Easing fiscal policy will negatively impact GDP after first year - minister
MOSCOW. May 21 (Interfax) - Easing fiscal policy can have a positive impact only in the first year of implementation, after which such measures will have a negative impact on Russia's GDP, Finance Minister Anton Siluanov believes.
"We estimate that a positive effect from easing fiscal policy in Russia will be seen only in the first year. Beginning with the second year, the influence on GDP will turn out to be negative: the effect will be felt of private expenditures being pushed out by government ones, the decrease in the predictability of Russian economic policy, growth of debt, deficits, dependence on the volatile foreign economic situation," Siluanov wrote in an article on fiscal policy published by business daily Vedomosti on Wednesday.
He noted that fiscal stimulus benefited the United States in 2009, when interest rates were reduced to zero, unemployment and the utilization of production capacity deviated from long-term levels and the country faced the threat of deflation. In such circumstances, the "temporary fiscal stimulus by the American authorities was very appropriate," the minister said.
But the situation in Russia is completely different: unemployment is close to historic lows, utilization of production capacity is close to the highest levels of the past decade, while inflation is above 7%. "Fiscal stimulus in such a situation will force the Bank of Russia to pursue a tougher monetary policy and lead the economy into a so-called bad balance: high inflation, interest rates, deficit and low growth rates," Siluanov said.
As an example, he cited the increase in budget spending in 2012, which supported economic growth but also increased inflationary pressure, which in turn led to an increase of the Central Bank's key interest rate and accelerated growth of wages in the economy. "We came to 2013 with an increased state share in the economy and worse budget prospects. The economy's reaction was predictable - growth rates began to slow dramatically," Siluanov said.
He recalled the alternative version of the Economic Development Ministry's forecast for Russia's social and economic development in 2015-2017, assuming changes to the fiscal rule that limits government spending. "A strange picture is seen: an increase in budget spending by 0.5% of GDP per year, 2% overall in the period of 2014-2017, leads to a total acceleration of GDP growth rates to 9.5% for the same four years [according to the Economic Development Ministry projection]. Such an assessment of fiscal spending multipliers is surprising," Siluanov said.