Staunton, July 10 – Moscow’s newly announced plans to freeze spending for three years at a level below even that of this year will drive the country’s regions into debt, increase social tensions, and points to the collapse of the economy over the course of a long period of stagnation, according to Russian economists.
One, Mikhail Khazin, who is president of Moscow’s Neocon consulting firm, tells Rosbalt’s Dmitry Remizov, that the policy the finance ministry has successfully insisted upon means “the banal ‘eating away’ of reserves and will lead the Russian economy to a catastrophe” (rosbalt.ru/russia/2016/07/08/1530383.html).
Apparently, he says, officials haven’t thought through the consequences of what they are doing: “They think only about one thing: we will support the current level of consumption as low as it is, but we will support it [even] by the liquidation of the economy as a whole. It seems to me,” Khazin continued, “this is a catastrophic decision.”
The finance ministry appears to believe that by balancing the budget, Moscow can reduce inflation and thus attract foreign investment. But in the current situation, such investment is not going to be forthcoming. Moreover, for obvious reasons, what the finance ministry is doing will in fact lead to more inflation, not less.
Pavel Kudyukin, an economist at Moscow’s Higher School of Economics, agrees and says that the government’s plans will not only make the situation in the Russian economy worse but will have the effect of increasing social tensions around the country. At best, there will be stagnation; more likely, there will be a further decline.
He argues that “under crisis conditions, it would be more logical possibly even to increase the budget deficit” so as to stimulate domestic demand and thus the development of the economy, given the declining role of foreign trade in the Russian economy overall and the problems in many of Russian regions.
Regional governments are already in debt not only to Moscow but to commercial banks, and with no new money from the center, Kudyukin says, they will borrow more, thus siphoning off money that might otherwise be used for economic expansion and possibly putting some of the banks themselves at risk.
Valery Gartung, first deputy chairman of the Duma’s industrial affairs committee, also believes, according to the Rosbalt journalist, that “freezing budget spending will lead to the further decline in the standard of living” in Russia. Indeed, the government’s decision will have “murderous consequences for the national economy” and won’t lead to its recovery.
The average standard of living in Russia has been falling for three years, he says, and “it is continuing. Budgetary spending on social needs is contracting,” spending on education and health care is being cut, and as a result, freezing the budget at levels even below this year’s is going to hurt many Russians. The government should seek new revenue sources rather than make more cuts.
Sergey Smirnov, an economist at the Academy of Sciences INION center, says that the government is not only making a mistake by its decisions but is taking actions that may in fact lead to more government spending not less. That is because the economic decline it is promoting will lead to more unemployment and more government payments to those without jobs.
He says that he “suspects that the finance ministry has not considered the coefficient of elasticity: how the labor market will react to the contraction or stabilization of spending on the federal budget” and thus is assuming it can make these cuts without incurring more spending obligations, something that is almost certainly untrue.
But as Rosbalt’s Remizov concludes, Moscow is “hardly likely to listen to the advice of experts. More likely, the bureaucrats will continue to freeze pay and benefits and thus the economy as a whole. As a result, entire cities and regions will be pushed to the edge of survival” – and by implication even beyond that.
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