The consequences of the budget deficit for the population of the country are named: high inflation, weak ruble

— The Ministry of Finance previously estimated the volume of federal budget revenues for January-June at 12.3 trillion rubles. This is 12% less than in the same period in 2022. And the volume of expenses for the six months of this year amounted to 14.9 trillion rubles. (growth by 19% year on year). The deficit for the first half of the year amounted to 2.6 trillion rubles. – in June it decreased by 816 billion rubles. Will the trend towards shrinking the hole in the treasury continue, or will it continue to grow? What have the government cut spending on?

Goykhman: — The Ministry of Finance explained the decrease in the deficit in June by the fact that the first months of 2023 budget expenditures were advanced to a greater extent than previously thought. That is, more funds were included in the expenses of past months than now. Accordingly, the average daily item of expenditure is now decreasing. Nevertheless, the current situation does not cause thoughts that everything will be negative, very bad or even catastrophic. Even if we do not meet the planned deficit – this is 2.9 trillion rubles. at the end of the year, it will not be exceeded much.

Buklemishev: – What exactly the authorities have reduced spending on is not clear, since the statistics are now closed and we do not see specific areas of expenditure. But looking at the dynamics and measuring the budget by months, and even more so by days, as it is now done, does not make any sense. Still, the costs are high, and they are extremely uneven. If we recall, for example, last year, in December 3 trillion rubles more were spent than planned. This changes the whole picture of budget execution. I would not be engaged in preliminary calculations and forecasts for the year, but would look at the trend, which, most likely, will be towards a gradual increase in the deficit.

Prong: — In absolute terms, of course, the budget deficit will grow, there is no doubt about it. At the same time, the budget deficit of 4.8% or even 5% of GDP, which formed in Russia in the first four months of 2023, is definitely not a problem. You have to understand where it comes from. The first months of the year – January, February – the Ministry of Finance advanced emergency budget spending on defense, infrastructure, social benefits … It is clear that the budget deficit is mainly due to the failure of oil and gas revenues, which fell by more than 40%. Meanwhile, budget revenues from exports will rise. For oil, most likely, too. At least domestic budget collections will not fall. First, there is a growth in GDP – this is the development of the economy. Second, inflation inflates budget revenues. Thirdly, the growth of real incomes of the population will lead to an increase in consumer activity. All these circumstances will contribute to revenue collection. Well, in sum, this will lead to the fact that in the second half of the year, from our point of view, the budget will feel to a certain extent better than in the first. Therefore, in relative terms, the budget deficit, most likely, will no longer be inflated.

“Puffs” for the people

In order to reduce the budget deficit, the government approved a 10% cut in unprotected spending in 2024. As stated in the Ministry of Finance, the measure will save about 450 billion rubles. Which items will be affected by the budget cuts in the first place?

Buklemishev: — Reducing expenditure items is a creative process. So far, the Ministry of Finance is telling budget recipients to decide for themselves where they can shrink. Naturally, we are not talking about social spending, that is, the reduction will not affect benefits, pensions… We are talking mainly about unnecessary spending, for example, investment. In other words, these are expenses that burden now and also create a reserve for future expenses. Such obligations will be cut. Also, apparently, some purchases will be cut, and it is quite possible that departments will begin to reduce vacancies in order to reduce the payroll.

Prong: – First of all, all kinds of investment projects, including development programs, will go under the knife. In fact, when we talk about sequestering the budget for this year, we are not talking about eliminating some programs, but about postponing them to a later time. If we are talking about the construction of new roads, or clinics, or kindergartens in certain regions of the country, then the sequestration will mean that plans for the construction of these facilities will simply be postponed for several years.

– A number of experts do not exclude that science, education, culture, medicine, the housing and communal services system and transport are the first contenders to be among the underfunded areas. This is true?

Goykhman: – Not really. We talked about the fact that these industries are classified as protected articles. They are the least of your worries. In terms of reducing funding or postponing it to a later date, you can worry about, say, environmental protection.

– Deputy Prime Minister Dmitry Chernyshenko previously warned about the risks of cutting social spending in the face of a budget deficit. In your opinion, what is the future of the social sphere?

Goykhman: – Social spending primarily refers to the obligations of the state to citizens, including some spending on health care, education, payment of interest on public debt. I think it is impossible to rule out some small shifts in social spending towards minimization. Nevertheless, all social guarantees will almost certainly remain, that is, pensions, salaries for state employees, allowances, scholarships … On the whole, I don’t think that there will be a noticeable reduction in social programs. And unprotected articles will be reduced in the main. They amount to approximately 8 trillion rubles out of the planned total expenditures for the next year of 29.4 trillion rubles. By reducing them by 10%, you can save 800 billion. I believe that this is the maximum amount of cuts that the Ministry of Finance can make.

– Should the population in this case count on unscheduled indexation, one-time payments or other financial “gifts” from the authorities, as happened more than once in previous years?

Prong: — You have to understand that the authorities have an obligation to make sure that pensions grow faster than inflation. And it will most likely work. There will certainly be some additional expenses for social programs. But speaking in general, then, most likely, those people who depend on the budget will have to wait. My prediction: some additional distribution of “buns” to the population will still occur, but only due to either legislative requirements for the growth of pensions, or the need to keep state employees in their jobs.

Buklemishev: – If something was not promised, then you should not count on it. Will there be any payments? Yes, of course they will. Let me remind you that next year is an election year. During this period, spending directed at the population traditionally increases by about 1% of GDP. I do not think that this time the tradition will be broken.

Ordinary consumers will pay

– Due to the budget deficit, many companies from various sectors of the economy have announced an increase in tariffs for their services: resource supply organizations of housing and communal services, air carriers, catering enterprises – almost all recalculate the price upwards. The reason is that production costs are rising, and it is not possible to cover them at the state expense. Should companies rely on state support and how much can goods and services rise in price due to a budget deficit?

Goykhman: — State support has always been very selective. This is the subject of agreements with the Ministry of Finance. I do not rule out that some additional transfers from the budget may be allocated to some, and not to others. In general, the tendency to increase prices and tariffs is natural, and it is associated not only with the budget deficit, but also with inflationary phenomena. Companies need to look for a level of balance, a compromise between increased costs and the ability to offset them through rising prices. Because it’s not always possible. There are restrictions not only on the appetites of companies, but also on the effective demand of the population. It is impossible to increase the tariffs of state monopolies and prices in those industries where they are already quite high.

Prong: – Companies that fulfill the state order, especially those associated with a special operation, of course, will receive direct funding from the budget. And there will definitely be no increase in prices for their products. Strategic companies, on which the functioning of the country’s economy depends, can also count on assistance from the budget – some soft loans, financing, and so on. Everyone else will have to survive by increasing prices. Another thing is that prices for natural monopolies are regulated. The government, refusing to raise prices for heat, gasoline and housing and communal services, will simply force these companies to work at a loss for a year and postpone the increase in tariffs to the next year. This has happened in Russia before, and more than once — say, during a pandemic. You also need to understand that indexing is a year late. Prices rise today, and compensation for the increase in these prices occurs only next year. Therefore, if the price increase is higher than the planned size, then ordinary consumers will pay for it.

Buklemishev: — There is no extra money in the budget now. But at the same time, many industries that play a significant role in terms of the special operation and the strategic development of the country will be supported to the extent that they need. They will not be denied any funding. At the same time, the volume of state support is obviously being reoriented to certain sectors and groups of enterprises. All the apocalyptic economic forecasts of the past and this year did not come true. Apparently, our economy will grow. Oil and gas revenues are already on the rise. And if so, then the government may consider that it is not necessary to support this economic growth. Something itself is “cooked” in a certain way and works. So those who did not receive state support before will not receive it now.

— Now we are concerned about the high deficit of the Russian budget. Meanwhile, the economies of many countries, including the leading ones in the world, have been living perfectly well in conditions of budget deficits – and for many years. So, maybe there is no problem in this, if the economy continues to work, and the country continues to develop?

Goykhman: – The budget deficit in half a year or a year leads to an increase in inflation. The state increases the amount of money in circulation to cover the deficit, increases borrowing, rates. All this leads to a depreciation of the national currency, the growth of inflationary indicators. On the one hand, state employees, pensioners, the poor receive these funds, but, on the other hand, prices are rising. Such funding is largely depreciated due to inflation caused, among other things, by the budget deficit.

Buklemishev: – The consequences of getting used to the budget deficit are imperceptible at the beginning, but over time they become chronic. Let’s remember the 90s, when everyone said “a deficit of 5-10% is nothing to worry about, we’ll survive it”, but it all ended in a devastating crisis, default and the need to seriously cut costs. I hope that the lesson learned then was well learned by our authorities. Now the budget deficit does not look so deadly. I expect 5-6 trillion rubles a year. This can easily be financed both from reserves and from the balances that are available in the treasury. The situation will become a problem when the chronic deficit passes to the next year, then to the second, third. Then it will be clear that it will not be possible to cover it only with borrowings. It will be necessary either to take money away from those who are already “sitting” on them, from budget recipients, or to raise taxes.

Prong: – For ordinary people, the budget deficit is more of a blessing than a problem, as the government spends more money on social needs, on the development of industries, on infrastructure. It turns out that in the short term (2-3 years) there is nothing wrong with a budget deficit. But one should always keep in mind the long-term perspective: if debts continue to accumulate, then in the future, in 15–20 years, this may lead to the bankruptcy of the state. It will be fatal for the Russian economy.

Dynamics of surplus (+) and deficit of the federal budget of Russia (trillion rubles)

January 2022 +0.51

April +1.15

July +1.41

November +0.13

January 2023 -3.30

April -2.08

July -2.59

Source: Ministry of Finance