Balance ahead: budget deficit may exceed the plan by 1.5 times
By the end of the year, the Federal Treasury may go into negative territory by 7 trillion rubles, which is almost 1.5 times more than the updated plan, the CMAKP predicts. The reasons are a strong ruble, reduced revenues from oil and gas exports, lower company profits and a rapid increase in spending. New loans will have to cover the deficit. However, with oil prices at $ 80-90 per barrel, the shortage may decrease by 1-1.5 trillion rubles, experts believe. The national debt still does not exceed 18% of GDP, and the domestic debt, even in the case of new borrowings, will not exceed the limits set in the budget. Thus, the budget system has a margin of safety, but the authorities should still look for new sources of income and restrain spending.
What budget deficit do the authorities expect?
After 2022, the federal treasury moved to a steady deficit: in 2023-2025, the gap between income and expenditure was 1.7-2.6% of GDP. In 2026, it may reach 3% of gross domestic product, or 7 trillion rubles, the Center for Macroeconomic Analysis and Short-term Forecasting (CMAKP) expects. His experts reflected their assessments in the report "Principles and guidelines of fiscal policy for the day after tomorrow" (Izvestia reviewed the document).
In the budget law, the shortfall is planned at 3.8 trillion. However, in July, a new forecast appeared on the Electronic Budget portal — 4.8 trillion (with revenues of 40.3 trillion and expenditures of 45.1 trillion). Olga Belenkaya, head of the Macroeconomic analysis Department at Finam, called these figures an interim guideline, rather than official estimates: the authorities did not amend the law.
Thus, the CMACP forecast exceeds the updated indicator by almost 1.5 times, and the initial one by about 1.8 times. At the same time, in the first six months, the shortage of funds reached 5.7 trillion, which is 1.7 times more than a year earlier. Izvestia sent a request to the Ministry of Finance.
Usually, the government adjusts the budget through the State Duma in the spring, but this year this did not happen, Olga Belenkaya reminded. But the norms adopted in June allow the authorities to borrow and spend beyond the established limits without changing the law. This indirectly confirms that the negative and the volume of loans will be higher than planned.
The main uncertainty is related to expenses: in the first half of the year, they noticeably broke out of the seasonal norm of the last three years. Therefore, the final gap of 6-7 trillion rubles looks realistic, the expert believes.
Why budget expenditures exceed revenues
The main pressure on treasury revenues is exerted by a strong ruble, the author of the review, a leading expert at the CMACP, Emil Ablaev, told Izvestia. Due to the low dollar exchange rate, oil and gas revenue is declining after conversion into rubles. For the same reason, the budget receives fewer taxes and duties on imports, even if purchases abroad are increasing. Together, these revenues bring in 13-15 trillion rubles, about a third of all federal revenues.
Company profits have already declined by about 10%, and the decline is likely to remain at this level by the end of the year. However, about 80% of the planned gap can be exceeded by a strong ruble and rising costs, the expert believes. In addition, the deficit of the regions may approach 2 trillion, and some of their problems will have to be solved by the federal center, the expert added.
In the first half of the year, government spending increased by 16% year-on-year, said Olga Belenkaya from Finam. The Ministry of Finance explains this by the rapid conclusion of contracts and the payment of advances. But previously, the main amount of funding was at the beginning of the year, and now the process has stretched for almost six months. By July, the authorities had already used 55% of the annual spending limit.
Losses from cheap oil were partially offset in the second quarter, she added. Nevertheless, raw materials receipts for the first half of the year turned out to be 164 billion lower than expected. They are under pressure from payments on the fuel damper and the exchange rate: when making the forecast, the dollar was expected to be about 92 rubles, whereas on July 17 it cost 78 (at the exchange rate of the Central Bank).
The rise in oil prices after the escalation of the conflict between the United States and Iran has improved the situation. However, risks remain due to restrictions on the export of petroleum products, an increase in the discount on Urals and the threat of new US sanctions, Olga Belenkaya explained.
At the same time, non-commodity charges accelerated due to VAT adjustments, an increase in the number of taxpayers, inflation, and increased tax control. But weak economic growth and fuel shortages could worsen the outcome, she warned.
What is the danger of budget deficits?
The gap in the treasury at the level of 7 trillion rubles is a negative signal for the economy, says Vladimir Klimanov, director of the IPEI Regional Policy Center at the Presidential Academy. Increased government spending drives up inflation, and new loans increase debt service costs. Therefore, in the EU, for example, the deficit is limited to 3% of GDP. There is no such rule in Russian law, but the government and the Ministry of Finance traditionally consider this level to be a safe border.
The growing budget deficit will also affect the decisions of the Central Bank, says Ekaterina Kosareva, managing partner of the VMT Consult agency. In order not to increase inflationary risks, the regulator may noticeably slow down the reduction in the key rate or temporarily stop it.
However, it is important why there is a shortage and where the money comes from to cover it, said Olga Belenkaya. So, if the treasury has not received oil and gas revenues due to a temporary drop in prices, the shortage will be compensated by the sale of currency and gold from the NWF.
Currently, the Ministry of Finance plans to place federal loan bonds (OFZ) for almost 6 trillion and repay obligations for 1.3 trillion. The net volume of new loans will amount to 4.2 trillion, said Emil Ablaev from CMAKP. The domestic debt reached almost 31 trillion at the beginning of the year, and its ceiling by 2027 is set at 37 trillion. Therefore, even with a total deficit of about 7 trillion, additional borrowings of 2.5–3 trillion will meet the limit.
But servicing obligations is becoming more expensive, the expert warns in the report. In 2021, interest cost the treasury 1.1 trillion rubles, or 4.4% of all expenses. By 2025, the amount has grown to 3.2 trillion, and the share has grown to 7.5%.
However, if oil costs $80-90 per barrel by the end of the year, and Russia maintains its current export volumes, the shortage may decrease by 1-1.5 trillion rubles, said Natalia Milchakova, a leading analyst at Freedom Finance Global. The national debt does not exceed 18% of GDP yet, so the situation is not critical. Although the authorities should still look for new sources of income and restrain spending.
How to close the gap in the treasury
Usually, the shortage of funds is covered by issuing government bonds, using treasury account balances and selling assets, Svetlana Frumina, Head of the Department of Global Financial Markets and Fintech at Plekhanov Russian University of Economics, reminded.
In the second half of the year, the government can reduce spending not related to the social sphere and defense, Ekaterina Kosareva from VMT Consult believes. It is likely that the completion of individual infrastructure projects will be delayed, and part of the shortfall will be covered from the National Welfare Fund.
At the same time, control over the business may increase. The tax authorities will become more active in looking for schemes with non-payment of VAT, splitting up companies and replacing labor relations with self-employment, the expert believes.
To improve the budget, the CMACP suggests switching to longer and more accurate planning. The forecast should be updated during the preparation of each three—year financial plan and several scenarios should be calculated - with different prices for raw materials, the cost of loans, the amount of social obligations and the level of debt.
Major tax, customs, and spending decisions need to be checked in advance for consequences for the federal treasury, regions, extra-budgetary funds, and companies. It is also important to consider their impact on investment, production, employment, and economic growth.
The Parliament, in turn, needs independent analysis on the economic forecast, public debt and key financial decisions. The main principle is to study risks before making commitments, while the parameters and sources of financing can still be changed without a large—scale reworking of the budget, experts believe.
Thus, there is still a margin of safety, but a gap of 7 trillion rubles will require taking out more loans and will limit expenses more severely. The longer spending outstrips income, the more expensive it is for the government to borrow, and the higher the risk that the economy will have to pay for slower projects, tighter tax controls, and higher interest rates.
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