Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Budget Without Future

To tell the truth, I feel uncomfortable about making the same evaluations of this year's budget that I made of the budgets of last year and the year before that. I wish I had something new to say, but this year's draft budget does not essentially differ from previous ones.


What is being proposed this year? The inflation rate for next year is projected a 10 percent, which is half last year's rate. The expenditures of the federal budget come to 524.3 trillion rubles ($96.5 billion) and the revenues amount to 433.6 trillion, leaving a deficit of 90.7 trillion rubles or 3.3 percent of the gross domestic product, or GDP.


What do these figures mean? The inflation forecast is reasonable. But the figure of 12 percent inflation, or 1 percent per month, seems more realistic. I do not agree, however, that low inflation alone, or even combined with low Central Bank discount rates (to the level of 25 to 30 percent), will be enough to create the conditions for economic growth. There are still other conditions that the 1997 budget does not address. Moreover, low inflation means the government cannot count on additional inflationary revenues as it had two to three years ago. Thus, the outlays and revenues in the budget should be strictly regulated. This will be all the more difficult given that a careful analysis of the draft raises serious doubts over the reliability of the calculations.


If at the end of this year revenue returns reached even 12 percent of the GDP, then this would be considered a good result. But how can the figure of 18 percent that is projected in the budget be accounted for? It is not very likely that taxpayers who have enjoyed Cossack-like freedom this year will be rushing with bags of money to pay back taxes. In any case, the 80 trillion rubles that the budget says it will receive from improved tax collection is only an assumption which is not enforced by any real measures. The list of the biggest debtors to the budget has existed for several years. And the government can declare from year to year its resolve to shake the back taxes out of them, but words are words.


The most important sources of revenue in the draft are a change in tax breaks and the raising of certain rates, which should bring around 40 trillion rubles into the Treasury. But changing all privileges in one sweep, as the budget proposes, is hardly a sound idea. The privileges that certain monopolies, organizations, branches of industry and regions enjoy is one thing. Such privileges can and should be abolished. But it is quite a different matter when they involve companies that are able to redirect up to 50 percent of their profits into investment before taxation.


It is obvious that the proposal to get tougher on tax collection and simultaneously increase the tax burden -- in other words, squeeze out the last drop of income from industries -- will not produce positive results. The approach should be fundamentally different: The tax base should be expanded, and the improvement of tax collection should coincide with a decrease in the general tax burden.


The debates over expenditures will also be heated. The prime minister forbade his subordinates from lobbying the government for support of their interests. But what is there to lobby for? State investment is decreasing, and the expenditures on science, culture, education and health care remain at their former levels. Only the outlays on servicing the internal debt are growing (accounting for almost 1 in every 6 rubles in expenditures) and the expenses on the army and other armed security forces. The main fight will apparently revolve around the armed forces and whether they will take away the last crumbs from teachers, doctors and scientists.


How can the budget deficit be closed? The creators of Russia's financial policies set up the Treasury bill "pyramid" these past few years to close the budget deficit and combat inflation. But they failed to think in the long term. The result is the classical formula: They wanted it to be better but it turned out as always. Inflation was conquered, but the internal debt grew considerably. Moreover, the market for government securities has, like a vacuum cleaner, sucked up all other available financial sources.


Alternatives for bringing in budget revenues and closing the deficit through sources other than taxes include: privatizing state property; use of government reserves of precious metals and stones, government holdings in stock companies, foreign economic activities and the repayment of debts to Russia by foreign governments.


It is possible to adopt an ideal budget, but it will be worthless if it can't be carried out. This is exactly what is happening today. The government must finally break away from the budgets of 1994 and 1995. But for the time being, it seems unwilling to do so.


In the end, the budget is only a mirror that reflects the real financial and economic progress of the reforms in the country. Or, as in Russia's case, the lack of progress. Looking into the mirror, it is easy to see what is lacking and what is needed for further developments.


The first is tax reform based on a general lightening of the tax burden and widening of the tax base. The second is reform of the army based on the real needs of the country instead of the will of generals. Third, there should be investment policies aimed at economic growth and tax and credit laws that attract foreign capital. Fourth, branches of industries that should be able to finance themselves must no longer receive budget subsidies. Fifth, there should be effective bankruptcy procedures. And last on the list but first in importance, there is a need for political will to carry out these reforms. As for the budget, above all, it's only a mirror.





Mikhail Zadornov is chairman of the State Duma budget committee. He contributed this comment to The Moscow Times.