Fiscal rules have acquired a mainstream status in economic policy, with over 90 nations adhering to this practice. In Russia, the new federal budget rule is similar to those adopted by other commodity exporters, as it decouples expenditures from volatile commodity-based revenues. Some countries, like Colombia and Chile, additionally recourse to measures mitigating the effect of fluctuations in non-commodity revenues.
Compared to previous fiscal rules, the new one contains a tougher definition of unsustainable revenues: from now on the Russian budget shall regard as such any oil & gas income in excess of the one corresponding to the base price for oil at USD 40/bbl. Under the new rule, budget expenditures should not require cutting and would flow smoother in case of a wider range of oil price changes. The enforcement of the rule will require 4.5–5% reduction of real federal budget expenditures in 2016-2020, which will not affect economic growth.
The new fiscal rule would have survived the recession of 2014, but hardly that of 2009. The impossibility to compensate with expenditures for the non oil & gas part of the economic cycle may lead to a suspension of the rule in case of a recession similar to the one seen in 2009, or the one not accompanied by an oil price shock. This is fraught with lack of incentives to taper support measures and may result in excessive expenditures after the crisis is over.
The level of non oil & gas federal budget deficit may gradually decline to 5-6% from 10% (the average for 2009-2016), if the new fiscal rule features the real cutoff price at USD 40-45/bbl (the actual cutoff price is USD 40/bbl), with real prices reaching above USD 50/bbl.
Oil & gas revenues of the federal budget may undershoot 0.4% of GDP in a particular year exclusively due to the ruble exchange rate deviation from the level expected under the given oil price. In 2017, this will be compensated by the actual oil price exceeding the one set in the budget. However, the very possibility of shortfall illustrates the influence the exchange rate targeting mechanism has on the observed and structural deficits. In the long-term, sustainability of both the fiscal rule and the budget will largely hinge upon whether or not any errors, if they occur, have a mixed and non-systematic nature.
Fiscal rules help achieving socially important targets
Fiscal rule is a long-term quantitative restriction imposed on any budgetary aggregate (revenues, expenditures or deficit), or on government’s balance (mostly debt).
A countercyclical economic policy targets stimulating domestic demand during cyclical downturns and restraining it at booming times.
Fiscal rules have acquired a mainstream status in economic policy, with over 90 nations adhering to this practice1. Theoretically, these rules help achieving socially important goals, such as:
1. Ensuring balance between short-term and long-term goals of the government. Limiting the influence of the electoral cycle and the industry lobby on deficit, debt and expenditures patterns.
2. Providing for sustainable budget expenditures relative to potentially volatile revenues and, as a result, ensuring their acyclicity, or countercyclicality, thus contributing to macroeconomic stability.
3. Maintaining creditworthiness of the state by capping debt or sustaining budget reserves, thus reducing the probability of debt crises.
Developing and commodity exporting countries tend to strive after the first two targets, while the third one is usually less relevant in an environment of relatively high inflation and ballooning economic growth. Therefore, fiscal rules in such countries are often aimed at limiting the budget deficit without formally setting a debt ceiling. A relative smoothness of expenditures is achieved through pegging them to the structural deficit, which is acyclic by definition (see Figure 1).
Raw-material exporters are primarily trying to decouple expenditures from volatile commodity-based revenues. Some countries take additional steps in order to mitigate the impact of fluctuations in non oil & gas revenues (Colombia, Chile).
Whether the rule attains its objectives or not, depends on both correct wording and practical implementation2. The effect in the end appears to positively correlate with such factors as:
a) Sustainability in various macroeconomic conditions (or clear stipulation of circumstances allowing for deviations from or exceptions to the rule).
b) Coverage of most of budget system levels.
c) Clear and easily understandable wording, coupled with possibility of an independent implementation assessment, reference to factual data (as opposed to poorly predictable or questionable indicators), and absence of grounds for manipulation.
d) Existence of a formalized system ensuring compliance with the rule (penalties for non-abidance, personal and shared responsibility).
1 IMF Fiscal Rules Dataset 2016. 2 See, for instance, “Fiscal Rules in Response to the Crisis—Toward the “Next-Generation” Rules. A New Dataset // IMF Working Paper No. 12/187” by A. Schaechter, T. Kinda, N. Budina and A. Weber, 2012.
Table 1. Fiscal rules in commodity exporting countries
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