they should complement and encourage private investments, rather than replace them. The positive impact of public investments on production both in the short run (due to demand effects) and in the long run (due to the supply effect) is supported by evidence from many studies (see, e.g.,
At the same time, it is not easy to make a straightforward assessment of the quantitative parameters, since the results depend on many factors from the phase of the economic cycle to the methods for funding public investments. The efficiency of the procedures for selecting and subsequently monitoring investment projects is especially important; according to IMF estimates, around one-third of expenditures for public investments are lost, on average, due to inefficient implementation of investment projects. The positive impact of public investments on the economies of the most successful countries in this respect is twice the effect of invested budget funds in the least efficient countries (
Education expenditures improve the quality of human capital and, as shown by multiple studies, have a positive effect on economic growth (see Acosta-Ormarchea and Morozumi, 2013;
Increasing government expenditures for health care leads primarily to lower disease and mortality rates in the population, which eventually result in longer life expectancy (and a healthier life span). A larger workforce and higher quality of human capital also encourage accelerated economic growth (Afonso and Jalles,
The evidence of negative consequences of increasing non-productive expenditures is just as strong. These consequences have been demonstrated for social transfers (e.g., in Acosta-Ormaechea and Morozumi,
It should be noted specifically that there is danger in government allocation of subsidies (except when they are aimed at correcting market gaps). Subsidies distort the distribution of economic resources and limit market competition (
Below, we review changes in Russia's budget expenditures in the main industry sectors and make an international comparison of their sizes and structures. The distribution of the Russian budget system expenditures between productive and non-productive expenditures is shown in
Productive expenditures in the Russian budget system.
Sources: Russian Ministry of Finance; authors’ calculations.
The international comparisons used IMF data related to 2014, according to the COFOG classification, which differs slightly from the Russian classification of expenditures. The expenditure indicators for Russia were compared to average indicators across three country groups: developed, transitional economies of Central and Eastern Europe (CEE), and large developing countries. As seen in
a Productive budget expenditures (% of GDP).
Sources: Hereinafter, unless stated otherwise, IMF; authors’ calculations.
Proportion of productive budget expenditures out of total expenditures for the general government (%).
The comparison is similar for education and health care. Russia lags developed and CEE countries in terms of these expenditures as a percentage of GDP but surpasses developing countries (
Proportion of education expenditures out of total expenditures for the general government (%).
Proportion of health care expenditures out of total expenditures by the general government (%).
The reverse situation is observed for law enforcement and defense expenditures. Here, Russia shows higher figures for both the size of expenditures as a percentage of GDP (
Proportion of public order and safety expenditures out of total expenditures for the general government (%).
Proportion of defense expenditures out of total expenditures for the general government (%).
In terms of social protection expenditures, Russia lags developed countries and the CEE but is ahead of developing countries. In both cases, this is related to expenditures as a percentage of GDP and the specific proportion of those expenditures (
The only large category of expenditures where Russia does not stand out from other countries is expenditures on the national economy. However, comparisons can be complicated, as this category contains a combination of heterogeneous expenditures, from infrastructure investments that have a high positive effect to subsidies that have a negative impact on the economy.
Proportion of social protection expenditures out of total expenditures for the general government (%).
Overall, Russia has a specific structure of budget expenditures. It combines expenditures for developing human capital (education and health care), which are lower than in other countries, with an increased level of expenditures on defense and security.
The next aspect of budget modifications is the availability of conditions for economies in non-productive industries. In the law enforcement system and the military, a large number of employees is noted in addition to high expenditures (
Estimated number of servicemen in the armed forces and the law enforcement system per 100,000 people, 2014.
Reforming the law enforcement system requires a substantial optimization of the number of people employed, along with change in its organization, administration system, and incentives for employees. A one-fourth reduction in the number of employees, with a corresponding economy, is acceptable as a target. The Main Guidelines of Fiscal Policy for 2017 through 2019 already provide for reducing expenditures on this item to 2.0% of GDP. It also appears reasonable to reduce spending further, to 1.8% of GDP by 2024, stabilizing it at this level.
The increased procurement of combat vehicles and reform of monetary provisions for servicemen led to a rise in total defense expenditures from 2.6% to 2.7% of GDP on average from 2006 to 2011, to 3.8% of GDP in 2015 and 4.4% of GDP in 2016. The Law on the Federal Budget for 2017 through 2019 allows for a reduction in defense expenditures to 2.9% of GDP. The subsequent stabilization of the financing for armament procurement as a percentage of GDP will enable maintenance of the overall size of defense expenditures at 2.8%. The drafting of the rank and file from the armed forces can be switched to a voluntary (contract-based) scheme. This will improve the armed forces’ combat readiness with minimal distraction for the most active portion of the workforce from economic activity under tough demographic conditions.
The social security system shows huge potential for improving the efficiency of expenditures. According to estimates, over three-fourths of all social benefits (excluding pensions) are received by citizens not falling within the category of the needy. Part of the pension payment also represents social security by its nature. Here, the situation is similar; a substantial portion of social benefits are allocated to pensioners with incomes exceeding the living minimum, or even the average level (
An important source for improving the efficiency of the social security system is increasing the retirement age. During the past 11 years, life expectancy grew by 6.5 years in Russia (7.5 for males). With the current (falling) proportion between the duration of work and retirement years, it is simply impossible to earn a “decent senior's living.” In this case, reform is required to ensure the stability of the budget system to the degree necessary for current and future pensioners; without it, the gap between pensions and wages (excessive already) will continue to grow. To this end, the retirement age should be increased gradually, and the employment duration requirements to qualify for an early pension should be tightened. Accumulative voluntary pension security systems should also be developed. It is important that the range of beneficiaries for this reform be as wide as possible; a portion of the saved funds is earmarked for stabilizing the transfer from the federal budget to the Russian Pension Fund, while another portion is planned for stabilizing the replacement ratio (the ratio of average pension and average wages).
There are also considerable opportunities to reduce expenditures for general public services. A brief glance at the population's spending priorities has been provided through a survey of 6,000 respondents, carried out by the Levada Center at the request of the CSR between December 2016 and January 2017. In answers to the question, “In your opinion, to which areas should the government allocate more funds than now?”, the following areas were favored most: health care (55% of respondents), transportation development (45%), social policy (45%), and preschool and high-school education (44%).
Expenditures for the national economy require a differentiated approach. Budget expenditures for roads and transportation (infrastructure development) should be increased by one-third, while a number of other expenditures (having the form of unreasonable subsidies) should be thoroughly optimized. Additional funds for constructing transportation infrastructure will greatly accelerate development at a more technical level, ensuring the creation of a network of highspeed railroads and highways — the implementation of a multi-modal transport integration concept based on transportation and logistics hubs.
By 2024, educational expenditures should be increased by 0.8 to 1.0 p.p. of GDP from the current level. Changes should also be made at all stages of education, from introducing mandatory preparatory schools for children aged 5 to 6, to creating a network of national research universities that integrate research and education. Other vital areas of education reform include integrating the vocational education system into the applied bachelor's curricula, introducing specialized education in senior high school, and creating and transforming at least 300 hightech colleges and at least 600 multi-specialty colleges.
In health care, the following reforms appear to be promising: re-prioritizing from treatment to prevention, equipping medical facilities with new equipment, implementing chronic disease treatment programs, and developing personal health monitoring. Combined with additional funding, this will increase life expectancy to 76 years (currently 72 years) in the medium term. A reasonable increase in budget expenditures on health care would be 0.7 to 0.8 p.p. of GDP from the current level.
Considering the above, a possible trend among the overall parameters of the Russian budget system is shown in
Target Russian budget system parameters through 2024 (% of GDP).
Source: Authors’ calculations.
Target budget system expenditure indicators during the budget maneuver (% of GDP).
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To realize the potential of the proposed budget maneuver, the quality of public administration needs to be significantly improved. The country needs to switch from an inefficient hierarchical system, focused on current problems and mostly “manual” administration, to a modern change management system aimed at achieving strategic objectives for social development. Specific transformations include foregoing excessive regulations, increasing the role of indicators in the governor performance assessment system that characterizes the country's development priorities, and creating a single, transparent HR policy focused on selecting the best candidates and functioning to raise the prestige of civil service.
Unless specifically stated, indicators stated in real terms are calculated using domestic demand deflators which, in our opinion, ensure the best possible estimate of the purchasing power of budget funds.
The budget deficit is calculated based on long-term discounted forecasts of revenues and expenditures for the state budget and the GDP.
The matter of determining the minimum admissible amount of accumulated reserve assets requires additional rationale.
The total number of responses exceeds 100%, as respondents were allowed to choose up to five areas for expenditures.
An assessment of the effect of budget expenditures on economic growth rates in Russia requires a separate research.