The budget of the SVO era: what expenses will the government cut?

The government has submitted to the State Duma a draft federal budget for the next three years. The country’s main financial document for the next three years, compiled on the basis of the basic forecast of the Ministry of Economic Development, is globally different from its predecessors. First of all, defense spending has been increased by almost 70% compared to 2023, to 10.77 trillion rubles.

This category will become the most significant for the first time, ahead of social policy by more than 3 trillion rubles. As the Kremlin explained through presidential press secretary Dmitry Peskov, this is “absolutely necessary” since Russia is in a state of “hybrid war” and continues a “military special operation” that requires large expenses. The head of the Ministry of Finance, Anton Siluanov, also stated that the main objective of the document is to meet the needs of the front: “This is a considerable strain on the budget, but it is our absolute priority.”

“Of course, we needed to answer the question of how to solve the tasks set by the head of state. First of all, this is, of course, the country’s defense, the defense industry, economic development, but at the same time it is support for people,” said Andrei Makarov, head of the House Committee on Budget and Taxes, at today’s press approach in the State Duma.

The project assumes annual growth of the Russian economy of over 2% and a budget deficit from 0.9 trillion rubles (in 2025) to 1.6 trillion (in 2026).

As the authorities assure, the absolute priority remains tasks related to the fulfillment of social obligations to citizens, with targeted support for various strata. In particular, 4.4 trillion rubles are provided for the payment of a single benefit to pregnant women and families with children for 2024-2026. About 1.6 trillion rubles are planned for the provision of maternal capital, more than 482 billion for programs to improve housing provision for families with children. The project provides over 100 billion rubles to support citizens who find themselves in difficult life situations.

“In general, in the current situation, an increase in defense spending is quite expected,” says Artem Deev, head of the analytical department at AMarkets. – You need to understand: this money will be used, among other things, for the development of production and wages for workers employed in the military-industrial complex. Accordingly, the social component is present, albeit indirectly. As for the civil spheres, they will not be particularly disadvantaged: spending on housing and communal services, environmental protection, education, culture, cinematography and healthcare will increase.”

Next year they will save on national issues, the national economy, physical education and sports. Also, spending on media and general interbudgetary transfers will come under the knife. Thus, in Deev’s opinion, the project looks quite balanced, taking into account the current realities.

“The budget is ambiguous,” Nikita Maslennikov, a leading expert at the Center for Political Technologies, enters into the correspondence debate. – Among the strong features, I would highlight the rather moderate forecast deficit of the state treasury – generally less than 1% of GDP in 2024-2026. This indicates that the priority for the Ministry of Finance remains to maintain the stability of the financial system. In 2025, the new budget rule will come into full effect, with a cut-off price of about $60 per barrel, and not $42.4 as before. Accordingly, there is hope that the situation with income from commodity exports will normalize and become more predictable.”

At the same time, fiscal policy is clearly tightening. In 2024, the share of expenditures under the item “Social Policy” in the overall structure of federal budget expenditures will be reduced to 7.71 trillion rubles, this is the minimum since 2011. The volume of spending under the “National Economy” item will also be record low (3.93 trillion), Maslennikov notes.

As for defense spending, we must take into account: a considerable part of it is quasi-social transfers intended for mobilized regular troops. All those who are in the combat zone and receive a fairly high salary. Therefore, it is inappropriate to talk about the low social orientation of the new budget: a significant part of social expenditures de facto goes through other items.

“The big risk for the budget is associated with the unpredictability of tax policy,” says Maslennikov. – In 2024, nominal expenses increase significantly: from 29 trillion rubles in last year’s version of the document to 36.6 trillion. The question arises – how to provide them? Oil and gas revenues are good, but with rising price dynamics, sooner or later the effect of a reduction in demand for raw materials occurs, and mechanisms for slowing economies are triggered. The state will have to look for additional resources in some targeted way, including by tightening current fiscal mechanisms and introducing new ones.”

The projected inflation rate for 2024 recorded in the project is surprising – 4.5%. But where will this figure come from? After all, today consumer prices continue to accelerate, and it is obvious that this trend will continue at least until December. Even official forecasts for this year recognize inflation at 7% or higher. Why would she suddenly slow down further? After all, in 2024 we will see indexation of housing and communal services tariffs, says Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences. I would like to understand: if one of the key macroeconomic guidelines looks so unrealistic, then on what basis are other forecast scenarios being realized? Related, for example, to the income of the population, to the exchange rate of the ruble. On paper, they look quite optimistic: the ruble will strengthen and real incomes will grow. But the answer to the question “due to what?” the draft budget does not contain.