According to Vedomosti, the Ministry of Finance has delivered a new Budget Strategy 2030 (to replace the old version prepared in August 2013) to the government as the Ministry for the Economy has downgraded its base case scenario of long-term economic growth (to remind, average GDP growth over 2013-30 was cut from 5.4% to 2.5%). We believe that the most important points are as follows.
By 2030, budget revenues are to slide from the current 35.7% of GDP to 31.9%, and so a commensurate cut in expenditures is needed (from 36% to 32.2% of GDP) to limit the budget deficit to 1% of GDP.
Hence, MinFin highlights the necessity to revise state programmes and does not rule out the possibility of expanding the tax burden to the oil & gas sector and fine-tuning social tax.
Regions could well suffer from lower oil & gas revenues as the federal government’s capacity is set to narrow. By 2030, budget transfers will be lowered from 2.1% to 0.9% of GDP. However, this might be smoothed by rising budgetary revenues from personal income tax and profit tax.
In response to MinEconomy naming recently the most downbeat of its three scenarios as the base case, MinFin revised revenues down, leading to a deficit in 2017-30. Hence, the estimates of outlays are set to be cut as well, to below 1% of GDP budget deficit.
We believe that both the downgrade to MinEconomy’s long-term growth expectations and the revision of the budget strategy stress the importance and urgency of growthenhancing reforms on the supply-side. Hence, we think it will add pressure on the government to step up on the reform agenda and ensure that spending commitments (especially social) are met.