Training on SF, June 15–16

Actual budget slash took place

Execution of the federal budget

In accordance with the progress report of the Federal Treasury, execution of the expenditure side of the federal budget for 1Q 2016 constituted 22.5% of the existing federal budget for 2016. This figure is markedly less not only than the figure for 1Q 2015 (when a part of expenditures was carried forward and a part of expenditures was advanced for the purposes of the economy support) but also than corresponding quarterly figures for 2012-2014. In fact, it means that currently the budget system is functioning as if the actual budget slash already took place although such decisions have not been taken neither legislatively nor federally. Lagging expenditure dynamics are recorded over all expenditure items except for pension expenditure, inter-budget transfers and expenditure on servicing debt. If seasonality of government expenditure is close to typical and observed dynamics stay the same, the year-end budget slash may amount to 3-4%.

Table 1. Federal budget expenditure execution

Source: Federal Treasury, ACRA estimates

Figure 1. Expenditure execution as percent of the current budget

Sources: Federal Treasury, ACRA estimates

The need for the budget slash attributes to the fact that the current budget is based on the year-average oil price of USD50/bbl but nowadays it is expected that the year-end price is going to be lower than that. Consequently, oil and gas revenue that was planned earlier shall contract which will cause an above-target deficit (up to 5% of GDP). Considering the observed revenue dynamics – reduction of revenue from MET and export duties constituted the largest share of overall reduction of revenue for 1Q 2016 – expenditure cut shall amount to 10-11% in order to reach a target budget deficit of 3% of GDP.

Figure 2. Main revenue items of the federal budget in 1Q, % of GDP

Sources: Federal Treasury, ACRA estimates

There are a number of actual deficit coverage mechanisms such as expenditure cuts, increase of borrowings, privatization of state companies, spending of the Reserve Fund resources, but each of these methods has its disadvantages. Further expenditure cuts may amplify short-term negative macroeconomic trends and hurt the most vulnerable groups of population. Increase of borrowing will lead to the surge of government interest expenses considering current high interest rates. Privatization of state companies in the existing market environment won’t yield a maximum financial effect. Consequently, given the current economic situation, spending the Reserve Fund resources remains the best mechanism of deficit coverage despite the risks associated with retaining of the budget imbalance in 2017.

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