Development of Budget Block in RIM model

Any macroeconomic or inter-industry model should contain a block in framework of which government sector parameters are estimated in the most complete form reflecting all economic interactions of the state with business and the population. At present, the Budget block in the RIM model includes the following 5 elements:

  1. balance of the consolidated budget incomes and expenditures(that is the Federal budget, regional and local budgets);
  2. balance of the extra-budgetary funds incomes and expenditures (that is Pension Fund, The Federal and local Funds of compulsory social insurance and the Fund of the social insurance);
  3. institutional accounts for Government sector;
  4. government consumption in current and constant prices at the industry level (as a part of I-O tables);
  5. industry deflators of government consumption.

In the current moment, the statistical base is consists of the following data sets:

  • incomes and expenditures of the consolidated budget in the following classification (for the national economy as whole, without the industry levels for 1980-2008);
  • incomes and expenditures of the extra-budgetary funds (for the national economy as whole, without the industry breakup for 1993-2008);
  • taxrates (1980-2008);
  • institutional accounts parameters for Government sector (for 1999-2006)
  • calculated indicators of the government consumption in current and constant prices (for 1980-2008).

Calculation of the Block №1.

All indicators are calculated for the consolidated budget.

The basic program of the budget block calculation is:

  1. estimation of tax revenues indicators (its share is about 90% in the total income amount);
  2. calculation of values of internal and external sources of financing of budget surplus/deficit;
  3. using the results of the first two steps the indicators of budget expenditures are forecasted.

Revenues from VAT, personal income tax, company profit tax are modeled according to the standard scheme:

Tax revenues = coefficient * tax base * tax rate

The coefficient calculated by the regression equation has sense of tax collectability. This type of the regression is reasonable only for taxes with flat fixed rate.

Also the other equation is used for the taxes without flat fixed rate (excise taxes, payments for natural resources usage, export and import duties):

Tax revenues = coefficient * tax base

The regression coefficient is a so-called “effective rate”, which changes both with changes of tax rate and tax collectability.

(slide 6)The next step is modeling indicators of internal and external sources of financing budget surplus (deficit). The internal sources of financing are modeled as follows:

internal sources of financing budget surplus / deficit = coefficient1*funds left on government account + coefficient * (government securities’ issue – refund internal debt)

Owing to budget balance the value of money funds left on government accounts after each reported period is indicated as a part of internal sources of financing surplus. In our model it is set exogenously that let us to represent the government policy in terms of expended and saved current finances: the more the value of funds on government accounts is the less budget finances have been expended during the reported period.

The volume of the government securities’ issue (theoretically the main source of internal financing of budget surplus) and the volume of refund internal debt are put exogenously and represent the government policy on the Russian financial market. Last years the value of the government securities’ issue doesn’t exceed 1% of GDP. After the default in 1998 Russian government bewares to use actively this tool of budget policy for increasing the value of financing of budget expenditures. Nevertheless, under the conditions of the sharp budget incomes reduction the Government decided to escalate the volumes of the securities issue to 3% to GDP in 2009 and 1.5% to GDP to 2010-2011. This fact was taken in the consideration during the scenarios design.

The volume of external financing is determined by the following equation:

external sources of financing budget surplus / deficit = coefficient*repayment of government external debt

This equation shows the government policy in relation to the external debt: the favourable conditions on world oil and gas markets have been used for early repayment of accumulated USSR and Russian external debt without attraction of new considerable volume of external financing. In the current economic conditions such budget policy became impossible and within 2010-2012 the Ministry of finance plans to borrow about 60 billion dollars on the external markets.

The Russian budget is balanced, so the expenditures are modeled by the following scheme:

surplus/deficit = - (internal + external sources of financing budget surplus/deficit)

expenditures = (revenues – budget surplus/deficit) + oil-and-gas transfer

The oil-and-gas transfer is cash resources from the saved up oil-and-gas funds used for financing of the budget deficit under the crisis conditionsа. These funds were accumulated during 2004-2008 from the extra budget incomes from the high prices on energy sources and should serve as an «airbag» on a case of sharp falling in oil and gas prices. It is planned to use more than 90% of accumulated volume of the oil-and-gas funds during 2009-2012 for the budget deficit financing.

Having estimated the total budget expenditures value and having set exogeneously the expenditure structure (as the budget policy representation) we obtain the forecast budget expenditure indicators for all functional directions.

Calculation of the Block №2.

For the extra-budgetary funds parameters calculation we use a little bit different scheme than for the consolidated budget indicators.

Particularly, only incomes from the single social tax and insurance contributions are calculated for determining the tax incomes of the extra-budgetary funds. Also the inter-budget transfers from the consolidated budget to the funds for financing their deficit form a non-tax part of these funds revenues.

The expenditures of the extra-budgetary funds are estimated for only one item that is the expenditures for the social policy:

Expenditures = regression coefficient * number of pensioners * average pension

The average pension value is an exogenous parameter which is determined by the published government program during the nearest 3 years and through the growth rate for the further time period.

The quantity of pensioners and other persons received benefits are estimated in the demography and labor block.

According to the forecast indicators of the extra-budgetary incomes and expenditures their surplus (or deficit) and necessary volume of additional means from the consolidated budget for this deficit financing are calculated. So, the greater deficit is formed in the extra-budgetary funds balance the less cash assets from the consolidated budget remains on the government investments, as other expenditures items (defense, state debt service and others) are more or less stable.

Calculation of the Block №3.

Here I only result the principal estimation scheme (the full version named as … is available on the site).

*va (41) – value-added of Education sector, va(42) – value-added of Public Health sector, va(43) – value-added of Government sector from OKVED interindustry balances; similarly for the “wages” parameters.

Calculation of the Block №4.

In framework of the RIM model all nonzero components of a public consumption vector are estimated. Calculations is performed with use of the budget and extra-budgetary funds expenditure parameters (result of the calculations in the 1st and 2nd blocks).

However, to not make my presentation too long I’ll demonstrate equations only for significant vector components (on the slide they are noted by red colour): real estate, government management (including national defense) and compulsory insurance, education, public health, other social and personal services (including culture). We’ve chosen the most natural equations modification when the each component of the government consumption vector is calculated depending on the relevant budget cost items.

As you can see there are not unity independent variable coefficients because of the principal differences between the budget classification and the SNA classification.

The estimation of the public consumption vector in the constant prices is performed with calculated public consumption vector in current prices and its industry deflators.

Government consumption in constant prices = government consumption in current prices / industry deflator

Theblock №5.

In the RIM model the industry deflators are calculated for the nonzero components of the government consumption.

Here I present equations only for the significant vector elements:

In this equation the dynamics of the budget expenditures for housing-communal utilities and the appropriate industry deflator of the households consumption are used as explanatory variables. The last parameter was chosen as Real Estate business serves both government organizations and households that cause the synchronism in the price dynamics for both consumer categories.

In this equation the appropriate budget expenditures dynamics as well as GDP deflator and industry labor compensation dynamics are used. Our ideas about price formation on the government services determine such equation modification: it is salary value defines the industry costs and is connected with both increase in staff of civil servants and their salary indexation.

Here we use the dynamics of the consolidated budget expenditures for education, the households consumption deflator for industry “Education” and the public consumption deflator for industry “Real estate” as independent equation parameters. As to use corresponding deflator of the population, here is the same reason, as in equation for public consumption deflator for industry “Real estate”. Concerning use government consumption deflator for this industry we have considered the following fact: dynamics of the state expenses on the maintenance citizens with free-of-charge education, public health services, etc. is strongly influenced with the corresponding organizations costs for housing and communal services. It means schools, hospitals and so on have to pay for housing-communal utilities as all other economic agents.

As to the following equation only government deflator for the industry «Pharmaceutics» using as an independent variable demands the separate comment. The choice of this variable was quite natural: the essential share in the state expenses for the maintenance of public health services organizations is created with charges on purchase of medicines.

Last equation is constructed by the same principles as all previous and does not demand the separate comment.

Forecast results.

As forecast in framework of the RIM model have not been completed yet, I’m going to present some forecast results for budget parameters obtained with the macroeconomic model QUMMIR. The budget indicators are in fact macroeconomic so in case we use the same estimation scheme in interindustry and macro model the forecast results will be similar.

As you can get from a slide, Russian budget system will face with a huge deficit problem. Such fail result will be observed both for the consolidated budget and extra-budgetary funds. Even under condition of steady economic growth the budget deficit will be negative reducing to –0.7% to GDP. For comparison the surplus was +8% to GDP in 2007. According plans of Russian Ministry of Finance there will be three sources for financing budget deficit:

  1. loans on the internal market by means of government papers issue: its necessary value should be twice more than during pre-crisis period;
  2. loans on the external markets: about 60 bln. Dollars are planned to be involved till 2012. As I believe actually it won’t be inconveniently to loan this sum. For a example, in 2008 Russian bank system foreign debt increased by 56 bln. Dollars and even in the 2nd quarter of 2009 non-finance organizations loan about 17.5 bln. Dollars.
  3. and the main source for budget deficit financing is using of the extra budget incomes from high oil prices accumulated during 2004-2008 in oil-and-gas funds. By the end of 2012 these funds will decrease by 90%.

As to extra-budgetary funds deficit it may became one of the most important problem for Russian budget system because of growth of retired number. At the present moment the Federal budget transfers are used for financing the Pension fund deficit. Beginning from the next year according a new tax reform the incomes of the social funds will increased considerably, but this increase won’t be enough for the comprehensible pensions growth. Therefore, it will be necessary to transfer about 5-8% of the total value of the budget expenditures for financing extra-budgetary funds deficit. And this fact will be reduce the possibilities of the state investments in fixed capital, national defense and infrastructure projects.