Yesterday, the Ministry of Finance submitted a draft of the 2014-16 federal budget to the State Duma.
Details of the budget plan for 2014 show that the government has proposed channelling all inflows to the funded part of the pension system (pension savings) to cover the PAYG funding gap next year.
Given the backdrop of a stagnating economy and deteriorating tax collection, we find it encouraging that the government is sticking to its commitment to the budget rule. The lack of any short-term relief in the form of fiscal stimulus could well force the authorities to speed up structural reforms, we believe. On the flipside of stringent fiscal policy, however, the short-term growth outlook is set to remain bleak and we expect only a meagre recovery next year.
Furthermore, the proposed budget manoeuvre for 2014 implies an effective transfer of pension savings to cover the PAYG funding gap. That is clearly an unsustainable stopgap, highlighting once again that important decisions on the pension system reform cannot be put off indefinitely.
We also note that the spending mix in 2014 is becoming less investment-unfriendly, as the moderation in public sector wages growth provides room at least not to cut back aggressively on the budget-funded capital spending (as was the case over the last two years).
Looking beyond 2014, we find that revenue projections look unrealistic and the government is likely to have to slash spending growth for 2015-16. In this context we believe there is room to delay discretionary spending, especially expenditures related to the rearmament programme. Apart from that, comprehensive reform of the pension system, featuring an effective hike in the pensionable age, might also ease pressure on the budget in both 2015 and 2016, as well as on a longer term horizon.