Budgeting in Russia

Dirk-Jan KRAANBudgeting and Public Expenditures DivisionOECD

29th Annual Meeting of OECD Senior Budget Officials

Vienna, Austria, 2-3 June 2008

Topics to be covered in this presentation:

• General characteristics of the budget• Three-year budgets• Fiscal rules at federal and sub-national level• Extra-budgetary expenditures

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Growth of real GDP (percent change on previous year)

2002 2003 2004 2005 2006 2007 2008

EU15 (old) 1.1 1.2 2.3 1.6 2.8 2.7 (f)  2.5 (f)

EU10/12 (accession) 4.1 4.3 5.3 5.8 6.2 5.5 (f) 5.0 (f)

Russia 4.7 7.3 7.2 6.4 6.7 7.0 (f)  6.8 (f)

(f): forecasts 3

Expenditures and revenues of the Russian Federation(% of GDP)

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Budget balance of Federal Government and General Government in Russia (in percent of GDP)

2002 2003 2004 2005 2006 2007 2008 2009 2010

Federal government:

Primary balance 3.4 3.4 5.4 8.4 8.0 3.8 (f) 0.7 (f) 0.5 (f) 0.6 (f)

Overall balance 1.3 1.7 4.3 7.5 7.4 3.3 (f) 0.2 (f) 0.0 (f) 0.0 (f)

Non-oil overall balance -4.4 -2.7 -2.2 -2.9 -3.6 -4.8 (f) -6.6 (f) -5.9 (f) -5.3 (f)

General government:

Primary balance 2.7 3.3 6.1 9.1 9.2 5.5 (f) 3.3 (f) na na

Overall balance 0.6 1.4 4.9 8.2 8.4 4.9 (f) 2.8 (f) na na

Non-oil overall balance -6.9 -4.6 -2.9 -4.6 -4.4 -5.3 (f) -6.6 (f) na na

na: data not available(f): forecasts 5

Public debt of the Russian Federation(in percent of GDP)

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Three- year budget

• Introduced by revision of the budget code in 2007;• Applied for the first time in budget 2008-2010;• Purpose: to enhance medium term planning in the sectors and to facilitate the conclusion of multi-annual procurement contracts; • Separation in budget formulation process between updating exercise and authorization of new spending initiatives;• Envelopes for new initiatives have been put at 2.5 percent in t+1 (2009) and 5.0 percent in t+2 (2010).

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Russian three year budget and multi-annual expenditure estimatesin OECD countries

Similarities:• Periodically updated; limited reallocations within the sectors are possible during updating exercise; • Provides stability to the budget as a whole and to the sectors.

Differences:• There is no clear procedure for large reallocations within, and between, sectors and for large cuts; • Annual updates of estimates and adjustment of the undivided envelope in the light of revenue forecasts can change total expenditures compared to the first out-year estimate of the previous budget (this is a difference with estimates under a fixed expenditure framework as exists in Sweden, the Netherlands, UK). (3800 line items);• Annual updates can change total expenditures in the light of revenue forecasts (this is a difference with a fixed expenditure framework as exists in UK, Sweden, the Netherlands). 8

Fiscal rules

• Definition: rule that sets multi-annual constraints on expenditures, revenues or budget balance.

Fiscal rules in Russia:

• Federal budget (including transfers to federal social security funds);• Budgets of sub-national governments.

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Fiscal rules for the Federal budget

Budget aggregates

Limits

2008 2009 2010 From 2011 onward

Total expenditures - - - - - Non-oil and gas revenue   - - - -

= Non-oil and gas deficit < 7.1  % GDP < 6.5 % GDP < 5.5 % GDP < 4.7 % GDP

- Oil and gas transfer  6.1 % GDP  5.5 % GDP  4.5 % GDP  3.7 % GDP

= Budget Deficit  < 1.0 % GDP <  1.0 % GDP <  1.0 % GDP <  1.0 % GDP

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Features of fiscal rule for the federal budget

• Protects the budget against volatility of oil-price and oil production;• Ensures that a substantial and increasing share of the oil revenues is saved; • Nominal balance rule; does not provide for automatic stabilization; has pro-cyclical effects.

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Fiscal rules for sub-national governments(regions and municipalities)

• Debt not allowed to exceed own annual revenue (excluding grants);• Deficit not allowed to exceed 15 percent of own annual revenue (excluding grants);• Rules are stricter for regions and municipalities receiving grants totalling more than 60 percent (regions) or 70 percent (municipalities) of total revenue;• Regions depending for a large share of their revenues on grants are subject to special rules aimed at development of the tax base and budgetary discipline; the rules are stricter to the extent that the share of grants in regional revenue is larger. 12

Features of fiscal rules for sub-national governments

• Have generally been effective in keeping down the sub-national deficit; • Nominal balance rules; do not provide for automatic stabilization; has pro-cyclical effects;• Rather complicated and interventionist.

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Extra-budgetary expenditures

• Russia has made large progress in the area of budget transparency, particularly at the federal level;• Efforts have focused on: 1. non-tax revenues of federal entities 2. quasi-fiscal activities of public enterprises• Almost all expenditures and non-tax revenues of federal entities are now on budget;• Budgets of Extra-budgetary Social Security Funds are fully coordinated with the Federal budget and simultaneously submitted to the State Duma for authorization.

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Federal State unitary enterprises and joint stock companies in which the Russian Federation has a stake (1 June 2006)

(numbers)

IndustryState unitary enterprises Joint stock compagnies

Units % Units %Non-market goods   and services 1,817 25.3 356 9.6

Manufacturing industry, including 1,624 22.6 1,772 47.6

Machine building industry 660 9.2 663 17.8

Light industry 187 2,6 27 0.8

Building material industry 55 0.8 53 1.4

Food processing industry 55 0.8 141 3.8

Metallurgic industry 30 0.4 101 2.8

Chemistry  34 0.5 98 2.7Other manufacturing industries 603 8.4 689 18.5

Agriculture  913 12.7 363 9.7Construction  752 10.5 380 10.2Transport and communications 612 8.6 396 10.6

Forestry  53 0.8 99 2.7Other industries 1,407 19.6 358 9.6Total  7,178 100.0 3,724 100.0

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Remaining problems in the area of extra-budgetary expenditure

• Integration into the federal budget of revenues and

expenditures of State unitary enterprises that remain in the government sector;• Integration into regional and municipal budgets of non-tax revenues and expenditure from commercial activities of sub-national governmental entities;• Putting on budget of (now implicit) subsidies by public enterprises in the energy sector; • Clarification of the position of the ‘state corporations’.

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