“Survivor’s mistake”: the economist deciphered the results of the year from the Ministry of Finance

The other day, Russian Finance Minister Anton Siluanov held a final pre-New Year briefing. The main points of the speech were: the excess of revenues and expenditures of the country’s budget this year; restructuring of expenses; no plans to increase corporate income taxes next year. According to Leonid Krutakov, associate professor at the Financial University under the Government of Russia, these statements are not as rosy as they seem at first glance. They are trying to subordinate the economic growth strategy to the fiscal situation, which is not good.

“In terms of income and expenses, our indicators are higher than we planned. Due to what? Non-oil and gas revenues increased primarily by 3.1 trillion rubles. And oil and gas in terms of – as it was, 8.9 [трлн рублей], well, maybe it will be around nine. We had 8.93 in plan, but it will be maybe around 9 [трлн рублей]”- media quote Siluanov.

According to Krutakov, which he expressed in his column on the pages of the Vedomosti publication, the meaning of the minister’s thesis is simple and lies in the fact that both revenues and expenses of the Russian federal budget this year exceeded the plan. At the same time, positive results were achieved due to the growth of non-oil and gas revenues. Oil and gas revenues, according to the minister, remained at the same level, that is, consistent with the plan.

“The President has set a tough task to achieve technological sovereignty and expand the scope of the country’s domestic production. What is commonly called “getting off the oil needle”… “But there is a problem. This problem is called selection bias (survivor bias). Its essence is to concentrate attention on one group of data (“survivors”) to the detriment of another (“dead”). As a result, focusing on data that proves success creates a distorted picture of reality. And this is not good, because it ultimately leads to making incorrect (disastrous, in the logic of the “survivor”) decisions,” says Krutakov.

The expert backs up his statement with numbers. According to him, even if “oil and gas” revenues to the budget grow to only 9 trillion rubles, and according to industry experts this figure will be higher, they will amount to 34.44% of the total tax revenues planned by the Ministry of Finance for 2023 (26.13 trillion rubles). And with budget revenues growing to 29.23 trillion rubles, the contribution of oil and gas will be 30.79%.

“It is the oil industry (more broadly, energy) that creates the base, the foundation for economic growth. Any economy, even transactional and digital. To understand this, just look at the growth of oil and gas production in America, which is desperately “climbing the oil needle.” The fact is that it is energy that creates the primary value on which the entire global chain of production of surplus value is built. The oil industry generates starting budget revenues, which are the source of growth in government orders for the manufacturing industry.”… “The processes taking place today in the oil industry create the same increase in non-oil and gas revenues of 3.1 trillion rubles, which Siluanov reports in absentia to President,” writes Krutakov.

The expert believes that it is unacceptable to arrange statistics in this way to suit the desired results. The numbers should serve not only as beautiful results for the year, but also as important data for the strategy for the next one.

“Another “survivor’s mistake” is the Ministry of Finance’s constant conflation of the oil and gas industry into the so-called “oil and gas.” The quotation marks here are not accidental. Oil and gas are completely different industries, with different taxation and different levels of “fulfillment of the income plan,” the expert believes.

He clarified that the “tax plans” of the Ministry of Finance did not include 550 billion rubles of mineral extraction tax on PJSC Gazprom, the decision to withdraw which was made after the approval of the budget parameters. Therefore, expected gas revenues this year will amount to 2.2 trillion rubles, or 68% of the plan. At the same time, oil revenues, on the contrary, can reach 6.8 trillion rubles, which is more than three times more than gas taxes.

“Here it is necessary to recall that just a month ago the Ministry of Finance complained about the catastrophic drop in oil and gas taxes. Information was published about a 16-year tax anti-record – 22% lower than planned”… The “orgy” broke out on the eve of the vote in the State Duma on the draft budget for 2024, which included a 30% (2.6 trillion rubles) increase in the tax burden for the “oil and gas” (in reality, for the oil) industry in relation to 2023 – up to 11.5 trillion rubles. And the State Duma, against the backdrop of media noise, voted on this budget in three readings,” the associate professor reports.

The next discrepancy, according to Krutakov, is that the “oil and gas” item includes only direct contributions to the federal budget (MET, AIT and export duties). Left out of the brackets are dividends, income tax, property tax and land tax paid by oil industry enterprises. The Ministry of Finance’s statistics also do not include personal income tax and insurance premiums paid by oil industry employees.

“Over the 11 months of this year, according to the Federal Tax Service, oil companies, in addition to direct contributions, ensured the flow of another 3 trillion rubles into the country’s budget system. And these are regional growth programs and social payments, which are included in the statistics on the growth of non-oil taxes. And these effects are also not taken into account in statistics,” writes Krutakov.

The author of the article argues that a change in approaches to the country’s financial policy is necessary. We need to move from budget logic to investment logic. This is not a technical issue, but a problem of cliches and logical matrices that formed in the minds of many leaders in the pre-sanction years.

“As an example, we can cite the tax-free excess profit (forecast of 3.5 trillion rubles) of the Russian banking sector. Banks are the institutional environment (service infrastructure) of the economy and business. The main banking indicator is not profit growth, but growth in lending volumes. The flip side of bank profits is the diversion of investment resources from the country’s economy, that is, a significant reduction in non-oil and gas revenues to the budget,” the expert reports.

Unlike the oil industry, where the level of fiscal withdrawals depends on market indicators (oil prices, ruble exchange rate), the only fiscal payment of banks is income tax. And this tax in the banking sector is negligible (only 29%), three times lower than in the oil industry (taking into account tariffs and interest on bank loans – more than 90%). There is a direct withdrawal of funds from the real sector of the country’s economy in favor of fake growth programs in the banking sector.

“Another example of “stamps of the past” are the country’s budget costs for debt servicing. The reason for this is the prohibitive level of interest rates set by the Bank of Russia, which leads to record costs for servicing the public debt. In the outgoing year, the Ministry of Finance will allocate a record 1.7 trillion rubles for these purposes, which is 200 billion rubles more than the initially budgeted amount and amounts to 5.8% of total government spending,” writes Krutakov.

As a result, the Ministry of Finance “cuts” taxes primarily on the oil industry, which creates the main effects of the country’s economic growth. At the same time, out of the planned tax increase of 2.6 trillion rubles, more than 1.3 trillion (more than 50%) will be received, according to the calculations of the Ministry of Finance, due to changes in the tax regime, that is, due to an increase in the tax burden. More than 90% of this increase will come from the oil (not “oil and gas”) industry.

“This is the logic. And this is the financial policy. The fundamental thing here is the fact that, as a result, we subordinate the country’s economic growth strategy to the fiscal situation. The goals do not follow from an analysis of the fiscal situation in the country; they are shaped by political challenges. And financial policy should ensure the expansion of the country’s capabilities, and not limit them to a budget item,” the author concluded.