Agenda: Socioeconomic development forecast and federal budget for 2014-2016, and 13 other issues
Dmitry Medvedev’s opening address
Finance Minister Anton Siluanov’s report on federal budget for 2014-2016
Transcript:
Minister of Economic Development Alexei Ulyukayev reports at the Government meeting
Dmitry Medvedev: Colleagues, today is an important day because we have gathered for one of the key Government meetings. Today we’ll discuss a package of issues related to the draft of the three-year federal budget. Logically, we’ll listen to reports on the development forecast, the draft law on the federal budget and related issues of monetary and credit policy and the budgets of the social funds. We have finished the current stage of this difficult marathon at the Government level, and now there will be hard work in the State Duma and Federation Council committees and parliamentary parties.
Let’s start with the socioeconomic development forecast for 2014-2016. You know that the post-crisis revival of the global economy, including the economies of our leading trade partners such as Europe, has not been as active as we had hoped. In fact, there is a continuing recession in Europe. The growth in Asia and the United States is insignificant, although there have been recent signs of revival in some developed countries. But we’ll see how they do next year. This is a heartening change, of course, but it would be premature to describe it as sustainable, which is why nearly all international organisations are reviewing their forecasts. The IMF has lowered its forecast for global economic growth in 2013 from 4% to 3.1%. Just like our colleagues in other countries, we certainly hoped for more optimistic developments.
Dmitry Medvedev: "It has been decided to freeze the prices of natural monopolies for one year. This will make it possible to restrict the growth of utility costs, which is important for individuals, and I hope this will produce a substantial anti-inflation effect. Annual inflation is to total 4-5%, an all-time low over the past few years."
As for this country, the Ministry of Economic Development said it expects the gross domestic product to grow by 1.8% this year. We hope the growth rate will increase to around 3% in 2014. This is the basic development scenario we used to draft the budget. There are also more conservative scenarios. We understand very well that much will have to be done to implement this scenario. We must continue working to create favourable conditions for private investment by improving the business climate. We need to create a modern production and transport infrastructure, to continue improving legislation and [government] institutions, and to optimise the system of public management. In other words, we need to improve our competitiveness in all areas, in particular at the level of national jurisdiction, the regions and municipalities, as well as individual companies and employers.
Of course, what matters in a forecast are not only the concrete figures, but also the general trend, and so the decisions we take should strengthen the positive trends and reduce the possible risks. It is very important to choose the right priorities and to distribute our financial resources wisely, because they are not limitless. We must plan our revenues, including the privatisation income, as well as internal and foreign borrowing carefully in order to ultimately create a realistic – I repeat, realistic – and balanced budget.
And now I’d like to say a few words about the draft budget itself. We have repeatedly discussed the main parameters. Yesterday, the Government Commission on Budgetary Planning for the Upcoming Fiscal Year and the Planning Period held its meeting, and we summed up the results. What do I consider to be most important?
First, the Government’s priorities for the budget are well-known; these priorities have been stated repeatedly, and they have been laid out in the budget address, the well publicised presidential executive orders and by the Policy Priorities of the Government up to 2018. And all these policy priorities should be fulfilled.
Second, the budget has turned out to be quite austere. While drafting the budget, we proceeded from the real global and national economic situation, and we focused on various restrictions, which are linked with the unfavourable situation on financial and commodity markets. And, naturally, we based our calculations on budget regulation, and we also considered demographic factors. Therefore we’ll have to cut back on budget spending, but not to the detriment to our main goals. The well thought-out allocation of funding and so-called budget rationalism should become mandatory for the entire budget system. We need to reassess the efficiency of state spending, to monitor the implementation of state and federal targeted programmes, and we should strive to make state purchases and the expenses of state-controlled companies as transparent as possible. All this is quite feasible today. The budget has been planned in accordance with the programme principle for the first time, and it will be implemented in line with this principle. Moreover, we are launching the Federal Contract System in early 2014.
Third, despite the difficulties I just mentioned, the budget mostly remains socially oriented. Additional funding is stipulated for fulfilling our social obligations, and this funding mostly tends towards increases. First of all, this implies subsequent wage increases for public-sector employees, including educators, medical personnel, social workers and researchers. Of course, this will increase the load on the regions, and we’ll try to help our colleagues as much as possible. The budget stipulates the required allocations. We will continue to finance the modernisation of the healthcare system and education and to support maternity and childhood.
It has been decided to freeze the prices of natural monopolies for one year. This will make it possible to restrict the growth of utility costs, which is important for individuals, and I hope this will produce a substantial anti-inflation effect. Annual inflation is to total 4-5%, an all-time low over the past few years.
Fourth, the budget prioritises the creation of favourable conditions for sustained economic growth and investment incentives. Next year, we’ll move to implement major investment projects. Despite our problems, substantial allocations are stipulated for these purposes, and I hope that they’ll be spent efficiently.
Support for small and medium-sized businesses and the creation of a comfortable environment for entrepreneurship is a separate issue. The Government should always focus on this issue. Even while cutting back on budget revenues, we decided to preserve privileged insurance premium payments for small companies. And we are also channeling sizeable funding into a federal guarantee fund, which has been established especially to support small business.
And finally, I know that state finances can be managed efficiently only if we ensure openness in the budget process and a public discussion of the budgets at all levels, that is, from drafting budgets to monitoring the spending of allocations.
I suggest that we conduct our discussion in the following way. Right now, I will invite the Minister of Economic Development to speak about the forecast. The Minister of Finance will then report on the federal budget. After that, we’ll ask our experts to take the floor. Today, Mr Yasin (Yevgeny Yasin, Head of Research and Professor with the National Research University Higher School of Economics) has been invited to address our meeting. We will discuss both the forecast and the budget, after which our colleagues will report on the joint monetary-credit policy. Central Bank Chairperson Elvira Nabiullina is among the speakers. Other speakers will focus on budgets of the social funds, and our Government colleagues will discuss some related legislation. If you support this discussion model, then let’s go on with it. Mr Alexei Ulyukayev, you have the floor, please.
Minister of Economic Development Alexei Ulyukayev reports at the Government meeting
Alexei Ulyukayev: Mr Medvedev, colleagues. The Socioeconomic Development Forecast for 2014 and up to 2016, now being offered to you for examination, was drafted in an extremely complicated global and nationwide macroeconomic situation. In 2012, levels of economic growth were virtually restored after the 2008-2009 crisis. However, on the one hand, we faced substantial restrictions with regard to global demand for the main Russian export items, and this caused a decline in physical export volumes. In the first six months of this year, export volumes decreased by about 2.5%. Due to the market situation, prices for many Russian export items, including metals and some other products, also plunged. Therefore, domestic demand did not receive the boost that could have come from global markets. On the other hand, a lengthy increase in production outlays, including outlays linked with the prices of infrastructure monopolies, gas-supply rates, energy and power rates, railway-traffic rates, higher-than-anticipated salary rises and the rouble’s rising effective exchange rate, created a situation in which the financial performance of various companies started rapidly declining. The decline manifested itself distinctly during the first six months of 2013. As a result of this, on the one hand, national companies were unable to conduct more effective price manoeuvres to maintain their competitiveness. And, on the other hand, this obviously hampered various self-financing programmes for fixed-capital investment purposes.
We can see that investment programmes were hit the hardest. As of late August, nationwide fixed-capital investment volumes have decreased by 1.3%.
GDP growth rates also leave a lot to be desired, and this forecast was revised twice. Currently, 1.5% GDP growth rates are being posted. Mr Medvedev, as you have said in your introductory remarks, 1.8% GDP growth rates will be posted before the year is through. This is largely linked with the nature of the investment process and with the fact that the construction of numerous permanent facilities is being completed at the end of the year.
Industry is posting zero growth, and this is largely due to the operation of the mining sector. As regards the manufacturing industries, they record negative trends, that is, just over negative 1%. In effect, the only factor responsible for the current modest economic growth is consumer demand which is maintained by a sufficiently high increase in actual disposable incomes, actual salaries and the retail trade turnover. Therefore, our forecast being submitted to you for consideration is, indeed, a realistic scenario, but we hope that a number of measures, contained in the Government’s action plan, will yield the necessary results.
On the whole, we believe that domestic demand and invigorated investment activity will become the main factors making it possible to boost economic growth in 2014 and the following years. Domestic demand (primarily consumer demand) will make up for about 2.3%. We expect investment volumes to increase by 2.5% in 2013 and by 3.9% in 2014. Furthermore, they are expected to soar by 5.6% in 2015 and by 6% in 2016. This means that the share of this factor will increase considerably from 0.6% in 2013 to 1.3% of the GDP in 2016, or by over 100%. This is a serious and ambitious objective, and we believe that it will and must be addressed using the entire combination of these factors. First of all, we should overcome the negative spiral of growing production outlays, which are particularly burdensome for Russian businesses. Therefore, we suggest converting to a counter-cyclical price-and-rate policy and stipulating price-and-rate growth ceilings for infrastructure monopolies on the basis of negative inflation. Speaking of 2014 objectives, we suggest that prices and rates for consignors and industrial users of electric energy and natural gas should not be adjusted for inflation. This does not concern population. In our opinion, this tactic will provide companies with essential resources. It will allow them to balance their budgets and to invest in corporate development programmes appropriate to their respective business plans. We realise that this situation creates risks related to the fulfillment of the investment programmes of Gazprom, Russian Railways, and national grid companies. But here we see some resources, which are, on the one hand, linked with the fact that they will save on incoming expenses, and, on the other hand, linked with efforts to improve the pricing structure for the purpose of goods and service supplies in order to implement the investment programmes of a company, which could be supported by us. We could also work together with colleagues at a Government commission, and so on. This, too, is a substantial resource for saving on operational expenses, as well as the components of investment programmes’ outlays.
I would like to note that we are merely extending the austerity principle being stipulated by the budget for budget-funding recipients to natural monopolies, which should also implement their respective planned programmes while reducing cost-and-price parameters. Those substantial gains, due to be obtained by the industries, will enable them to make serious headway in implementing their respective business plans. To be honest, we believe that it is possible to work actively in order to reduce the entire burden of corporate outlays. At first, this work would involve natural monopolies to be followed by the users of their services. This would also include suppliers for the purpose of implementing their investment programmes, and this austerity principle would subsequently encompass other recycling stages.
As for the population, we suggest the long-term negative inflation formula, which should encompass the 2011-2016 planning horizon, to say the least. We will use inflation levels for the previous year and a special 0.7% reduction coefficient, during our calculations. We believe that, on the one hand, this will give the population a sizeable resource for improving there welfare. And, on the other hand, this will hopefully make our economy more cost-effective.
In addition, this counter-cyclical price-and-rate regulation measure will produce an anti-inflation effect. We think it will be possible to curb and maintain 4-5% annual inflation. We estimate that 4.8% inflation will be posted in 2014 and that it will decrease to 4.4% to 2016, taking into consideration the innovative negative-inflation measure with regard to the use of these resources by the population.
Second, we base all our calculations on the average investment-activity volumes of the business community. On the one hand, they will be based on present-day loan-issue trends. And, on the other hand, they will hinge on the overall improvements in the business environment and on the implementation of the National Business Initiative “road maps.” This includes 13 road maps, and we have made considerable headway on some of them, including “road maps” such as Customs Administration, Power Network Connections and Housing Construction. Four more “road maps” have to be approved. We expect top-quality work from entrepreneur-support institutions and the business ombudsman. We are working on a programme of public-private partnership. The relevant draft law has been submitted to the State Duma and is currently being discussed there. This will make it possible to restructure investment projects. This new approach towards the development of major infrastructure projects will largely rely on the implementation of public-private partnership principles when major projects, including those being implemented at the expense of the National Welfare Fund, can receive an acceptable profit-sharing structure. This will make it possible to reliably protect investment risks and therefore, to increase the entire volume of proposals in the economy. To date, this includes three major transport projects set to involve Russian and global businesses as well as pension savings being managed by a state managing company and budget allocations.
Export support is the next aspect. Our calculations stipulate a major increase in high-tech and value-added product exports. Their nominal export share is to increase by 25% before 2016. To accomplish this objective, we suggest using export-support tools including export guarantees, export loans and loan-interest subsidies for export-support purposes, which are being implemented here using the mechanisms of state development institutions including the Russian Export Insurance Agency and the Vnesheconombank.
Support for small- and medium-sized businesses will become a high priority and a tool for economic diversification.
In this regard I’d like to mention the measures on which our calculations were based, such as the extension of the reduced, 20% insurance payments to the budgetary funds for small and medium-sized companies at least until 2018, as well as measures aimed to develop the system of guarantee funds. We currently have regional guarantee funds, and the creation of a federal system of guarantee funds is planned to be completed in 2014. This provides for establishing a federal guarantee fund in the form of a non-banking credit organisation, which is to be allocated 30 billion roubles from the federal budget within two years. This should be enough for a substantial increase in guarantees, and, in general, for reducing the cost of loans for end borrowers.
We hope to be able to use the National Welfare Fund not only for infrastructure projects, but also for funding the operation of small and medium-sized companies. In particular, funding could be provided for medium-sized businesses’ investment projects of no longer than seven years at up to 10% annual interest, but only if the money for this purpose from the National Welfare Fund is allocated to VEB at 6% annually.
Taken together, these measures, the structural changes and the improvement of economic institutions’ operation in accordance with the Government action plans should help us move to a trajectory of sustainable economic growth, which should reach 3% of GDP in 2014 and subsequently increase to 3.1% in 2015 and 3.3% in 2016. Industrial production is planned to grow at more than 2% annually, while the service industries and agriculture are expected to grow at a higher rate. It is planned that trade based on the people’s real disposal incomes will grow by 4% and will continue to have a positive influence on economic growth.
We proceed from the assumption that the foreign economic situation is unlikely to improve significantly. Recession has slowed in Europe and there are hopes of economic growth in the United States, but there is a risk of the economic growth rate declining in developing countries.
In general, we used almost the same forecasts of global economic growth to prepare our development scenarios. We believe that the positive balance of current accounts will gradually decrease, but this can be probably compensated by measures taken to improve the investment climate, which will hopefully reduce the outflow of foreign private capital substantially, from $70 billion this year to $25 billion in 2014 and to zero in 2015, with a possibility of a minor increase in 2016. Overall, the general balance of current and capital accounts will be almost neutral.
We understand that this is not an optimistic scenario. To check the viability of its provisions, we used two trial scenarios, one based on a positive and the other on a negative global economic situation. But the achievement of even this scenario will be far from easy or simple; this can only be done if we implement all the measures I have mentioned and many more. There are certain risks, particularly in relation to the assessment of lending growth.
We have factored in rather high growth rates, but there are no guarantees of achieving them, in particular in retail lending, which is the foundation for consumer demand. Moreover, maintaining infrastructure monopolies’ investment programmes at the current level will be hard work and will entail certain risks, as these companies’ income will decrease because we have frozen their prices in 2014. However, we believe that the forecast is more or less well balanced and realistic, and can be used for planning the Government’s work. Thank you.
Dmitry Medvedev: Thank you, take a seat. Mr Siluanov, please proceed.
Finance Minister Anton Siluanov reports at the Government meeting
Anton Siluanov: Mr Medvedev, colleagues. The federal budget for 2014-2016 has been drafted with due regard for the new three-year development forecast and takes into account the decrease of the main parameters compared to the approved figures (the forecast also takes this into account), first of all the gross domestic product, the wage fund and the incomes of profitable organisations. As a result, we have slightly reduced budgetary revenues compared to the budget approved for 2013-2015, and hence we will need to review our plans which require additional budgetary allocations, redefine Government programmes and decisions, the implementation of which will require budgetary funding.
Experts believe that this draft forecast remains quite optimistic even after adjustment, and so our key priority is to redirect our economic and budget policy towards growth and to readjust budget spending so as to achieve the economic growth rates and the goals set out in the new forecast, notably, to increase the efficiency of the publicly funded sector.
Forming a three-year plan was not easy, but it will be even more difficult to draft the budget for 2017-2018 and the subsequent period. So our task is to start preparing for this, reviewing Government commitments, adopting decisions on mid-term priorities and securing substantial funding for them.
Basically, the 2014-2016 federal budget is based on a forecast according to which budget revenues will decrease compared to our initial forecasts and parameters: by nearly 500 billion roubles in 2014 and by more than 1 trillion roubles in 2015. In accordance with our new budget rules, expenditures cannot be reviewed in 2014-2015 because there is an approved three-year budget for 2013-2015.
However, spending under the new draft budget has been adjusted to tied revenues and expenditures, primarily the size of utilisation duties which will be collected starting from 2014 and will be registered as both revenue and expenditure. When registered as expenditure, utilisation duties will be used to support the basic industries.
Moreover, in accordance with the law on the budget, we have excluded so-called provisionally approved spending from the list of expenditures of the 2014-2015 budget, because such funds are not spent if the revenue forecast is smaller than planned in the three-year budget.
Furthermore, I’d like to say that had we not approved the budgetary rule, we would have had to reduce expenditures by more than 520 billion roubles in 2014 and over 670 billion in 2015.
We have planned considerable expenses in real terms. Compared to 2008, our gross domestic product should grow by 16.1% in real terms in 2016, revenues are to increase by 3.2% and expenditures by 30.9%. The latter figure shows that we have very substantial spending obligations, which we cannot increase in 2016-2017.
I’d like to say that when we discussed our plans with the tax service for the last time yesterday, we found an opportunity to increase our revenues by 20.4 billion roubles in 2015 without reducing our expenditures. This should decrease our budget deficit in 2015. We used the so-called budget manoeuvre to balance the budget, which concerns both revenues and expenditures. Revenues can be raised through an increase of the mineral extraction tax on oil.
We suggest increasing the mineral extraction tax on oil while at the same time reducing the export duties on oil and oil products. This will create additional room for manoeuvre and additional revenues: 35 billion roubles in 2014, 67 billion in 2015 and 72 billion in 2016. Besides, taking into account the adoption of legislation that will enable us to fight tax evasion more effectively, we plan to collect additional revenues by reducing the shadow economy and enhancing taxation transparency.This will allow us to attract about 50 billion roubles in 2014, over 100 billion in 2015 and over 230 billion in 2016.
We also plan to receive additional dividends from the consolidated shares of federal joint-stock companies based on 35% profit under the international financial reporting standards in 2016, that is, based on the reporting for 2015.
We also expect more dividends from Rosneftegaz in 2016 when it buys 19.5% of Rosneft’s shares worth 423 billion roubles.
We also plan to manoeuvre with our expenses. We suggest reducing them by 5% with the exception of the costs of compliance. We also propose cutting down subsidies to budget-funded and autonomous institutions by 2%. This means that the salary increases provided by subsidies to budget-funded agencies to fulfil presidential directives on roadmaps, all other government purchases, and the rest of the budget-funded sector will be preserved. The proposed reduction is a mere 2%.
In addition, as part of our redistribution plan, we suggest that salaries of public sector employees, army servicemen, prosecutors and judges should not be adjusted for inflation. This will save the budget over 100 billion roubles in 2015 and 2016. This manoeuvre will allow us to redistribute an additional 240 billion roubles in 2013, 430 billion in 2015 and almost 470 billion in 2016.
The total amount of redistributed resources – in terms of revenues and expenses linked with a larger income basis and a 5.2% reduction in the government’s spending on purchases and other things, the suspension of some defence expenditures and the renunciation of the salaries adjustment – will provide us with the opportunity to redistribute about 1.5 trillion roubles.
If we add our proposals regarding pro-rata pensions, then the three-year budget will increase by about 350 billion roubles. To sum up, we have about 1.800 trillion roubles at our disposal for resolving priority tasks.
First and foremost, these funds will be spent on executing the tasks set by the President’s directives dated May 7, 2012 to create a reserve of 100 billion roubles to deal with employment problems, and support small companies and single-industry towns next year. This is the reserve that will allow us to resolve economic issues next year. Some of it will be spent on the development programmes of the Far East and the Trans-Baikal area, the south of Russia and Kaliningrad and on support for educational projects. These are the new priorities recently set by the Government.
We’ll spend these funds to continue our policy on reduced interest rates, insurance premiums, small business, IT companies and the self-employed. Under these conditions, we’ll continue forming reserves next year. Our Reserve Fund will increase by 341 billion roubles to reach over 3 trillion roubles, or 4.1% of the GDP. We’ll be able to replenish it in the future despite forecasts and budget difficulties.
The total national debt will amount to about 13% of the GDP. This is a very small figure compared to other countries. We must make final adjustments to its parameters based on the decisions made by Vnesheconombank on guarantees to EXIAR during yesterday’s meeting of its Supervisory Board.
I’d like to say a few words about the regions that will find it difficult to form their budgets in 2014-2016. Their revenues have already practically stopped growing compared to last year, but they will have to resolve their tasks and allocate appropriate funds to this end.
In our estimate, the regions will form their consolidated budgets with a deficit of a little more than 220 billion roubles in 2014. This is a high figure because in 2011 it amounted to about 335 billion and in 2012 it was about the same. However, we expect the deficit of the regions to decrease (and the forecast confirms this). In this context, we’ve envisaged additional financial aid to the regions – over 120 billion roubles next year, 130 billion in 2015 and 150 billion in 2016. This financial aid will not suffice and we must think now of how to replenish their budgets. We believe that we should mainly increase the collection of property taxes from companies that do not often pay them in full. This applies to regional budgets, too.
In conclusion, I’d like to say that we will carry out a whole package of major structural reforms over the next three years. We have re-oriented our budget to our programmes. Now, the results of expenditures will be the most important issue, and the implementation of programmes will be reviewed not only by the Government but by the State Duma as well. Specific attention will be paid to what is achieved with the budget resources that we allocate towards different targets.
In 2015, we’ll launch another important reform – a pension reform that will encourage pensioners to continue working and receiving official salaries. This is important and we have provided funds for this reform.
In addition, major reforms will take place in healthcare. We will gradually switch from direct budget financing to insurance healthcare via the Mandatory Medical Insurance Fund. Substantial reforms will take place in education – universities will be re-oriented and the Russian Academy of Sciences reformed, to name a few.
Important new decisions will be made on additional investment in infrastructure. We’ll finance new infrastructure projects from the National Welfare Fund for the first time and they will provide a further impetus for our economic growth.
The financial sector will also be reformed. A mega regulator has already been launched. The operation of non-government pension funds will be improved to make it more stable.
In conclusion, I’d like to say that apart from implementing structural reforms in the next three years, we should reduce the expenditures of the budget and the economy as a whole. In effect, this is our most important task for the near future as we won’t increase the competitiveness of our economy, our country and in part the budget sector if we do not resolve it. All of these decisions are reflected in the budget projections for the next three years and we’ll carry them out. Thank you for your attention.
Dmitry Medvedev: Thank you, Mr Siluanov. Take your seat, please. I’d like to give the floor to Mr Yasin. Go ahead, please.
Professor at the National Research University Higher School of Economics Yevgeny Yasin
Yevgeny Yasin (Academic Supervisor of the Higher School of Economics): Ladies and gentlemen. Thank you very much for this opportunity to speak at the Government meeting. I read the materials with immense interest and believe that their general tone is fairly positive. To begin with, I’d like to agree with the proposal to freeze tariffs as a short-term measure that has been suggested by the Ministry of Economic Development. I consider it fully justified.
Regrettably, there is undue optimism concerning the implementation of numerous proposals. First, the economic growth rates are unlikely to stand at three per cent in the next three years, considering this year’s trend towards their decrease that has not been predicted by anyone. But this trend is not going to end. The economic trends will still be pronounced. I’d like to ask my colleagues to pay more attention to these issues.
I would put it like this – we are entering a period that will call for profound changes that will not become effective instantly.
If you want to see 3% growth tomorrow, you should realise that capital measures relating to changes in the investment climate and many other things will not affect the growth rate. Thus, I’d like to see a more realistic assessment of the situation and I think that we need a more ambitious approach to the changes that must take place in this country. We're talking over and over again about institutional changes and reforms as if they are a magic formula, but the things that are being done and planned are unlikely to bring about any such significant changes. I think that it’s time for us to give a thought to institutional reforms and fiscal reforms, which would reflect the changes that will take place in the institutional field, if any.
In addition, the Expert Council on behalf of which I’m speaking today is prepared to participate in drafting proposals about issues that I’m personally concerned and dissatisfied with. Thank you.
Dmitry Medvedev: Thank you, Mr Yasin. Now, I’d like the Government members to take part in the discussion. Ms Nabiullina, please go ahead.
Elvira Nabiullina (Chair of the Central Bank): First, the evaluation by the Central Bank of the leading economic growth indicators is more conservative than in the base version provided by the Ministry of Economic Development. We believe that the base forecast provided by the Ministry of Economic Development is fairly optimistic, primarily because it implicitly proposes the instantaneous transfer of solutions on institutional and structural elements to economic growth. We believe that it overemphasises the investment growth amid declining profits of private companies, while it forecasted a decline in oil prices. In our view, the investment growth is overrated. Of course, if the oil prices are higher (as you may recall, the base version of the forecast provides for a decline from the present level). Perhaps, we will be able to secure such growth. This is my first point.
My second point is that the proposal regarding adjustments to the housing and utilities tariffs will affect the Central Bank’s policy on curbing inflation. We assumed earlier that the utilities bills will be frozen, including in 2014. Based on this assumption, we forecasted inflation at 4.5%. In our view, the Government decision to adjust tariffs instead of to freeze them will raise inflation by about 0.5% instead of 0.2%. The factor that is proposed is a relatively high reduction factor that is 30% below the actual inflation rate. That means that in 2014 the adjustment for consumers will amount to 4.2%. I believe that we should discuss adjustments to the utility prices and tariffs for individual consumers based on the fact that it affects the inflation rate as well. According to recent surveys, housing and utilities tariffs and inflation are consumers’ key concerns. Otherwise, they will receive higher inflation and utility bills. I do believe that we have such opportunities. If you look at the price growth for housing and utilities services since 2006, they were double that of inflation at an annual 18%-19 %. Importantly, we should boost the efficiency and control costs. Thus, I propose returning to this issue, as we need to bring inflation down. At the end of the day, it will affect the interest rates on loans and corporate costs.
I’d like to ask our colleagues from the Government to make sure that the exchange rate is not indicated in the forecast. If we are about to switch to inflation targeting in 2015, we should not set the exchange rate in our management decisions; all the more so, since it is affected by mixed factors. Fixing the nominal exchange rate or the real effective current exchange rate would be the right thing to do.
Thank you.
Dmitry Medvedev: Thank you.
Go ahead.
Vladimir Fortov (President of the Russian Academy of Sciences): Thank you very much. I would like to ask two questions. The first one is…
Dmitry Medvedev: Who would you like to ask? There are a lot of…
Vladimir Fortov: The speakers.
Dmitry Medvedev: The speakers, alright.
Vladimir Fortov: I would like to ask both questions, one by one. The mediocre economic growth rates, as it has been said, are determined to a large extent by overdependence on the situation in foreign markets. So, if we want to change this, we should develop our research and transition to a new economy based on knowledge, which will naturally involve rapid development of fundamental research. However, the table here shows that with GDP growth of 3% during 2014, 2015, and 2016, the Fundamental Research subsection falls by 7% in 2014, rises by 6% in 2015, and drops to 17% in 2016. This is a troubling pattern.
My second question is also short. Mr Siluanov, you have mentioned reforming the Academy of Sciences, if I am not mistaken. I would like to understand, in terms of the budget, if it will be effective. After being reformed, will it be better for the budget, or the opposite, will it require spending for implementation? According to the first version of the draft law, the reform would cost half a billion roubles, which are mainly payments to academicians and corresponding members. Now the situation has changed quite significantly, so I would like to understand whether we will invest in the reform, or whether we should expect a return, and if so, how much? Thank you.
Dmitry Medvedev: Thank you. So, as far as I understand the questions, I think the first question is for the Economic Development Minister, and the second one is for the Finance Minister. Please, go ahead.
Alexei Ulyukayev: Thank you. Indeed, innovative development is a powerful driver of economic growth, and in our estimates we take into account the mechanisms to create a research product, its commercialisation, which we are going to pursue, on the one hand, by subsidising the corresponding activities, interest rates, and so on, and on the other hand, by developing infrastructure, including in the regions, such as industrial parks, business incubators, and regional innovative clusters. We will support this through special economic zones and also according to the standard procedure. And in terms of the effect on medium-term economic growth, I think it is quite an efficient mechanism. Of course, fundamental research has a more long-term and indirect impact. It will yield fruit ultimately, but it is very difficult to take it into account the medium-term estimates, so we will focus on rapid commercialisation of the research product. May I also comment on inflation? Ms Nabiullina has said that…
Dmitry Medvedev: Of course, please.
Alexei Ulyukayev: I am afraid that while Ms Nabiullina has paid attention to the changing conditions in 2014, she overlooked 2015 and 2016. The inflation-minus formula will mean a smaller rate of tariff indexation for residents in 2015-2016 than was previously expected. Therefore, based on the totality of these three years, the inflation rate will not increase but decrease. It will just be more smoothly distributed over the three-year period. Thank you.
Dmitry Medvedev: Thank you. Mr Siluanov, your turn.
Anton Siluanov: Thank you. I want to say that we’ve included the financial support of the Russian Academy of Sciences in the budget, taking into account the targets of the reform. Regarding the reform of the Academy, we want to increase the efficiency of funding for fundamental research, applied research and research conducted by the Academy. We spend a lot of money and we want a greater return for it, and that is why the Academy’s target is to ensure that government funding for research has a greater effect in the field of both applied and fundamental research.
Dmitry Medvedev: Thank you. Any questions? Please, any member of the Government can ask a question. In addition, I wanted to note that Alexander Galushka is present today in his capacity as minister. Yesterday he attended our meeting as a member of the Government, but now he is present here as a minister for the first time. You may ask questions, Mr Galushka. Best of luck! You are just back from the Far East where you had much to do, of course. By the way, you were lucky to be seated near Mr Trutnev. You can speak as a duet. Please.
Alexander Novak: Mr Medvedev, I have a proposal rather than a question. Since the socioeconomic development forecasts include a descriptive part, you can instruct us, in cooperation with the Ministry of Economic Development and the Ministry of Finance, to develop and spell out the details regarding the power forecast, because when the ratings are being set up, some consumers use the index price option, which can differ from the average – for example, the solution to the “last mile problem”, which includes higher tariffs for other customers and the public since January 1, 2014. I’ve reported on this, and I think this should be spelled out in more detail.
Second, regarding heat tariffs, we, of course, support the proposed idea, but there is difference between the first price zone (the European part) and the second. In the first zone the main source of heat is gas at heating stations, and taking into account the gas tariff freeze, we will still be able to meet the requirements. But in the second zone the main energy resources are coal, heating oil and diesel fuel. So it will be hard to meet these requirements in the Eastern part of Russia without losses for a company even with optimised spending. So I think that here in the forecast we should note that this is for Russia on average, and regulate the difference between its western and eastern parts.
And the third issue that I think should be raised. How will the problem of cross-subsidisation be resolved in the framework of tasks related to the tariff freeze? Thank you.
Dmitry Medvedev: Thank you. Do you have any comments? Please.
Dmitry Livanov: I should emphasise that cutting spending on education, both in absolute figures, and, what’s worse, as a percentage of the country’s budget, is in conflict with the President’s Budget Address that he delivered in June. Thank you.
Dmitry Medvedev: Next please.
Elvira Nabiullina: Still, it’s just a proposal. Considering the change to the utilities prices announced today, I would ask you to harmonise these figures with the forecast because we had an inflation projection of 4.5%-4.6% for 2014 (I am talking about 2014) without tightening our monetary policy – a measure which would seriously affect economic growth. Those inflation figures are only relevant with zero growth in utilities bills. If we revise this growth to 4.2%, then the inflation figures will change as well. The other option would be to tighten the monetary policy, which, as I said, is not good in the present economic situation. So, I would ask you to harmonise these figures and policies for 2014. Thank you.
Dmitry Medvedev: Thank you. Any more comments? Alright.
We discussed these projections with our colleagues yesterday and we are discussing the forecast and the budget today. In fact, what was said was nothing new for most of us. Now that the decisions have been taken, please bear in mind that we need consolidated work on a relevant bill in the State Duma, following the same framework that I outlined during yesterday’s meeting of the projections commission. This is a must.
As for the comments and proposals that you made, I certainly suggest returning to these issues if our colleagues believe that it is necessary – concerning the economy’s competitiveness, financing the Russian Academy of Sciences, and the descriptive segment of the power-generation forecast, where there are a number of difficulties. The issue of raising or not raising the prices of natural monopolies is indeed complicated, but our invited experts sounded rather approving as far as this move is concerned. Still, this decision is difficult to implement, and each sector where infrastructural monopolies operate has its own problems – in the natural gas sector, railways, and especially in power generation. We understand all of this, and this is why instructions have been issued for the Ministry of Economic Development to take these problems into consideration, so as not to damage the infrastructural monopolies’ business targets and investment plans. These things usually affect people’s wellbeing.
Now in terms of the so-called “inflation minus” pricing formula for households – we could discuss this policy again, but please bear in mind two things. First, what you propose is a serious change from the initial plan for the utilities bills increase – I mean the indexation of utilities prices by the inflation rate multiplied by a 0.7 coefficient. And, second, I would like all of the Government members and everyone else here to bear in mind that it is most important not to deceive the people. We cannot promise them a zero increase and act differently. This is what we have to think about, including the Government and Central Bank. Let’s agree on this now. Thank you. The decisions on the first two issues have been approved.
