- Health, education reallocations can boost growth, survey shows
- Russia has channeled bigger share toward spending on military
The debate raging over Russia’s budget may be missing the point.
As spending has become skewed in favor of the military, half of the analysts surveyed by Bloomberg say that what the government needs to do to unlock economic growth is to reallocate money to education or health care as well as to a category that includes roads and investment. Only a fifth of the 20 respondents or fewer believe higher outlays are needed for social spending, utilities and defense.
With Russia’s largest rearmament program since 1991 in full swing, shifting into reverse gear is easier said than done. Although Russia is no longer an Upper Volta with nuclear weapons, as the Soviet Union was called at the height of the Cold War, President Vladimir Putin has become embroiled in conflicts from Ukraine to Syria. That means extricating the country from the drag of military commitments will be a challenge after the share of spending in the consolidated budget on education and health care has already declined in the last five years.
“The current structure of budget spending can’t accomplish the task of boosting economic expansion,” said Alexandra Suslina, head of the fiscal policy division at the Economic Expert Group in Moscow. “It so happens that defense is one of the key priorities for the people making the decisions.”
Russia’s spending on education as a share of economic output is already among the lowest for countries in the Organization for Economic Cooperation and Development, at almost half the level of its emerging-market peers Brazil and South Africa.
A 2013 working paper by the International Monetary Fund, which considered 56 countries during 1970-2010, found that only diverting spending to education “has growth-enhancing effects that are statistically significant,” with none of the other reallocations giving a similar boost.
While defense expenditure rose to 3.9 percent of gross domestic product in 2015 from 2.5 percent five years earlier, and social spending jumped to 13 percent from 11 percent, the share of funds allocated for education has barely budged at 3.8 percent.
To help fund the budget, the government is planning to quadruple its domestic net borrowing to 1.29 trillion rubles ($20 billion) next year, with slowing inflation boosting demand for sovereign debt. Yields on five-year bonds fell this month to the lowest level in two years before climbing in the past three days and reaching 8.35 percent on Tuesday, the highest level in a week.
The Finance Ministry said on Monday that the federal budget ran a deficit of 2.9 percent of GDP in the first eight months of this year, on track to be the widest since 2010.
“In the long run, Russia urgently needs to reduce the share of the unproductive investments into weapons and military equipment,” said Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC. “The burden of military spending may prove unsustainable in the world of low commodities prices. At the same time, redirecting spending on national education and infrastructure would improve the future prospects of the Russian economy.”
Russia in 2015 rolled back cuts to defense spending for this year, undoing the reductions after embarking on a bombing campaign in Syria, the nation’s first military foray outside the former Soviet Union in three decades.
With the collapse in oil prices putting a strain on public finances, Putin in April said for the first time that spending cutbacks will extend to defense and security, which together with social outlays account for almost 60 percent of this year’s expenditure. The Finance Ministry has proposed cutting defense spending for 2017-2019 by 6 percent from this year’s level, the business daily Vedomosti reported last week. Similar proposals have previously been sidelined.
The country was the world’s third-biggest defense spender in 2014 after the U.S. and China, according to the Stockholm International Peace Research Institute. Defense and the related category of national security and law enforcement ate up about a third of the budget last year, more than double the ratio in 2010.
As the economy endures its longest recession in two decades, millions are sinking into poverty as incomes continue to plunge. With the budget bloated with military spending, parliamentary elections this month -- followed by a presidential ballot in early 2018 -- are putting pressure on the fiscal taps to remain open.
The federal government has already agreed to freeze total spending for the next three years. To reach an economic-growth target of 4 percent, authorities need to reallocate funds and raise expenditure by a total of 3 percent of GDP for education, health care and infrastructure, according to former Finance Minister Alexei Kudrin, who left the government in 2011 because of a public feud with then-President Dmitry Medvedev over military spending.
“The highest long-term returns wait for investments in education,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “But Russia’s budget doesn’t have primarily an expenditure problem, but an income problem. The Kremlin needs to diversify its income -- by making more efforts to sustainably diversify the Russian economy away from energy.”