The rapid increase in government spending adds to the arguments for the inevitability of further tax increases in the Russian Federation

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This material was produced in Russia, where it is prohibited by law to cover the special military operation of the Russian Federation in Ukraine

MOSCOW, May 16 (Reuters) – Higher spending dynamics and a widening of the Russian Federation’s budget deficit due to the continuation of Moscow’s “special operation” in Ukraine weakens experts’ confidence in the government’s promise to implement the projected plan in 2023 and confirms their belief that further an increase in the tax burden is inevitable.

The “hole” in the federal treasury expanded by 1 trillion rubles in April, reaching 3.42 trillion rubles in the first four months. This is half a trillion more than the 2.93 trillion rubles provided for in the budget act for the entire year 2023 and slightly more than a year earlier, when the deficit amounted to a record 3.29 trillion rubles, i.e. 2.3% of GDP.

The main reason for the increase in the deficit are expenses, which jumped in April to a maximum in January, which increased by almost 800 billion rubles compared to March, despite the promises of the Ministry of Finance that after accelerating the financing of certain contractual obligations in January this year. -February expenses will be normalized.

The Ministry of Finance still insists that the level of government spending in 2023 should be based on the maximum amount of funds set out in the budget law in the amount of 29.1 trillion rubles and the amount of additional non-oil and gas revenues, if any.

This seems difficult to implement in conditions where spending has already reached 39% of the annual plan approved in the budget within four months, believes Olga Belenkaya, head of the macroeconomic analysis department of FG Finam.

“While the annual growth rate seems modest (+3.9% y/y in April) and the Ministry of Finance notes this as a slowdown in the monthly growth rate of spending, it is an increase compared to the April 2022 base, which increased sharply in against the background of the outbreak of hostilities in Ukraine,” noted Belenkaya.

All four months of spending have been consistently above the seasonal norm, and to stay within the overall annual cap, the budget will need to cut spending below last year’s level for the remaining eight months, Alexander Isakov, an economist at Bloomberg Economics for Russia, wrote.

In the context of increasing defense spending against the background of the “special operation” in Ukraine, as well as on the eve of the presidential election scheduled for 2024, when social benefits for the population will traditionally increase, it will be difficult, analysts say.

“NOT TRAGICAL”

If we assume that April spending is seasonally “normal”, then by the end of 2023 it should amount to 35.6 trillion rubles instead of the promised 29 trillion, Isakov calculated.

Economists Natalya Orlova and Irina Rostovtseva of Alfa Bank expect the government to raise its budget deficit forecast for 2023, despite repeated promises not to do so.

Finance Minister Anton Siluanov said that the authorities intend to stick to the planned budget deficit of no more than 2% of GDP in 2023, and Maxim Oreshkin, assistant to the president of the Russian Federation for economic affairs, promised in late April that the federal budget in the months remaining until the end of the year would be implemented with a surplus and at the end of the year the excess of expenditure over revenue would be close to the target values.

“The budget situation is worrying with continued strong spending growth and unstable revenues, despite the growing tax burden on the corporate segment,” Alfa-Bank analysts wrote.

Although the Ministry of Finance continues to point to the existence of unallocated reserves, as well as the release of 1.5 trillion rubles after the transfer in 2022 of the transfers planned for 2023 to the Pension Fund, BCS analysts believe that by the end of the year the deficit may increase to 4-5 trillion rubles.

The same forecast is provided by Belenkaya from Finam, pointing to the growing risk that the “hole” in the treasury may turn out to be even bigger.

Renaissance Capital economists Sofya Donets and Andrey Melashchenko estimate federal budget spending in 2023 at 31 trillion rubles, the same as a year earlier, and the deficit exceeds 3% of GDP.

Evgeny Kogan, an investment banker and professor at the National Research University’s Higher School of Economics, expects the “hole” in the treasury to reach about 6 trillion rubles, or 3.9% of GDP, by the end of the year.

“Unpleasant but not tragic,” said Kogan, who believes the deficit could be easily closed with spare funds from the National Wealth Fund and national credit, calling a deficit above 5% a “dirty” deficit. budget.

The Kremlin sees no problems with the budget.

“We have quite good macroeconomic indicators, both the Ministry of Finance and the president have said it many times … The situation is completely controllable and there is the necessary safety margin for various parameters,” Presidential Press Secretary Dmitry Peskov said last week.

THIRD OPTION

At the same time, the increase in spending and the budget deficit may prompt the Central Bank to tighten monetary policy, which the heads of the Bank of Russia have repeatedly warned about, Alfa-Bank and Finam analysts wrote.

“Although the domestic market and FUS reserves still allow for financing the budget deficit, its expansion in relation to the projects included in the budget may be one of the arguments for increasing the basic interest rate of the Russian National Bank of Poland in the coming months,” believes Belenkaya.

Another consequence of the growing deficit could be a further increase in taxes at a time when sanctions prohibit foreign borrowing and domestic debt is constrained by the Ministry of Finance’s reluctance to take on high loans and take on additional interest rate risk, and spending cuts complicate the pre-election period.

“What if expenses have gone up and revenues have gone down? It is possible to increase the interest rate on the loan and, in principle, on the domestic market, with some work with it, the conviction that it will not last forever and a good premium, this debt will absorb and finance it. As for the deficit of 3-4% of GDP, not 10% of GDP, the market can withstand it for quite a long time. Another thing is that if you are a conservative Ministry of Finance and do not want to borrow for a long time and expensively, then you are looking for other options, says Donets.

“The first is to cut other spending (except defence). Why not, you can shorten it if you don’t have an election cycle. And we got it. Therefore, there remains a third option – raising taxes,” she said.

Oleg Shibanov, a professor at the Russian School of Economics (NES), head of the Center for Macroeconomic Research in Sberbank, is waiting primarily for an increase in taxes for wealthy Russians.

“Some of the taxes that will be introduced will rather look like ‘social justice’ taxes. We have already seen experiments with personal income tax, and I think these experiments will continue, because everyone will find that increasing taxes on earners is a reasonable measure of mutual support, believes Shibanov.

The Ministry of Finance of the Russian Federation has already planned an increase in taxes for large enterprises – in February it turned out that against the background of the growing budget deficit, the authorities want to collect 300 billion rubles from large enterprises in the form of a one-off payment – timely payment.

Changes in the Tax Ordinance regarding the additional fee from entrepreneurs will come into force in 2024, but the Ministry of Finance is waiting for receipts by the end of this year, providing for a relief for those who pay ahead of schedule. (Daria Korsunskaya. Editor Dmitry Antonov)