The latest murmur among Moscow's gorye economisty -- or economics cognoscenti -- is that populist spending in the run-up to the June presidential elections will break the budget. This is a view worth examining. If spending exceeds the 1996 budget law, the government will need to sell more state treasury bills or -- worse -- print money. And if the campaign heat gets so strong that the budget is thrown to the wind altogether, Russia's four-year trudge towards a fiscal "rule of law" will be severely put back.
On paper, at least, the 1996 budget -- eventually signed by Yeltsin on the last day of last year -- is more prudent than its 1995 counterpart. Reflecting last year's tax compliance and collection difficulties, envisaged revenues are down somewhat, from 18.8 percent of GDP to 15.1 percent. But this fall is more than compensated by a considerable cutback in planned expenditures -- 26.7 percent of GDP to 18.9 percent. Consequently, the proposed deficit for 1996 stands at 3.9 percent of GDP, down from the projected 7.9 percent of GDP in the 1995 budget.
Total expenditure is not only reduced, but the spending pattern has shifted sensibly: There is less emphasis on defense and state industrial activity and higher priority given to law and order, social programs, and debt servicing. And crucially, the 1996 budget continues last year's trend of avoiding the use of inflationary Central Bank credits to plug the budget deficit.
But the "on paper" comparison of the "budget law" for 1995 and 1996 depends both on what actually happened in 1995 -- the "budget execution" -- and what fiscal whiz-bangs and fudges the coming year is likely to hold.
It isn't easy to talk about fiscal outcomes during 1995, as the Ministry of Finance is being a bit cagey about the October-December figures. Judging by the first nine months, though, revenues averaged 14.1 percent of GDP, short of the 18.8 per cent target. However, expenditure was a great deal tighter than envisaged, averaging 16.5 percent of GDP. This was more than 10 percentage points below the annual ceiling in the budget law, and much less than the 23 percent of GDP spent during the first three quarters of 1994.
A great deal of speculation now surrounds the "execution" of the 1996 budget law. The president is clearly going to be under pressure to buy votes, or to avoid being seen dishing out pain. The Duma will no doubt shout about increasing the minimum wage. And because all state benefits -- including pensions and unemployment benefit -- are multiples of the minimum wage, such increases have grave "knock-on" expenditure implications. Regional apparatchiks will similarly look to weaken the government by clamoring for subsidies. Such claims will be difficult -- even politically suicidal -- to refuse.
Despite the government's new realism on the revenue side, a crunch may be unavoidable. Three cheers that the awful excess-wages tax has been abolished -- but it did account for around 11 percent of revenue. To consolidate the ruble corridor, tax breaks have also been used to placate exporters. To offset these revenue sacrifices, the government plans to abolish the so-called 30:70 rule, under which firms stash slabs of money away from the glare of the State Taxation Service in the name of protecting wage payments. But given the recent surge in wage arrears, implementing a 30:70 abolition will also be politically expensive.
Hidden within the budget, though, is some fiscal reprieve. The document assumes an average monthly inflation rate of 1.9 percent. Post-communist Russia has never seen inflation even close to 1.9 percent per month -- the lowest figure was 3.2 percent in December. When inflation is higher than assumed in the budget, nominal revenues received by the government increase, while nominal expenditures written into the budget -- the state's legal obligations -- stay the same. Ergo, extra rubles.
The ability of the Finance Ministry to dish out these "extra" rubles without consulting the legislature was the reason the pre-election Duma fought the low inflation assumption. But the government pushed it through. And there it remains, affecting each and every calculation in the budget.
At a recent meeting with foreign investors, Chernomyrdin himself admitted that inflation during the first three months of 1996 would be at least 4 percent. Upcoming seasonal increases in non-tradeables -- gas, water, electricity, telecommunications -- mean he will not be proved wrong. There is an irony here. Reformists in the government -- the chikagskiye malchiki -- have fought inflation hammer and tong for the past four years. But continued inflation may be what delivers the remaining reformers precious fiscal room for maneuver.
On paper, at least, the 1996 budget -- eventually signed by Yeltsin on the last day of last year -- is more prudent than its 1995 counterpart. Reflecting last year's tax compliance and collection difficulties, envisaged revenues are down somewhat, from 18.8 percent of GDP to 15.1 percent. But this fall is more than compensated by a considerable cutback in planned expenditures -- 26.7 percent of GDP to 18.9 percent. Consequently, the proposed deficit for 1996 stands at 3.9 percent of GDP, down from the projected 7.9 percent of GDP in the 1995 budget.
Total expenditure is not only reduced, but the spending pattern has shifted sensibly: There is less emphasis on defense and state industrial activity and higher priority given to law and order, social programs, and debt servicing. And crucially, the 1996 budget continues last year's trend of avoiding the use of inflationary Central Bank credits to plug the budget deficit.
But the "on paper" comparison of the "budget law" for 1995 and 1996 depends both on what actually happened in 1995 -- the "budget execution" -- and what fiscal whiz-bangs and fudges the coming year is likely to hold.
It isn't easy to talk about fiscal outcomes during 1995, as the Ministry of Finance is being a bit cagey about the October-December figures. Judging by the first nine months, though, revenues averaged 14.1 percent of GDP, short of the 18.8 per cent target. However, expenditure was a great deal tighter than envisaged, averaging 16.5 percent of GDP. This was more than 10 percentage points below the annual ceiling in the budget law, and much less than the 23 percent of GDP spent during the first three quarters of 1994.
A great deal of speculation now surrounds the "execution" of the 1996 budget law. The president is clearly going to be under pressure to buy votes, or to avoid being seen dishing out pain. The Duma will no doubt shout about increasing the minimum wage. And because all state benefits -- including pensions and unemployment benefit -- are multiples of the minimum wage, such increases have grave "knock-on" expenditure implications. Regional apparatchiks will similarly look to weaken the government by clamoring for subsidies. Such claims will be difficult -- even politically suicidal -- to refuse.
Despite the government's new realism on the revenue side, a crunch may be unavoidable. Three cheers that the awful excess-wages tax has been abolished -- but it did account for around 11 percent of revenue. To consolidate the ruble corridor, tax breaks have also been used to placate exporters. To offset these revenue sacrifices, the government plans to abolish the so-called 30:70 rule, under which firms stash slabs of money away from the glare of the State Taxation Service in the name of protecting wage payments. But given the recent surge in wage arrears, implementing a 30:70 abolition will also be politically expensive.
Hidden within the budget, though, is some fiscal reprieve. The document assumes an average monthly inflation rate of 1.9 percent. Post-communist Russia has never seen inflation even close to 1.9 percent per month -- the lowest figure was 3.2 percent in December. When inflation is higher than assumed in the budget, nominal revenues received by the government increase, while nominal expenditures written into the budget -- the state's legal obligations -- stay the same. Ergo, extra rubles.
The ability of the Finance Ministry to dish out these "extra" rubles without consulting the legislature was the reason the pre-election Duma fought the low inflation assumption. But the government pushed it through. And there it remains, affecting each and every calculation in the budget.
At a recent meeting with foreign investors, Chernomyrdin himself admitted that inflation during the first three months of 1996 would be at least 4 percent. Upcoming seasonal increases in non-tradeables -- gas, water, electricity, telecommunications -- mean he will not be proved wrong. There is an irony here. Reformists in the government -- the chikagskiye malchiki -- have fought inflation hammer and tong for the past four years. But continued inflation may be what delivers the remaining reformers precious fiscal room for maneuver.
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