The Long-Term Impact of Structural Reforms on the Budget of the Russian Federation

Abstract

The detailed analysis carried out in this work shows that the Russian budgetary system is extraordinarily cumbersome and inefficient. It has a host of systemic shortcomings that cannot be resolved using macroeconomic policy measures. The principal systemic problem of the Russian budget is the imbalance between spending obligations and the revenue base. The true scale of the spending portion of the budget is significantly higher than the official statistics show - according to estimates, it is about 53 percent of GDP, while revenues are only 37 percent of GDP (in 1999). The principal economic policy goal in the near term should be eliminating this gap by pursuing structural reforms. In view of the small possibilities for raising additional revenues, the principal direction of state policy should be reducing expenditures. But such reductions are impossible without profound structural transformations in the budget sphere. These would go beyond the bounds of fiscal policy, and include structural and institutional reforms in the social sphere, defense, and state administration. The revenue side of the budget should also be reformed. This pertains principally to the tax system, which has become one of the main impediments to economic growth. Tax reform should emphasize reduction and even distribution of the tax burden, as well as increased efficiency of tax monitoring and administration. If these structural reforms are implemented, within five to ten years the Russian budget should decline to 40-42 percent of GDP with zero deficits. This roughly corresponds to the lower limits of budgets in the countries of the Organization for Economic Cooperation and Development (OECD).