Finance Minister Anton Siluanov reports at the extended Ministry of Finance Board meeting
Transcript of the beginning of the meeting:
Dmitry Medvedev: Good afternoon, colleagues. We are meeting here to review the results of the work of the Ministry of Finance last year. I won’t take the Minister’s words; naturally, Mr Anton Siluanov will deliver a detailed report. I would only like to make some general assessments and to share my perception of national and global developments.
First of all, I believe that the Ministry of Finance worked in a well-coordinated and highly professional manner. In some cases, the Ministry worked in a creative manner. And, most importantly, the specialists worked as a team of like-minded individuals. This is a very important quality in any ministry’s work, let alone such a sophisticated ministry as the Ministry of Finance. The specialists who know everything about the intricacies of our financial policy and the status of international financial markets are here. As you know, the results of national socio-economic development over the first two months were summed up last week. I would like to comment on these rather complicated results.
In February 2013, Russian economic growth slowed down considerably for the first time since late 2009, so to say. The GDP grew by virtually 0.1% over February 2012, as compared to 1.5% in January. The GDP grew by about 0.9% in January and February together. This is considerably less than at the same period in 2012.
Although the main causes are obvious, I would, nevertheless, review them. This includes a production slump, which has continued for over a month. Unfortunately, the construction industry is growing slowly. The same can be said about retail trade and the volume of paid services. In addition, overall investment activity tends to slow as a result of all this.
We have to seriously analyse why this is happening. And quite possibly, we might have to adjust some of the decisions which have already been made. How can this be explained? I don’t want to reinvent the wheel by repeating that the Russian economy is now deeply integrated into global economic processes. And naturally, the problems of the European Union, rising global food prices and a number of other factors seriously influence the Russian economy. High budget deficits in the industrial world, uncontrolled public debt, the sovereign derivatives market and major banks, which were not duly controlled in some countries, became key problems in 2011-2012. Consequently, global GDP growth slowed from almost 4% in 2011 to 3.1%. And I’m not even talking about the fact that the EU economies are in a recession and that the 2013 forecast, is unfortunately, negative: near zero or even below.
All these problems have raised the issue of formulating a new growth model. Of course, Russia also has to address this issue. This issue is discussed at international platforms, various international forums, including the G20 forum, etc. This implies state-of-the-art technology which will make it possible to reduce production outlays by several times, a search for a new social policy and substantial institutional changes. Russia also faces these global challenges.
National economic modernisation, incentives for the economy of knowledge and the attraction of domestic and, of course, foreign, investment is the only main development option. We must ensure real changes in our industrial development, but not like we did in the 1930s. We must accomplish this objective by ensuring the large-scale introduction of innovation, by improving the quality of life for Russian citizens, by creating the most favourable environment for doing business and by promoting private initiative. Under these conditions, the inflation-targeting policy also remains the right approach. And, naturally, the same can be said of the decisions which have already been made, including the decision to establish the International Financial Centre in Moscow and the decision to establish a joint financial market regulator.
I’d like to emphasise that in modernising the country we must strictly observe fiscal discipline and fulfill all of our social commitments.
Obviously, the Ministry of Finance and the Government’s financial and economic bloc in general bear very serious responsibility for the implementation of these plans. I’d like to talk about some issues that I consider most important.
The first point is about the need to ensure a balanced budget system. First of all, I’d like to mention the introduction of the budget rule, which is making the parameters of the budget policy immune to the current fluctuations of oil prices, and is protecting our economy against external shocks.
Although everyone is criticising the budget rule (naturally, few people will like it), its strict observance is indispensable for general budgetary and macro-economic stability. Only in this case it is possible to ensure development and steady economic growth. Incidentally, the current events in Europe are just another example of how important it is to be attentive to spending and the problems of budget consolidation.
Second, it is necessary to use finances effectively. This year the Ministry of Finance will switch to full-scale long-term budget planning, and will draft a long-term budget strategy. It is necessary to adjust the requirements to state programmes. I think we should renounce – at least for the near future – the argument (sometimes used by our ministries) that we will carry out the basic version of some programme only if we receive additional funds. We have spoken about this more than once and I support the position of the Ministry of Finance on this issue. In general, we must use basic funding to fulfill the main parameters of a programme without resorting to any additional sums.
Also, in analysing the implementation of federal targeted programmes, we should actively use the project approach. In other words, we should achieve concrete results by implementing a project, rather than reporting on how the money was spent.
We have started a round of meetings on drafting the budget for the next three year period. Some decisions have already been made but, as usual, this is a difficult job and it requires hours of debates. As a result, by streamlining the budget we have reduced expenses on the purchase of products for state needs by 5%. I hope for a balanced position on the part of the Ministry of Finance, and for understanding from other agencies. On the one hand, we must concentrate our resources on priority areas, about which the Finance Minister talks at every meeting, and on the other hand, we must do this not by increasing expenses but by using resources more effectively, applying new technology, new approaches, instruments and rational management – something we are not yet good at.
The third point is about tax policy. It must be predictable and that’s the end of it. In other words, it should not drive business into the shadows but should encourage its long-term development. It is necessary to pay more attention to upgrading the quality of tax administration and developing tax ethics. We must overcome the attitude of the 1990s, during which tax evasion was seen as valour. To achieve this we must increase the share of cashless transactions and bring it closer to the standards of the majority of modern states. We must also steadily reduce the field of operation of fly-by-night companies, although this work is very complicated and it is essential to conform with legislation while doing it.
The fourth point is about the national debt. Owing to a sensible credit policy, the indicators of debt stability have remained at a low and safe level, and in this respect our country is doing much better than most states. Our national debt amounts to about 10% of the GDP. Obviously, we must preserve this competitive advantage.
At the same time, as the issuer of debt obligations, Russia has managed to preserve the trust of “old” investors while attracting new ones by offering longer bonds, such as 15 year federal bonds and 30 year Eurobonds denominated in US dollars.
Last year we took measures to liberalise the Russian debt market and upgrade its infrastructure to create the necessary conditions for proper IPO by our companies.
And the last point I’d like to make. We must keep inflation at bay. This means access to affordable bank loans for the real economy, but regrettably, we don’t have this, despite relatively low inflation. We must also have mortgage loans with a low interest rate. Our private companies should be able to plan large and long-term investment projects. Finally, we must protect the savings of our people, which is a key task for each of us.
Ladies and gentlemen, in concluding my opening remarks I’d like to emphasise that we cannot achieve stable and dynamic economic growth with just one or a few measures. We must conduct systemic work in all directions – in absolutely all areas. This is what we should focus on.
I’d like to thank once again the Ministry of Finance for its meticulous work and professionalism, and express my hope that you will continue doing a good job and occupying a balanced position in the near future and long-term perspective. I wish success to all of you!
Finance Minister Anton Siluanov reports at the extended Ministry of Finance Board meeting
Anton Siluanov (Minister of Finance): Mr Medvedev, colleagues,
First, I want to thank Mr Medvedev for assessing the work of the Ministry of Finance. It is true that our team is well-coordinated; we have common goals and objectives. I also want to thank you for your overall backing of all our initiatives, which are born in this building and which we propose to the Government. Thank you very much! Everyone feels your support and this gives us additional strength and energy to continue to work in the same way.
Colleagues, in my report, I’d like to highlight the key issues of the activity of the Ministry of Finance that we set for 2013 and for the mid-term – these issues are based on the strategic guidelines of the Government of the Russian Federation. The Ministry of Finance has determined ten main tasks for us. Part of them was formulated last year, and we are continuing to implement and adjust them according to the changing situation.
The first task is to ensure long-term balance and financial stability of the budget system. Financial experts are always looking toward the future, calculating possible risks and developing solutions to prevent such risks from becoming a reality, therefore the need for financial resources almost always exceeds possible resources. This is true for households, corporations and public entities. Making decisions without financial backing, however useful, leads to negative consequences for budget stability and for confidence in the state financial policy. Therefore we believe that the decision to form budget spending possibilities based on understandable principles and rules, restricting the enormous demand on the budget, is a timely and correct approach. The national budget, one half of which is made up of oil and gas revenue, cannot be a deficit budget. If it is, there are excessive risks of a failure to implement its commitments.
It should be borne in mind that there is a recession in the Eurozone this year. The crisis situation in Spain and Italy cannot be ruled out. The extravagant budget policy of these countries has driven the economic policy into a blind alley. Meanwhile the need to reduce state expenditure leads to destabilisation of the overall situation. Therefore, in our view, the idea to set budget rules against strategic goals of the state policy is not substantiated. All of us should stay within our means. The principle of reasonable conservatism is the foundation of efficient management of the state finances of any country that pursues a responsible budget policy. No strategic goal of the state policy can be achieved without long-term balance and stability of the budgetary system.
It is often said that it is necessary to stimulate demand through the budget. Of course, the state is a good source of demand. But what demand is necessary, such that ultimately we do not have to stimulate imports or price growth, and expand ineffective expenditures that fail to influence the economic growth rate? In effect, the situation is currently different: our problem is not in the demand, but in the supply. We are creating development institutions with enormous budget fund balances, and considerable capital continues to flow abroad.
We have money; we are ready to use the National Wellbeing Fund’s money and the resources of pension accruals. We simply need to improve the legal framework protecting property rights so that deals can be legalised and concluded, not in Cyprus or under similar governing laws. It is necessary to create a comfortable business environment for investors so that they can issue shares, and buy and sell them in Moscow with the same ease as they do in London or New York. Given loaded capacities, we pump budget funds into demand and as a result, the expenses for some facilities, roads and infrastructure often considerably exceed global prices. We cannot resolve the problem of growth by increasing the state demand alone. We need structural measures in the labour market, the capital market, property protection and development of the financial market. Meanwhile it is clear that the role of state demand should not violate the general balance of the budget system. Therefore it is important to conclude developing and adopting the long-term budget strategy until 2030 this year. We have begun to finalise it and plan to submit the draft to the Government in June 2013 simultaneously with basic drafts of the federal budget for 2014–2016. This will make it possible to harmonise mid-term and long-term budget planning, determine our possibilities and outline our priorities.
In March 2013, the forecast of socio-economic development until 2030 was approved. According to this forecast, three basic scenarios for how the situation may develop are proposed. Should we be guided by an overoptimistic and accelerated development scenario, we will create an unstable and dangerous situation for the budget. It is proposed to take an innovative scenario as the basis. At the same time, it is proposed to transfer the gap between the incomes – compared with the conservative scenario – to conditionally approved expenses that will be distributed between state programmes in case of annual confirmation of the income forecast. This approach will make it possible to form expenses with an 8-9% annual growth, or an annual growth of about 1 trillion roubles (this is no small sum). This will create a cushion for executing expenses in the event that oil prices slide down to $60-$80 per barrel. We could finance our liabilities for two or three years by creating these reserves. The annual increment of the expenses, about 1 trillion roubles (in our estimate, approximately every year federal budget spending can grow by 1 trillion roubles) approximately coincides with the volume of applications that we envision under the state programmes, according to the optimistic scenario. But if we look at how this 1 trillion roubles can be used… Primarily, of course, for financing the adopted liabilities – indexation of wages, monetary allowances, for the development of the state programme for armaments and for indexation and implementation of earlier decisions. Therefore we have no serious possibilities for new spending liabilities, unfortunately. They will emerge only in the event that the current budget is redistributed. We are developing such proposals and are discussing them at Government meetings, and we believe that this is the road we should follow.
The second task is to improve the quality of budget formation and performance. In 2012, we created a foundation for preparing a programme budget. We have prepared and introduced systemic amendments to the Budget Code in the State Duma, the expenses have already been distributed between state programmes. The draft budget for 2014–2016 will be formed based on programmes. The executors responsible for state programmes will be informed on the limits of budget allocations – and this is very important because they are responsible for achieving targeted indicators in each sector. Thus the budget allocations will be directly harmonised with the results of the performance of the relevant sector.
The ultimate effectiveness of the programme-based budget depends on the quality of the state programmes. Most of them need to be improved, especially with regard to the feasibility of their goals, indicators, and regulatory tools, not just budgetary expenses, structural reform plans, and so on.
Currently, the state programmes are based mainly on financing various expenses. Spending leads to results. We believe that the state programmes should mostly focus on structural changes in the industry, which is more effective than mere increases in public spending.
These requirements for the programmes have been outlined in different documents, but they haven’t been implemented. We believe we should hold a full-scale public discussion of the state programmes, including in the Duma, and approve the revised versions that are consistent with the corresponding parametres of the long-term budget forecast and targets.
The issue of prioritising existing and newly adopted spending commitments is high on our agenda. The transition to the programme-based budget offers more opportunities to manage resources for those who are in charge of programme implementation. What you need to do is just take advantage of it, rather than request additional funding from the budget, as before.
I believe that the assessment of the ministries’ performance should be based on how effectively they manage their budgets. Often, the opposite is true: they focus on putting together proposals for additional requirements for budget funding. By the way, several ministries and departments have already re-arranged their work, but these are still isolated cases.
I believe it’s necessary to toughen requirements for financial and economic feasibility studies for proposed solutions ranging from specific projects to legislative initiatives. Today, it has become common practice to declare additional costs involved in the implementation of the decisions with agreed amounts of resources. No one seems to be responsible for such doubling or tripling of expenses in the course of a project’s implementation, although I believe that such increases in costs are serious violations of fiscal discipline, similar to non-targeted use of budget funds.
Transparency and openness with respect to public municipal finances are the most important tools in spending budget funds more effectively. This is our third goal. Late 2012 saw a landmark event: Russia joined the top ten countries according to the Open Budget Index. Currently, this is the highest spot that Russia has in any international rankings. Our goal is to join the top five in 2018. This is quite achievable. To this end, in 2013 we will continue to build the E-Budget information system, which will not only make the moves of participants in the budget process absolutely clear, but will also help to increase the operational efficiency of the public administration many times over in the future, including through the specialisation of functions. As an example, the centralised accounting in the federal bodies of executive power and public institutions can be transferred to the Federal Treasury in the future. This is one way to raise the efficiency of budget spending. In 2013, we will commission the budget system website, which will be used to post systematised current information about the implementation of all budgets, from federal to local. The website is already in pilot mode, and the expert community, including the Open Government, has access to it. The budget numbers will be posted on the website in a clear and understandable form for anyone who may be interested.
Budget transparency is a necessary but not sufficient condition for making effective use of budgetary funds. You also need a system of state and municipal financial control that can detect and, more importantly, prevent violations in a timely manner. The development of such a system is our fourth goal. In 2012, the State Duma received and adopted in the first reading amendments to the Budget Code and the Code of Administrative Offences, which govern these regulations. They include a clear definition of the area of public internal and external financial control, refocusing on the oversight of results of the use of budget funds, which is important. The end result and the assessment of how effectively the money was spent should be the focus of the control system. We are introducing a system of administrative responsibility for budget violations and imposing fines. We will penalise and disqualify certain officials. The opposite is true today: we are, in fact, imposing fines on organisations and consumers, which ultimately limits the ability to provide such services. We hope that the draft law will be passed during the spring session and will expand the functionality of Rosfinnadzor and similar regional and municipal financial oversight agencies. We plan to greatly improve and expand Rosfinnadzor’s capabilities and improve its material base, so as to strengthen the oversight function of the Government.
The next three goals are related to financial regulation and the development and implementation of the tax debt policy, primarily, the development of financial markets. The modern financial market and the banking sector are key to economic growth in Russia. The Ministry of Finance believes this is a particularly important issue. Our work in this area will be built along the following lines.
First, we will create a mechanism to encourage citizens to form pension savings and to use them for long-term investment. As part of this work, we have expanded the avenues for investing pension assets in securities issued for financing long-term infrastructure projects. As is known, 100 billion roubles from the pension funds will be invested in the development of railway infrastructure. We have also developed measures to improve the effectiveness of investment for non-governmental pension funds as well.
The insurance market, particularly life insurance, is another institution for attracting long-term investments. In order to develop this area, we plan to expand opportunities to form and invest insurance premiums, similar to pension savings. The Ministry of Finance is finalising the law on financial products that contains the OECD-compliant rules for pension insurance savings regardless of the financial institution chosen by future retirees. This is important.
Second, we should ensure an adequate level of control and oversight on the financial markets. We have developed the proposals to improve the oversight over the activities of non-governmental pension funds, especially the ones involved in mandatory pension insurance. Similar to banking legislation, we have developed proposals to preserve pension savings during the accumulation phase and, more importantly, during the pension payment phase. We are working to introduce prudential supervision in the industry. All these measures will help to ensure the transparency and reliability of the financial market and raise overall confidence in its participants.
A single regulator based on the Bank of Russia is being created in order to improve the stability of the financial market and oversight. The legal framework has been prepared and will be considered during the spring session of the State Duma. Importantly, this decision will make it possible not only to improve the effectiveness of oversight on the financial market, but also reduce the administrative burden on financial market participants.
The third area is building modern financial market infrastructure. We have planned and are implementing measures to expand the infrastructure of financial markets, such as the central depository or T+2 exchange settlements. By the way, the latter have already been launched. Investors have been waiting for them for quite a while, and this year it happened. Starting this year, foreign investors will have access to the government securities market through international clearing systems. In the near future, we will provide such access to the corporate bond market, and in 2014 to the stock market. Russian and foreign investors should be able to trade shares of Russian companies on terms that are not inferior to the ones available on the foreign markets.
Another important task faced by the Ministry of Finance is to improve the tax system. Indeed, the tax system should not perform only a fiscal function. It should also encourage entrepreneurship. It is necessary to preserve the competitiveness of our taxation system. Without increasing the tax burden on the non-oil-and-gas sector of the economy, we must create conditions for attracting additional sources of revenue to budgets at all levels. To do so, we propose adopting measures in the following areas. First, improve the quality of tax administration and increase tax collection under the current tax system. We see here significant potential for raising budget revenue without raising taxes. To do so, we need all eligible taxpayers to pay their taxes.
The Government has prepared and submitted to parliament a draft law on combatting illegal financial operations, one of its aims being to increase tax collection. It envisages additional measures against tax evaders which would reduce their number and thus improve the business climate in the country. Improved tax administration contributes to a new system of dispute resolution between the Federal Tax Service and taxpayers. Out-of-court settlements of tax disputes have reduced the number of tax conflicts: since the system was introduced, the number of complaints has fallen from 70,000 to 50,000 in 2012. The number is continuing to fall by 10% every year and the number of cases that go to court by 15-20%. As a result, tax agencies can better represent their interests in court. We are now winning almost 70% of all tax claims, the best result in recent years. That percentage has increased by an order of magnitude in recent years because until recently court rulings were by no means always in favour of the Russian Federation. The introduction of modern information technology has helped to expand the range of services. The procedures for interaction between the tax agencies and taxpayers have been simplified, 35 electronic services have been introduced which enable people to start and conduct business, meet tax obligations and receive consultations in any part of the world.
The second area is greater responsibility of the regional authorities in the area of tax regulation. Regional and local authorities will be playing a greater role in law enforcement. We are working to create unprecedented conditions for the Far East and Trans-Baikal in terms of applying tax incentives and measures to promote business. These are measures to stimulate supply, something that we have been discussing.
Now onto the question of law enforcement, which is crucial if the measure is to be effective. The executive bodies in the constituent entities of the Russian Federation must select and register investment projects, determine the rate of profit tax and offer other tax benefits. The main concern is to prevent this process from becoming mired in bureaucratic procedures.
After a long period of preparatory work proposals concerning tax on real estate of private individuals will be submitted to the State Duma before the summer recess. Cadastre evaluations of real estate have been completed, the draft law has been written and what remains is the most difficult part of the task, i.e. enforcing the tax. The Cadastre assessment of real estate has revealed a far higher number of real estate objects than those on which private individuals currently pay tax. That is a substantial reserve for replenishing local budgets.
The third area. We are planning to continue fine-tuning the tax system in the oil and gas sector, which will be aimed at making the tax system more flexible and ensuring the highest possible increase of taxes if prices for commodities rise and on the other hand to provide incentives for bringing in reserves that are difficult to extract and are located in remote areas. Specifically, the Ministry of Finance is working on the following projects. First, to create a new tax system for offshore hydrocarbon extraction. Secondly, to provide tax benefits for the extraction of mineral resources for oil fields with difficult extraction conditions. Thirdly, we will complete the development of a new formula for calculating the tax on the extraction of gas, whereby the tax rate will be determined depending on gas prices in domestic and foreign markets.
Another task in the field of tax policy is the need to raise revenues for road funds. In connection with the transition to class 4 and 5 petrol, the overall revenues of road funds could fall by 100 billion roubles over the next three years. We need to consider how to tackle the issue in a comprehensive way, not only by raising excise duties on petroleum products, but by introducing other mechanisms, for example modifying export duties for oil products and possibly raising some other taxes on the oil sector. The corresponding approaches are currently under development.
The fourth area in improving the tax system is creating conditions for the development of the financial sector. We need to ensure a level playing field with regard to various long-term investment objects, such as real estate, bank deposits and other assets. For the sake of developing financial markets we are prepared to abolish capital gains tax on securities if the securities have been owned for more than three years and to offer some other benefits and new tax instruments to develop financial markets.
The next task is efficient management of state debt and state financial assets, the task of ensuring our presence in the financial markets in order, on the one hand, to tap the necessary resources to finance the budget deficit and on the other hand to avoid raising financial market rates and, accordingly, loan rates in the banking sector. The main priority here is to maintain a moderate and safe debt burden. Incidentally, it’s precisely this approach for making borrowings that we propose to the G20 countries within the Russian Presidency of the G20.. A balanced debt policy goes a long way to ensuring Russia’s sovereign rating. In the absence of a budget deficit the debt to GDP ratio should not rise, according to our forecasts. We look forward to a significant increase of our presence in the market of foreign institutional investors, which would enable us to issue longer securities, above all federal loan bonds, to an extent that matches best world practices. Since the beginning of this year the presence of institutional investors has doubled as a result of the institutional measures we have taken.
To make the management of sovereign funds more effective we are creating the Russian Financial Agency. The issue is currently being considered by the State Duma. We have prepared a new version of the relevant draft law and hope it will be passed during the spring session.
The main aim is to invest more of the accumulated resources so that they contribute to the economy. This year we will start investing in the National Wealth Fund and we are ready to increase investments in subsequent years.
The next three objectives are related to broader structural reforms and are directly linked to budget policy issues. One is to provide state services and carry out state functions more effectively. The transitional period of reforming state and municipal institutions in accordance with Law 83 ended in 2012. All the necessary legal and methodological conditions have been put in place. As a result of the first stage of the reform, state targets and subsidies to support them have been introduced and conditions have been created for greater financial and economic autonomy of budget-financed institutions.
At the same time the use of new mechanisms in the work of state institutions is still to a large extent only token. The new mechanisms must be filled with new substance in 2013, and we propose to implement two substantial measures. The first is to enshrine in the legislation the duty of the federal executive bodies to form integrated basic lists of state and municipal services in the relevant sectors. Executive bodies at every level, from the federal to the municipal, will have to set state (municipal) targets for the institutions under the jurisdiction on the basis of these lists. That would create a single legal and methodological framework for every sector delivering such services, for assessing the quality and accessibility of these services. And the second measure is phasing in uniform approaches to determining the standard cost of specific state or municipal services. That would make it possible to compare the effectiveness of the activities of institutions, to award state orders on a competitive basis, to involve non-governmental organisations in fulfilling the assignments and to optimise the budget network. We hope that such amendments will be adopted before this year is out.
In the light of the new criteria we have to take another look at the work of the budget-financed organisations and institutions, of which there are too many and whose number must be reduced. This becomes evident when instead of delivering state services to citizens the functions of budget-financed institutions boil down to providing to the founder services which can be placed in the market. Forming a list of such services and the prices of them helps to identify inefficient budget-financed institutions which we could easily get rid of, thereby making significant savings. The implementation of the reform of delivering state and municipal services involves the task of raising the remuneration of public sector workers. Pay rises must be backed by a dramatic improvement in providing state and municipal services, performance-related pay in the public sector, optimal use of internal reserves, including optimisation of the existing excessive network. In comparing the pay of public sector workers with that in the real sector we should take into account the hourly workload, the length of holidays, benefits and compensations. This is the only way to proceed if we are to realistically assess the effectiveness of the measures taken.
The next task is to develop public-private partnerships (PPP). Given the limited budget resources, we have to tap all sources of financing state priorities, especially in areas like transport, energy, industry and the development of an innovation-driven economy. That is only possible through the use of PPPs. Private capital not only provides additional resources for financing. The use of PPPs presents new requirements for the quality of investment projects. Attracting private capital is a kind of guarantee of the effectiveness of state investments because in this case the state is a business partner, with the requirement that any invested capital yields returns and profits. Unfortunately, many people have lost the habit of working in accordance with these principles. It is far easier to get a subsidy or a contribution to the capital of a joint stock company and demand guarantees on borrowed money. But today there is no alternative to using PPP principles. Government ministries and agencies must adopt a new mode of operation. Private business can and must come to the budget sector to provide services in the fields of education, healthcare, culture and sport. Tougher competition would not only ensure rational and economical use of budget money, but stimulate efforts to improve the quality of these services.
Developing relations between budgets at different levels has always been a key task for the Ministry of Finance. This is our last task, the 10th one. The stability and balance of regional budgets depend in many ways on inter-budget relations. The main task is to make the regions more independent in implementing their social and economic policies. At present every ministry tends to issue commands to the region. The actions of these commanders are prompted by the interests of their specific sectors without regard for the region’s systemic problems. As a result, regional finances are overburdened with decisions made at the federal level. This is particularly keenly felt at the Ministry of Finance when the regions come to us and complain that they have no resources of their own in order to contribute their share to financing the measures that are co-financed together with the federal budget. Considering the additional load on the budgets of the Russian regions involved in raising public sector wages, the requirements for co-financing of non-priority areas of federal support must be eased. For example, the Russian regions are required to contribute 70% to the Housing and Utilities Fund and 50% to financing certain subsidies to agriculture. This is beyond the capacity of the regions. By reducing the number of subsidies, while preserving budget support and reducing the required level of participation of the regions, we can create greater opportunities for the regions to fulfil the main task, namely that of complying with the presidential executive orders issued in May. The same is true of subventions from the federal budget.
And another important proposal. In order to give the regions more freedom in implementing their social policy, make it better targeted and ensure social justice we believe it would be practicable to allow the regions to independently grant social benefits to citizens on the basis of means testing. When it comes to regional social security measures, the regions must have the right to determine the needs rather than be rigidly constrained by federal legislation. We also propose giving more far-reaching rights to the regions in determining the revenue base of the consolidated budget of the constituent entities of the Russian Federation. In the light of the decision to transfer the powers of financing the salaries of preschool institution workers from the municipal to the regional level, a more flexible procedure must be adopted for leaving to the budgets of the constituent entities of the Federation the task of determining the tax on personal incomes, which is the main regulating income of regional and local budgets. That would make it possible to balance the consolidated budget of the constituent entity of the Federation, regional and local budgets.
Mr Medvedev, esteemed colleagues. The tasks for 2013 and the following years have been clearly set out. We understand the instruments to be used to implement them. What we need to do now is to fulfil these tasks as soon as possible. I am sure that the financiers who have always worked and will continue to work as a single team will cope with these tasks. Thank you.
Valentina Matviyenko (Speaker of the Federation Council of the Federal Assembly of the Russian Federation): Mr Medvedev, Mr Shuvalov, Mr Siluanov.
First of all, on behalf of my fellow senators, many of whom are present here today, I would like to thank the Ministry of Finance (no flattery intended) for its highly constructive interaction with the upper house of the Russian parliament, for our cooperative work, for listening to us and taking our proposals into account. We have always been able to find balanced and agreed approaches in adopting decisions.
The Minister’s thoroughly prepared report sets forth the results of the work over the past year. I believe that the results definitely merit a positive assessment.
I would also like to note that the heads of regions have appreciated the open and approachable style of the Minister and other Ministry officials. Even when you turn down our requests, which happens more often than not, you do so in a correct and well-argued way.
Of course I believe that the economy must be as liberal as possible, but financial policy must be conservative. Only such a combination, in my opinion, can produce macroeconomic stability, and in this matter the Finance Ministry’s role and responsibility are great.
Russia as a federative state can only develop successfully on condition of balanced development of all its constituent entities. This meeting is being attended by the heads of financial services of the constituent entities of the Federation. As chair of the House of Regions I would like to speak about regional problems and the state of relations between budgets of different levels. Let me say from the outset that the Ministry of Finance has already done a great deal and continues to work in this area. Nevertheless problems remain and there are many of them.
The Federation Council has repeatedly raised the issue of abolishing regional and local tax benefits established by the federal legislation. Our pleas have been heard, and the process has gotten off the ground, slower than we wanted but still it has begun. A number of new laws have been adopted. The abolition of other benefits, I hope, will be quicker. Although, on the other hand, sometimes you abolish benefits with one hand, and then re-introduce them again with the other, without fully compensating the regions for the shortfall in revenues.
As Chair of the Federation Council I generally believe that in our federal state the legislation is excessively unitary – like the one for a unitary state. Moscow cannot regulate everything in the regions; more powers and authority should also be given to regional parliaments. In assessing the situation as a whole, you have to say that most of the Federation’s regions have shown no cardinal improvement in their financial standing. In 2011, 57 regions (69%) failed to balance their budgets. In 2012, the number of subsidised regions increased. So the question of whether we are moving in the right direction in developing inter-budgetary relations still remains.
We support the Government’s initiative to consolidate subsidies for regional budgets and allow the regions themselves to distribute them according to priority areas, but that is not enough for stimulating development in the regions. We have to continue improving inter-budgetary relations, or, better still, fine-tuning them, helping above all those regions without sufficient development potential, and creating the necessary growth conditions for the stronger ones. In doing so, we must not encourage dependency in any way. Even subsidised regions have sufficient potential for economic growth and as a result for increasing their budget revenues.
The Federation Council has long been suggesting that part of the taxes be turned over to the regions, making the regions more independent and self-supporting. Mr Siluanov spoke about this in his report today. We understand that redistribution of revenues and powers is a complex issue, but at the same time it is the key to the development of the regions and the state.
At the same time, the package of measures formulated by the Government to incentivise the regions and attract investments in the 4th quarter of this year alone (this means they will not be included in the 2014 budget) is expected to draft proposals for the redistribution of tax receipts for the sole purpose of increasing budgetary support for municipal entities. That is undoubtedly important, but how do the regions stand to gain? Will they look up and down with envy? Here I quote the document: “Creating favourable conditions for attracting investment is the direct responsibility of bodies of authority in the regions and bodies of local government.” I think we share this responsibility, colleagues.
Little has been done to resolve the issue of unfunded federal mandates. By making decisions to increase the regions’ costs, we make them increase their borrowing, which has risen over the past two years by 260 billion roubles. Understandably, regional budgets are executed by the regions, but at the same time the Finance Ministry cannot remain on the sidelines. Every year the regions report to the Ministry on the implementation of their budgets and this gives us the full picture.
Why have we failed to stop the runaway borrowing by some regions which are now virtually bankrupt? It is not enough to quote debit and credit, as in book-keeping, we have to undertake a close study of the reasons for what is happening, to work out mechanisms of influence and finally appeal to the sense of responsibility of such unthinking leaders. In view of the problems, it seems to me that we have to improve the staffing of the Finance Ministry department concerned with regional matters.
When the draft federal budget for 2013-2015 was discussed in the Federation Council, one of the key issues raised was the rescheduling of budgetary loans. But no compromise decision was passed on it then. The size of the repayments today is almost double the volume of loans that can be requested from the federal budget between 2013 and 2015. In such a situation, the regions would rather increase their borrowing on the market. In that way we will simply pursue the same course, losing funds which could otherwise have been spent on development and, incidentally, on higher pay for public sector workers.
The Finance Ministry believes that the increased revenue in consolidated budgets in the regions planned for 2013-2015 and 100 billion roubles in financial aid to raise wages will be enough. But we believe that in calculating additional revenues the regions have failed to take into account the income shortfall owing to the creation of consolidated groups of taxpayers (this is a federal law, as you know) and also because of an exemption on newly introduced property (again a federal law). The Finance Ministry and the regions do not have a common set of rules for calculating the revenue base of regional budgets, with the result that the figures forecast by the Ministry and those by the regions differ, as if we lived in different worlds. I believe it is very important and very necessary to develop a single method of calculation.
Also, the regions are talking about cuts in their revenue base due to receipts from excise duties on petroleum products and vehicle taxes being siphoned off to road funds. This is an important source. By establishing road funds, we have laid down a financial foundation for road construction. But we have merely switched money from one pocket to another, thus undercutting other options – the development of the engineering infrastructure, the building of kindergartens and nursery schools, repairs of healthcare and educational facilities, and so on. Even before the 2013 federal budget was adopted, it was clear (we spoke about it) that the regions were underfunded to carry out presidential executive orders and might face problems with balancing their budgets. This March, we requested information about the wages situation in the regions. First of all I must warn you these figures are tentative. The current deficit in just 45 regions is over 80 billion roubles. Of course, the governors claim they will do their best and it’s true that the President’s orders must be fulfilled, but they can only do it by reducing spending on major projects or by taking out new loans.
Another major issue concerns the allocation of housing for orphans. Although subsidies to the regions have been increased radically, the number of orphans waiting for housing is growing, alongside the number of complaints they file with courts. We should help the regions deal with this issue, and so I propose increasing the share of federal co-financing to 50%. We need to create an efficient mechanism, possibly using the experience of providing housing to war veterans, which has turned out quite well.
Colleagues, we can no longer neglect the acute problems in the housing and utility sector. Badly deteriorated housing use an incredible amount of energy. There are over 200,000 accidents at water and heat supply and water discharge systems every year. Just imagine the huge amount of funds we spend on mending problems, whereas we should be investing in preventing them! Of course, allocations from the Housing and Utilities Reform Fund help the regions, but we should bolster this process. What am I referring to? Mr Siluanov has mentioned this in his report. The conditions for major renovations of residential blocks worsened this year. In the past, co-financing requirements for the regions varied between 20% and 50%, but the balance has been changed to 35%-70% this year. It is clear that the majority of regions will be unable to cover these costs and hence will not take part in the programme. As a result, housing and utilities will continue to deteriorate rapidly. Mr Siluanov, you have proposed changing the situation and we fully agree that this must be done. The balance was proposed for 2013 by the Ministry of Finance, although we did our best to convince them not to do this. It is good that you have mentioned this. So let’s change the balance right now.
In addition to the issues I have mentioned, the regions also need to address other, no less important goals set by the President and the Prime Minister. In particular, they need to improve the living conditions of large families with children, develop the system of childcare establishments, offer public transport discounts for students and so on. They will definitely be unable to do this alone, and so we must balance the budgets of different levels more delicately.
Of course, it is impossible to discuss all the proposals of the Federation Council in a short address. They will be summed up in a resolution on developing a federal budget concept for 2014-2016. Mr Siluanov, we are ready to support your proposal for improving conditions for business and the relevant legislation. We are ready to propose legislative initiatives. Let’s work together on this. Thank you.
Sergei Sinelnikov-Murylev (Rector of the Russian Foreign Trade Academy of the Ministry of Economic Development): Mr Medvedev, ladies and gentlemen. Thank you for this opportunity to speak. I’d like to focus on the link between fiscal policy and economic growth. In his opening remarks, Mr Medvedev highlighted this question as one of the most important. The answer will decide whether we should change our fiscal policy or not. If we look at the relationship between growth rates and government spending, we’ll see that when spending was high, growth rates were low (during the 2000s) and when spending was low, growth rates were high.
This is the first observation. In the 2000s our growth rates were about 6%-7%. Now they have dropped to 3.5%. Importantly, the 6%-7% growth was accompanied by high and annually growing prices of the energy and raw materials that we export. In other words, every year our growth rates were influenced by soaring energy prices. In our estimate – and this is the minimum estimate – every year these prices accounted for about a 1.5% increase in the growth rates during the 2000s. So, the current decrease in growth rates is not that radical – they have not declined from 7%, but from a lower starting point.
And the third point I’d like to make is that economists and macroeconomists believe that it is useful to analyse economic growth in two ways – short-term fluctuations around a trend line and the structural component of economic growth. Structural rates (these rates determine what the economy can produce based on its production capacities) were about 3%-4% a year throughout the 2000s. So why were the rates higher in the early 2000s up to 2008-2009, and why are they so low now? They were influenced by two factors – market-driven fluctuations in the business cycle and the world energy market. In the 2000s both of them were pushing us up to the 6%-7% growth rates I mentioned.
Now market factors (accounting for more than 2% growth per year) are driving us down. As a result, last year’s structural growth rates – 7.5% of GDP – correspond to the capacity of our economy.
Proceeding from this premise, we can assess proposals that we often have to review – can we increase economic growth rates, at least in the short term, with incentives, for example by raising the government’s demand? Under the standard economic theory, a rouble of government spending increases production by more than a rouble. The government increases demand and the economy steps up its output if it has the resources and capacities. Economic agents that receive this rouble save part of it and spend part of it, creating demand in the economy and so on. In simple models we get a bigger impact from increasing government spending by one rouble than by adding this rouble to GDP.
Numerous studies have been conducted in the last few years. Two of them were conducted on the Russian economy by Kseniya Yudayeva and Sergei Drobyshevsky. They have established that our multiplier is less than one. In other words, an increase in spending by one rouble results in GDP growth of less than one rouble. This is nonsense from the point of view of the simple theory I mentioned. If we produce something in the public sector or buy something we make a rouble of GDP. But there are secondary effects that are decreasing our economic growth in other sectors and industries. With some types of spending, the multiplier can be even negative, but in Russia it’s about 0.5. So, one rouble of government spending increases GDP by half a rouble. Production is going down. The picture is much the same in the United States, Germany, Britain, Canada and Australia. Their multiplier is between 0.2 and 0.8.
This happens because the requirements of simple models have not been met. Apparently, these models provide for rigid prices, but prices are flexible and government demand leads to soaring prices rather than higher production. Obviously, production factors are limited and we are on the brink of our production capacity, but the facts speak for themselves. It is hardly possible to make large gains in GDP by increasing government spending.
The OECD countries are posting pretty unimpressive growth. For instance, the average economic growth rate of the United States over the past 50-60 years is 2%. Nevertheless, the economy continues to grow.
What factors are important for long-term growth? First of all, it of course includes resources processed by the economy into finished products. This means labour and capital and of course, their combination, namely, efficiency and total-factor productivity, as it is called by economists. Unfortunately, this simple model cannot fully explain economic growth and the various differences that exist between countries. You can cite numerous examples, including economic growth of 2% in the United States over the past 50 years. Labour and capital growth accounts for only 0.5 percentage point (just one quarter) of this growth, and the rest is efficiency. Why is the US economy extremely cost-effective, while the Indian economy isn't? It can be explained, but it is very difficult to do so using quantitative parametres.
Nevertheless, will we speed up economic growth if we increase government spending? If we draw a picture with two axes, where one axis shows per-capita GDP and the other shows economic growth, we can see that with the increase of a country's level of economic development there is usually an increase in government spending. But at the same time, numerous research papers suggest that government spending becomes counterproductive once it reaches a certain level, at which point it actually slows down economic growth.
Currently, Russian spending is slightly higher than specific levels which could be explained by the country's level of economic development. Our level of spending is high and it is only natural that such spending may have adverse side-effects. But how should we act, what should we do ? We all agree that we would like to obtain more public benefits and other products called private benefits, but in most countries it is the public sector that creates these benefits: education, healthcare and science. What should we do about this? The answer is quite simple: We must provide more cost-effective services. This issue has already been mentioned today. What are the criteria for assessing the cost-effectiveness of resources, including resources based on government spending? It is usually said that this is determined by institutions, and this is probably true to some extent, because institutions influence economic growth and because they also determine investment. Investment increases capital and labour. In other words, investment in human capital and physical capital is extremely important for economic growth.
If we superimpose Russia on a picture, and if we put important institution development indices along one axis, and if we place per-capita GDP on another picture, then it turns out that Russian institutions are insufficiently developed. What conclusion can I draw from this? We will be unlikely to be able to boost economic growth and achieve greater prosperity unless we make serious headway in this direction. At the same time, we are now talking about budget institutions, rather than institutions in general. My colleagues and I have assessed the development of budget institutions. And why do we find it important to examine budget institutions? It's because they influence overall growth, and because they influence the volume of revenues obtained by us per rouble of budget spending. We can obtain more or less. And budget institutions are very important from this point of view because we can obtain extra benefits without increasing spending.
We have analysed changes in public institutions of the national budget system throughout the 2000s. It turns out that we have addressed virtually the same issues as all the best countries, in other words our attempts to transform budget institutions have reflected all best practices. This includes targeted-planning institutions, changes in running the budget sector and budget organisations, as well as their conversion to normative/per-capita funding. It also includes innovative and other development institutions, as well as ways of improving the state procurement system and an inventory of targeted programmes. We have addressed virtually all the issues. Unfortunately, in our estimate, we have failed to complete virtually everything, and this is very important.
And how can this be explained? What theories exist here? As I see it, we can explain this situation by the “natural resources curse.” It has long been noted, and I will not mention specific research papers, that countries with abundant natural resources, or countries that had abundant natural resources, the prices for which subsequently increased, grow more slowly than others. The same can be said of some states in the United States of America. Resource-rich states grow slower than others. Why is that? There are two aspects. The macroeconomic aspect, the so-called Dutch Disease, boils down to the fact that a more expensive rouble caused by the influx of petrodollars is not conducive to the growth of other industries, including export-oriented industries and manufacturing, except for the primary industry. It appears that Russia has managed to avoid this disease, either almost or completely. Why? Because the institution which was supposed to combat this disease was introduced through to the end. First this was about the Stabilisation Fund, and now we are talking about budget regulation. We control our spending in a very reasonable manner. But we have major problems with the cost-effectiveness and structure of spending. To my mind, Mr Anton Siluanov has probably outlined the key aspects in his report. I would probably shift some of the focus here. For instance, I consider the management of the public sector to be very important. I believe that even though we are doing a lot we have failed to achieve many objectives through to the end and often we are even moving in the wrong direction. There are many examples here we could mention. But it appears that every element of our social sphere is unique in itself, and this calls for a more detailed conversation than we are currently having. Therefore I will not dwell on this. Nevertheless, speaking of economic theory, everyone also realises that there are costs …
There is convincing evidence that a lot of spending, including spending on education, healthcare, culture, science, transport and communications and the innovation infrastructure, are all productive. They increase long-term and even medium-term growth rates.
As for law enforcement, public administration, the national economy and defence spending, these types of spending are counter-productive, they hamper growth, especially when they reach a certain level. In that case, specific decisions are naturally made on the basis of certain non-economic considerations. It’s naturally impossible not to spend money for national defence, but it’s not the economy, it is already geopolitics and politics. If we compare this list of productive and counterproductive sectors with another diagram, which compares Russian and OECD spending, then we will see that we are always lagging behind average OECD spending in terms of productive spending, and we are spending more on the counterproductive sectors, which include public administration, defence and law enforcement. In this connection, the proposals formulated by our team while drafting the 2020 programme … If current adjustments are made based on changes in the economy, then we will have to spend more (4% of GDP) on productive sectors and less (2% of GDP) on less productive or counterproductive sectors …
I believe that these updated conclusions would be as follows: we need to spend more on education in the medium term, up to 2020 – an increase of about 1-1.2% of GDP. Spending on healthcare and road building must be increased by 1% and 0.8% of GDP, respectively. At the same time, we must reduce spending on law enforcement by 0.9% of GDP, on defence by 1.1% of GDP and on the national economy by 1% of GDP. Regarding the national economy, this does not include those indirect subsidies caused by the existence of export duties. But this, too, deserves to be discussed separately. Thank you very much for your attention.
Dmitry Medvedev: Thank you. Colleagues, before we end the first part of this board meeting, I would like to say that, doubtless, we face large-scale and difficult tasks. Speaking of various specific aspects of the Minister’s report and some other reports, I would like to point out the need to finalise a draft law on tax administration and efforts to combat relevant illegal spending. This work is underway. I hope that it will be completed in the near future, but I would like to draw your attention to the fact that we must upgrade this draft law and make it acceptable to the law enforcement agencies and to those agencies who will enforce it, including the business community. I can see that our colleagues from the State Duma and the Federation Council are nodding, and that they are ready to continue this work.
As for improving the tax system, it is clear that all measures that are being implemented should be aimed at stabilising and streamlining the current overall situation and improving tax administration. The issue of long-term loans and lending to the real sector of the economy was raised here. I will not repeat myself. Obviously, these remain high-priority objectives.
Ms Valentina Matviyenko has touched upon the issue of restructuring regional debts. Of course, there is the problem of excessive regional debt burden. I believe that these processes have, indeed, become quite complex in some regions. Work must be conducted on the basis of individual plans. But in terms of an overall decision I believe that a special deadline should be chosen for adopting this decision, because a situation could arise where this would be perceived as the kind of message once sent to Soviet-era collective farms: No matter how much debt you accumulate, it will all sooner or later be written off. So this type of restructuring can only be used as a last resort. In all other cases, I believe that we need to work individually with each specific region, depending on their financial situation.
Ms Valentina Matviyenko has touched upon another issue, namely, allocations for achieving key state and economic objectives, including the financing of wage-related executive orders and certain other issues. Governors are indeed making such requests, and I regularly receive these requests. I would like the Ministry of Finance to make a final assessment of this issue and evaluate the real need, because of course decisions must be implemented, but at the same time we cannot allow the regions to be left to confront this problem alone. We have promised them that we will address this issue.
I would like to wish all participants of this board meeting success and all the best. Good luck. Thank you once again.
