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The Ministry of Economic Development submitted to the Government a plan to accelerate economic growth. Maxim Oreshkin told RosBusinessConsulting (RBC) about the refusal from the policy of budget consolidation in favor of development, about the sources of covering cash failures in regions and about the reform of national programs.
Deficit for the sake of investments
The Ministry of Economic Development submitted to the Government a plan to accelerate economic growth. What measures were set out in this plan? If we talk about economic growth, its pace is determined by three basic points: the ratio of aggregate demand and potential for economic output, the structure of aggregate demand and the supply side factors. Our plan is focused on the second and third points.
Firstly, the first block is the area of responsibility of the monetary policy under the working fiscal rule approved by the law. Under the frames of this the goal is obvious: to ensure 4 % inflation without serious deviations neither up nor down, and everything will be fine.
As for the structure of demand, there are several large blocks. The main task in fiscal policy for the coming years is to increase the share of investment, infrastructure spending (in the broad sense, the costs supporting investment activity). As it pertains to the tax policy, we propose actively to introduce an investment tax exemption. This exemption was confirmed by the law but was not put in application by the regions.
This relates to the reduction of income tax for actively investing companies. The main problem lies in the fact that the introduction of an exemption in regions is always a difficult choice because when you stimulate investment, you immediately lose a part of tax revenues, and the benefits are deferred for at least from two to three years. Secondly, there is a number of interbudgetary policy restrictions that prohibit the increase of the fiscal deficit due to the introduction of new tax benefits.
For the moment, the laws on investment tax exemptions were adopted only by 14 regions. Following the results 2018 and the first half of 2019, only two companies applied an investment tax exemption in Khanty-Mansi Autonomous District. The exemption amounts were relatively small. The exemption amount due to tax to the regional budget for 2018 was equal to 2.26 million rubles and the exemption amount due to the tax for the first half of this year was 807 thousand rubles.
How may the regions compensate for the shortfall in revenues?
We are in discussion now with the Ministry of Finance concerning our proposals on how we could help the regions to compensate for budget losses from the introduction of such tax exemption, as well as an increase in infrastructure spending. The regions will have to increase the budget deficit, and we will offer them a number of tools on the part of the federal center that will help them overcome the income shortage at the first stage.
Are direct transfers from the federal budget possible?
We are not talking about direct transfers. We consider that the resources spent for the coverage of the deficits arising as a result of new tax benefits shall have a largely credit character. There is an issue concerning budget loans for regions, and there is an opportunity for development institutions, such as VEB.RF, a state development corporation, to provide credit resources backed by the federal center. We believe that the federal center must support the introduction of investment tax reductions in regions to a greater extent and support the increase in infrastructure spending. I will not give any figures concerning the mechanism and resource level.
Does it turn out that these deficits will be indirectly covered by the federal center?
In fact, yes, because it is expensive for regions to attract borrowed resources in the market. But in any case, it will be repayable financing.
To what limit levels will it be allowed to increase regional budget deficits?
We offer specific limits, but I will not name them yet.
In any case, this will be either a reduction in income (due to tax benefits) or an increase in expenses (infrastructure spending). We repeatedly discussed the problem of deficits and debt of regional budgets for the past five years. But if you look at the results of the last year, the regional budgets surplus totaled more than 500 billion rubles. It is clear that a significant part of the surplus falls on Moscow, but even without Moscow this is a significant amount. This year, the situation with regional budgets is even better in terms of surplus, and debt is declining.
Therefore, from our point of view, the focus shall be transferred from budget consolidation to development agenda. And the two main tools that we see are the active introduction of investment tax benefits and the stimulation of the increase in infrastructure spending by regional budgets. But the federal center, firstly, shall allow this to be done under the framework of intergovernmental relations, and secondly, provide support in the form of budgetary credit resources in order to overcome the gap associated with the introduction of these measures.
Is there a risk that the increase in investment spending in the regions will be carried on to the prejudice of social spending (for education, healthcare, etc.)?
Promotion of investment and increasing spending on infrastructure is the way to increase social spending, not to reduce it. Investment costs differ by the fact that they create future value and future income. Economic growth will not be achieved without active increase in investments, and thus there will be no opportunity to actively increase investments in the social sector.
Strongest disinflation factor
What financial policy measures are there in the plan?
In terms of credit policy, we propose a restriction on the growth of consumer lending which has already been repeatedly mentioned. You have heard about the new initiatives of the Central Bank, which are fully supported by us. Whether the consumer lending will slow down up to 10 % (forecast of the Central Bank) or to 5 % (forecast of the Ministry of Economic Development), in any case, this is a serious step forward. Let's see how these or those measures work, and then we will adjust the estimates anyway. The slowdown in the dynamics of consumer loans will have a very serious disinflationary character and will open up opportunities for lowering the Central Bank's rates.
Is this a risk of lowering inflation far below 4 %?
Our forecast expects a slowdown in inflation to around 3 % in the first quarter of 2020. We presupposed inflation in the range of 3.6–3.8% (following the results of 2019) in our August report. Though we still suppose the inflation of 3.8 %, of course, we also see the risks of a downward shift. This is also due to the fact that the consumer credit, even with an increase of 10 % next year, will contribute to consumer demand minus 1.9 percentage points. This is the strongest disinflation factor, and if it is not compensated by other types of loans, then inflation may go even lower here.
As it pertains to financial markets, the key point is the formation of new instruments for long-term savings. You know about the initiative that was already announced by the Ministry of Finance to introduce a guaranteed pension product.
Does the Ministry of Economic Development support it?
It supports. I am personally ready to start transferring a part of my income to a private pension fund under this scheme, as soon as it is implemented.
Restore confidence in security forces
What does the Ministry of Economic Development propose to do to improve the business climate amid stories of security and law enforcement agencies attacking businesses?
An important story is the increase of entrepreneurs’ and businesses’ confidence in their future that will open the way for them to a greater investment volume. We believe that the key indicator is the level of entrepreneurs’ confidence in the judicial and law enforcement system, and when we discuss the effectiveness of these authorities’ work, we shall get oriented by it as well. This indicator generally shall be taken as a basis, this is a good acid test.
And how will it be measured?
We already use this index. Boris Yuryevich Titov [business ombudsman] voiced these figures recently at a meeting with the President. We believe that this is a crucial indicator, and so far, it is at a low level. This is a discouraging factor for investments. Confidence must grow, and this will contribute to the growth of investment activity.
What specific measures do you propose in this context?
This is not our area of responsibility, but the Ministry presented a number of proposals, including our approach to changing the Criminal Code and decriminalization, but I do not consider it correct to publicly come forward with these ideas. There is a working group led by the head of the President’s administration. We forward our suggestions there for discussion.
Do the members of the government realize that without restoring confidence in the judicial and law enforcement system other measures will simply be useless?
Only all the elements of the plan in aggregate may give a result. If the “legislation guillotine” fails, the control and supervision will remain a heavy burden for business. If regions do not invest in infrastructure and create tax incentives, there will be neither infrastructure, nor new investments. Everything works together, it won’t separately work.
Predictability for business
There must be predictable and stable conditions and higher profitability at the expense of lower costs for business to start investing.
We already have an understanding of stable tax conditions. There is a consistent and predictable fiscal policy, as well as a consistent and predictable monetary policy in many respects and with clear goals and mechanisms of work. The tariff regulation, transition to long-term stable tariffs and everything related to this may become our next steps. We have prepared the corresponding law. The introduction of the so-called grandfather clause concerning several types of regulation, which is laid down in the mechanism for the protection and promotion of capital investments. Now the final version of the draft law on agreements about the protection of investments is being prepared for submission to the State Duma. Almost all the disagreements in the government that relate to this subject have been removed. The adoption of the law on territorial preferential regimes is important for the restoring order in many existing regimes (TADs, RIPs, etc.).
There is a draft law prepared by the Ministry of Finance on improving tax legislation for small and medium-sized enterprises, which will switch from a simplified taxation regime to a general regime upon reaching a certain revenue threshold. A number of changes are proposed that will make this transition softer and smoother.
The development on the external boundary is the last story in terms of the structure of demand. Recently, an extensive program of strategic cooperation with India was signed in Vladivostok. We prepare a series of documents on reaching specific indicators of market deepening for Russian manufacturers. An increase of exports will make it possible to increase imports in those areas where it is possible to achieve cost reduction for the Russian economy.
Project-based approach to budgeting
Prime Minister Dmitry Medvedev instructed the Ministry of Economic Development and the Ministry of Finance to prepare the concept of a new management system by October 1. The type of management that is used in national projects must be transferred to all the government programs. What is the essence of the reform? What exactly does the Ministry of Economic Development intend to offer?
The Ministry of Economic Development proposes to change the entire system of state programs and federal target programs. Unfortunately, state programs did not become a real managerial tool unlike national projects that, for the first time, received competencies in the management system, including budgeting competencies. Now, national project managers and their supervisors can make specific decisions to achieve their goals. National projects are more focused on specific values. All this together allows us to achieve greater results than with the implementation of state programs, which de facto have become a simple collection of budget expenditures in one direction or another.
We propose to create an end-to-end strategic planning structure from national development goals to specific indicators that must appear in state programs and are already partially available in national projects. This is required for all the arrangements implemented in state programs and national projects will become primarily aimed at implementing national development goals.
Does it mean that state programs will be combined with national projects?
Yes, exactly. De facto it will be a single entity. Priority state programs, as they are defined now, will be named national projects.
What will be changed besides renaming and changing tags?
Firstly, they will be focused on results. Secondly, each state program will receive the same project management mechanism as national projects. This will make broader the competencies of those who manage state programs, assist them to achieve more definite results and ensure higher resource endowment. And the responsibility will also be defined. The failure to fulfill the goal will immediately be followed by relevant responsibility.
The "swamp" into which state programs were turned at this point will be reformatted into project logic. The decision-making process will become faster under the framework of state programs, including the redistribution of budgetary resources. Thirdly, we propose to institutionalize the analysis mechanisms that means we propose to introduce three types of expert evaluations that will accompany the work of all the state programs. This includes financial expert evaluation, which will be done by the Ministry of Finance, strategic expert evaluation, which will be done by the Ministry of Economic Development, and a technological expert evaluation, which will be undertaken by the Ministry of Communications and the Ministry of Industry and Trade from the point of view of applicable technological solutions in achieving desired goals. According to our proposal, all these types of expert evaluation will not be of a blocking nature, but the nature of materials for the project committee, and then the project managers will decide on further actions.
And fourthly, we offer a complete digitalization of the entire process, the creation of a single digital platform on which we will offer to transfer all the project activities in general, completely get out of paper, make the decision-making process completely transparent.
Is a greater budgetary flexibility expected? Because now it is impossible to redistribute funds between state programs.
The redistribution of funds between state programs is, as of today practiced between national projects, the sole power of the Prime Minister. The work within state programs is the flexibility that will be introduced.
State programs will consist of federal projects, sectoral projects and support programs. State programs are the same national project. A national project is the same state program, simply of a higher status and importance.
Will the entire state budget be divided among state programs built on new principles?
We propose to transfer the entire budget and all the government activities to the project-oriented principles of work. The Ministry of Finance likes to repeat that our national projects are 10 % of the budget. We set the task to transfer the remaining 90 % to those rails that have been tested on national projects. The idea is that state programs work to achieve national goals. To make state programs a real management mechanism based on principles and approaches tested on national projects. At the same time, the whole process is supposed to be digitalized as much as possible and to formalize the logic of expertise in decision making.
May it be named a reform of public administration?
It is one of the elements of public administration reform.
What are the other elements?
Another element that we are currently proposing is a reform related to how the HR function works in the civil service, this is the digitalization of the entire process related to the selection and development of staff.
What is the point?
All the government bodies must work from the point of view of a single base, understand what people work, what are their competencies, development paths. The processes of horizontal mobility in the public service between departments must be activated. It is what exists in any large corporation in terms of staff development, and it shall be implemented in the public service.
How to invest in National Wealth Fund
What do you think about the idea of export credits support from the National Wealth Fund (NWF) when the fund will reach 7 % of GDP?
Our position is that we need to change the structure of the NWF assets in favor of supporting the external expansion of Russian manufacturers, when the NWF will reach 7 % of GDP. I wrote a report about this to the President, about at the end of 2017. The Ministry of Finance has already submitted one draft law to the State Duma related to state loans from the NWF. In the autumn session, I hope the State Duma will adopt it.
Do you support the investment of NWF funds in the shares of foreign companies?
This is linked to a discussion on how to invest the NWF assets that do not reach the limit of 7 % of GDP. The question is whether we are ready to slightly increase the flexibility in making investment decisions to move away from super-liquid instruments to more risky instruments with greater profitability. When we developed a system with a cut-off level at the price of oil for directing funds to the NWF, we first studied in detail the systems of Norway and Chile. The way Norway invests its trillion dollars is a very good example. But there is no consensus among the members of the Government on investing the NWF funds that will be over 7 % of GDP.
What do you think about the investment of the NWF assets that exceed threshold limits in the domestic economy?
I believe that the NWF has nothing to do with investments in the domestic economy. If we are considering the provision of credit resources within the country, then you can find many different ways how to support the growth of the loan offer. For this, it is not necessary to use the NWF, a fund that is nominated in foreign currency. We can find various funding sources, including Treasury deposits (that now exceed more than 3 trillion rubles — RBC).
“Ideal Scenario” for unemployment
What measures on the labor market, in your opinion, are necessary to accelerate economic growth?
The plan includes measures to reduce structural unemployment in the regions and to increase the economic activity of the population. Almost all the regions included in the top ten federal subjects of Russia with a low level of socio-economic development have a high unemployment rate. By reducing unemployment in these regions, we may reduce unemployment in the economy in general even more.
But unemployment in Russia is already at historically low levels ...
It may be even lower. The basic trend towards a decrease in structural unemployment is associated with a change in the structure of the population. All over the world, the highest unemployment is among young people under 25 years of age. In our country, the share of this group of the population in the structure of the working-age population is declining because the labor force includes a small generation born in 1999 and in subsequent years. The structure of the labor force is changing in favor of more aged categories that means that even if the same structural unemployment persists in each birth cohort as a whole across the population, structural unemployment decreases.
Demographic changes, retraining measures for people of pre-retirement age, and work in certain regions with high unemployment must produce a reduction in structural unemployment. We now have in our forecast a decrease of unemployment to 4.3 % by 2024. But in principle, we need to set ourselves the task to go below 4 % in case of an ideal scenario. If you look at Japan, the USA, you will see that the structural unemployment is below 4 % in these countries.
In Russia, there is a shortage of labor power, especially highly qualified. Is this a solvable problem?
Measures are needed to strengthen the immigrant inflows with an emphasis on highly qualified specialists. We shall establish a more simplified regime for obtaining citizenship by foreign graduates of Russian universities. We propose a number of changes that will simplify the recruitment of highly qualified specialists to work in Russia, simplify the legal procedure for their work and obtaining work permits for them and subsequently obtaining Russian citizenship.
An important story is the digitalization of labor relations to increase their flexibility. The ability to flexibly conclude an employment contract will provide an opportunity to work for those who now do not always have it with the mandatory paper signing of [the employment contract].
It is believed that it is difficult for employers to fire employees, and flexibility should be increased in this regard.
I do not think so. Only if in RBC (smiles).
What are the chances that real incomes will return to growth in the near future?
We expect positive figures from the second half of the year that will allow the average annual figure to be corrected (according to the results of the first half of 2019, real disposable incomes of the population decreased by 1.3 %, and the Ministry of Economic Development predicts an increase of 0.1 % for 2019. — RBC). Our forecast for the next year is 1.5 % growth. In general, it must be said that a sustainable model of economic growth is impossible without a steady increase of incomes. And so that the incomes of the population grow, the demand for labor must grow, and the growth in demand for labor is associated with investment activity. All is very clear.
How do you propose to increase the efficiency of the public sector, which is growing killing competition?
The plan sets a specific indicator for reducing the state’s share in the economy from the current 46–47 % to 42 %.
At the exit, now we have a methodology for assessing socio-economic effects on the implementation of infrastructure projects, which will allow us to better select projects and direct funding to those that give a greater effect. We are talking about improving the efficiency of investment programs of natural monopolies. The pilot project that we are currently doing with Russian Railways involves evaluating all the investment projects, meeting the criteria for a rate of return of 10 % and a payback period of 20 years for all the ongoing projects.
Are there any opportunities to resume the privatization of large companies?
We raise questions about a number of privatization deals, but this time I will not say about which of them. I can only say that the responsible executives here are the Ministry of Economic Development and the Bank of Russia.
Are the banks that are now under the control of the Central Bank, probably, in the plan?
Yes, these are banks. And they need to be sold for real value, I’ve been talking about this for a long time.