- Tax revenue rates in the regions decreased due to economic stagnation. Amid crisis, intensive growth is impossible (real GDP growth rate was 3.8% in 2015), while extensive growth potential is almost exhausted.
- The regions maintained control over social expenditures of their budgets – share of social expenditures settled on the level of 2014, development expenditures have not been reduced.
- Continuous reduction of capital expenditures in housing and utilities is only a short-term solution, which can hinder economic growth and impair the investment climate in future.
- Debt crisis was deferred with help of public budget loans. The current leverage is high, but manageable. Debt portfolio risks will depend largely on the availability of budget financing.
- Regional budget deficit and leverage will increase in 2016 due to contracted tax base and rigid expenditure budget. The growth of budget deficit will be covered by bank and public budget loans. The estimated debt is RUB 2.4 trillion.
Increasing dependence on slowing revenues growth
In 2015 regional budget revenues grew due to the increase in tax and non-tax revenues, their share went up constantly and by 2016 it totaled 80% in the consolidated budget of the Russian federal subjects. In 2015 the growth slowed down: income tax revenues increased 7.3% (against 14.4% in 2014), personal income tax revenues increased 5.4% (against 17.4%). These figures show that the regional economies are suffering stagnation. The same trends are expected in 2016: in accordance with ACRA estimates income tax revenues in the consolidated budget will grow a mere 4.5%, while personal income tax revenues will grow a mere 3.5%.
This stagnation trends are equally pronounced in a number of other tax revenues of the regions. Revenues from federal goods tax (excise duty; equals 7% of tax and non-tax revenues) went down for two consecutive years. This was caused by contraction of alcohol market and indicates decrease in consumer purchasing power. The growth of regional property tax could be attributed to its extensive nature and demonstrates attempts of the regional authorities to make up for slowdown of other tax revenues.
Income tax is one of the basic budget revenues components. Figure 1 illustrates the breakdown by regions of income tax performance that is the consequences of oil prices reduction, import substitution program in agriculture and ruble devaluation, which appeared favorable for exporting companies. The following economic regions became the growth leaders: the Far Eastern Region, where the Sakhalin Oblast’ accounts for half of the revenues increase, the East Siberian Region as a result of revenues growth in Khakassia and Buriatia (in the power sector) and the Krasnoyarsk Krai (in the nonferrous industry); the Central Black Earth Region as a result of agricultural sector development. Revenues in the West Siberian Region decreased because of the Tyumen Oblast’ and the Yamalo-Nenets Autonomous Okrug due to high base effect (in 2014 it showed significant growth) and favorable tax treatment for the local companies investing in the oil and gas industry.
Other regions showed low income tax revenues in the absence of tangible economic growth drivers.
Figure 1. Growth of income tax revenues in 2015
Delicate balance between social expenditures and economic growth
So far, amid economic decline and slowdown of tax revenues growth, the majority of regions are managing to withstand the social burden avoiding significant deterioration in credit worthiness.
Most regions stabilized the amount of social expenditures (education, healthcare and social security). In 2014-2015 the share of these expenditures was settled at the level of 59%. However, in 2015 salary expenditures in this sector decreased 17%. As provided for by the 2016 federal budget, the federal authorities are continuing to reduce their subsidies, which partially compensate for the regions’ expenditures on wages increase. On the other hand, the regions cannot increase wages by means of structural optimization any longer (restructuring of healthcare and education sectors is almost complete). Therefore, we expect that after considerable reduction of personnel costs in 2016 regional authorities will have to slightly raise them moderately wary of criticism from the federal authorities. In 2015 the percentage of economic development expenditures (national economy, housing and utility sector and environment) remained at the manageable level of 28%. This is a positive sign as it shows the intention of the federal subjects authorities to continue development of regional economies even amid austerity measures.
Figure 2. Consolidated regional budget (excluding the Crimean Federal District): expenditures and deficit performance, RUB bln
In the period of 2012-2015 the share of general administrative and public service expenditures (including defense and national security) remained stable at 4.5%.
As the growth of revenues exceeded the growth of expenditures, deficit of the consolidated regional budget reduced from RUB 414 bln in 2014 to RUB 106 bln in 2015 (excluding the Crimean Federal District).
The situation will hardly be the same in 2016. Currently when tax revenues are stagnating and social expenditures have been reduced to the limit, we expect the budget deficit to rise up to RUB 148 bln if the expenditure structure remains stable.
Reduction of investments in housing and utilities is a doubtful way of saving
Reduction of housing and utility expenditures within the regional budgets raises concern: their share had been reduced regularly since 2011 (10%) and in 2015 it reached 7.5% of the regional consolidated budget. Within this budget item it is the capital expenditures that were subject to maximum reduction: in 2011 sector capex equaled 23% of the total housing and utility expenditures, while in 2015 they were cut to 9%, thus they were reduced threefold.
The housing and utility sector suffered lack of capital expenditures while the expenditures on mass media and sport increased: in 2015 the expenditures on these items exceeded capital expenditures in housing and utilities more than threefold. The condition of utility infrastructure is one of the weakest points in regional development, saving on this item can impair regional economic growth in future.
Figure 3. Reallocation of certain expenditures, RUB mln
Public budget loans reduced debt portfolio risks
The requirement to implement social initiatives of the federal center caused growth of federal subjects’ debt, primarily its commercial part. In particular, from 2013 to 2015 the amount of bank loans increased 40%, while no government securities were issued during this period. This implies reduction of maturity of the regional debt portfolio, as the bank debt maturity is shorter than that of bond issue.
In the last two years the growth rate of the consolidated commercial debt slowed down to 16% in 2014 and to 5% in 2015 (against unprecedented 40% in 2013). This owes to the fact that in 2013-2015 the amount of cheaper public budget loans went up 70%, this opportunity was crucial in the period of rates’ growth and debt market contraction.
Growth of public budget loans proportion has positive effect on the creditworthiness of the consolidated regional debt portfolio therefore in the short term most regions are likely to avoid emergency refinancing or commercial debt restructuring. Though, taking into account possible increase in the consolidated budget deficit, by 2016 year end we expect consolidated debt growth up to RUB 2.4 trillion. We assume that the deficit will be financed out of commercial rather than public budget loans because the regions have reached their public budget loans ceiling.
Figure 4. Consolidated regional debt portfolio performance, RUB bln
In 2013-2015 the growth of consolidated debt portfolio totaled 37%, which led to twofold increase in the debt service costs (in absolute terms), nevertheless in 2015 most regions still kept these costs at a manageable level (1.6% of total expenditure of the consolidated budget). Now these costs have already become heavy for some federal subjects (reaching 4% or more of the consolidated budget revenues). In accordance with ACRA estimates in 2016 the share of debt service costs will increase to 1.9% of revenues.