Prominent Russian economists called on the government not to prepare for the past war: economic policies used to combat the previous crises may turn out to be in this case not only useful, but also harmful.
Leading Russian economists, as part of a brainstorming session organized by the Liberal Mission Foundation, evaluated the likely scale of the economic crisis caused by the coronavirus epidemic, and possible ways to resist it and support the economy.
The results of the discussion are presented in the report of the Foundation for the Liberal Mission “ Coronacrisis 2020: What will and what will be done?” Scenarios for the development of the crisis and necessary measures of economic policy . ”
“The Russian economy today has probably faced the most serious challenge in the last 20 years and the prospect of a crisis that could exceed the scale of the crises of 1998, 2008-2009 and 2014-2015. This crisis was triggered by unprecedented pandemic measures taken by governments around the world, on the one hand, and dramatic changes in the oil market environment, leading to a significant reduction in Russian economy and budget revenues, on the other. This double challenge makes the Russian economy more vulnerable to crisis than the economies of other countries.
To date, the situation is aggravated by high uncertainty regarding the further development of events in both directions - both regarding the duration of quarantine measures forcibly restricting the economic and consumer activity of the population, and regarding the period of critical contraction of demand in commodity markets and new price equilibria that will emerge at the exit out of him. The extent and nature of the effect of such an artificial limitation of economic activity on different sectors of the economy are also unclear. This triple uncertainty increases the complexity of developing a strategy to counter the economic crisis in Russia.
At the same time, it is already clear today that even in relatively optimistic scenarios, the world economy this year will be at a zero mark of growth or go into a small recession, and in a pessimistic one it will experience a decline to 3% or more. The appropriate plug for the Russian economy, based on today's extremely preliminary estimates, can range from 3.5 to 9% of GDP reduction (see the forecast summary below).
Governmental measures to combat the pandemic are compulsory for citizens and businesses and lead to a sharp contraction in demand, curtailing a significant part of the services sector and almost complete paralysis of some sectors (passenger transportation, tourism, hotel, restaurant, leisure business). A sharp contraction in demand has a direct or indirect effect on almost the entire economy. The catastrophic blow of government restrictive measures is inflicted on small and medium-sized businesses, undermining its infrastructure; in turn, the insolvency of this sector leads to a reduction in budget revenues and provokes a crisis in the financial sector.
Therefore, the governments of most countries adopt broad programs to support the economy in the hope that this will prevent the recession from turning into depression and ensure its V-shaped course. Support programs include, as a rule, fiscal measures (reducing the actual tax burden), replacing shortfalls in budget revenues, supporting the financial system to maintain credit availability, direct budget payments to companies and the public to maintain employment and effective demand. In developed countries, support programs reach a volume of 10-15% of the country's GDP. Middle-income developing countries tend to provide much more modest support for the economy. However, the amount of support is very different at the moment, not only in connection with the economic opportunities of countries, but also depending on the restrictive measures already introduced due to the scale of the epidemic, therefore, direct formal comparison of them is pointless.
We consider the anti-crisis measures announced by the Russian government at present totaling about 2.5% of GDP (excluding funds to compensate for oil and gas shortfalls) insufficient, and the desire to shift the costs of compulsory quarantine to private business is short-sighted. First of all, it should be borne in mind that both the nature of this crisis and changes in the structure of the Russian economy make it impossible to pass through those scenarios that were used before, for example, during the crisis of 2008-2009. Therefore, the government should not "prepare for the previous war." In contrast to the previous crises, which were caused by the reduction of oil and gas revenues and the outflow of capital, the current reason is the forced reduction in the economic activity of companies and consumer activity of the population. This causes a sharp decline in demand and a drop in household incomes, which affects primarily the service sector, the weight of which in the Russian economy has grown rapidly in the last decade and in which the majority of small and medium-sized businesses are concentrated. It is these sectors that will first of all need help, but the mechanisms for supporting them, unlike the mechanisms for supporting large enterprises and the real sector, are not familiar to the Russian government, are not developed and are poorly provided for.
In addition, in connection with the double blow - forced quarantine and a sharp reduction in raw material incomes - the Russian government, unlike many other governments, will have to solve a threefold problem: replacing lost oil and gas budget revenues, falling non-oil and gas revenues and direct support to the economy. In connection with the double uncertainty mentioned above, the government is faced with a particularly difficult choice. Significant funds in the amount of about 9% of GDP, concentrated in the National Wealth Fund, may be needed in the event of a protracted lockdown and / or a protracted period of low oil prices, i.e. shock, the most pessimistic scenario, which assumes that certain significant quarantine restrictions will extend beyond the 2-3-month period (and this, in turn, will worsen the prospects for recovery in energy demand).
At the same time, failure to provide sufficient assistance to the economy in the acute phase - during the period of compulsory quarantine - is fraught with wide social and economic consequences - the destruction of the infrastructure of small and medium-sized businesses, too sharp reduction in solvent demand. In this case, the mechanism of economic depression will be launched, which, among other social consequences (growth of unemployment and poverty, reduction of citizens' income) will also result in new falling budget revenues. In the event that during the quarantine period the disappearance of businesses becomes widespread, human and physical capital is lost, hopes for a quick recovery will be unrealizable, and a scenario of a protracted L-shaped crisis will be inevitable. It is this sector, taking into account also self-employed and individual entrepreneurs, to a large extent that contributed to poverty reduction in Russia in the last ten years, and its return will become a heavy social damage for the whole society. The role of the services sector, which is largely serviced by small and medium-sized enterprises, in the Russian economy today is such that the resources of the public sector are not enough to “pull” the economy out of the pit (especially since oil prices are likely to recover lower levels).
The clearly insufficient support measures announced by the government to this day increase the likelihood of just such a development of events. The government misses the time and gives the business the wrong signal: the fact that the business does not receive evidence of the government’s willingness to share the burden of downtime with it does not seem to increase, but reduces the willingness of the business to use its own reserves, because in the proposed scenario they still have a huge the number of companies is not enough to survive.
The set of opinions and suggestions of Russian economists presented in this briefing report regarding the necessary measures of anti-crisis policy demonstrates both a fairly wide field of agreement and the discussion area. Presenting to the public both the first and the second seems extremely important today, because - we emphasize once again - neither in the world, nor in Russia have governments encountered such crises before and have neither experience nor proven recipes for dealing with them.
So, first of all, all participants in the discussion consider it necessary to significantly expand the support provided to the economy and, in particular, to small and medium-sized businesses and the population. In a conservative version, support measures should be increased to 4% of GDP (about 4.5 trillion rubles) , including both fiscal measures and direct support measures (but excluding funds needed to compensate for shortfalls in oil and gas revenues). Some participants in the discussion speak in favor of the volume of support equal to 5-6% of GDP, and in a more radical version it is proposed to bring it to the level of 9-10%, as is typical for developed and some developing countries.
Most discussion participants agree that the budget rule should be adjusted in the circumstances . However, some believe that the adjustment of the budget rule should allow substituting not only oil and gas, but also non-oil and gas revenues from the National Welfare Fund; Proponents of this approach agree that this year about half of the Fund can be spent (4% of GDP), and the second part should be saved in case of a shock scenario for the development of the crisis and replenishment of the shortfall in budget revenues over the next two years. More radical proposals allow the use of means of the NWF also for direct support of the population.
All participants in the discussion agree that it is impossible to cope with the crisis with the help of the NWF and the Russian economy will need a program of quantitative easing , i.e. domestic debt should be increased, however, since the redemption of government obligations by the market is currently unrealistic, these obligations must be redeemed by the Bank of Russia. In fact, we are talking about the emission mechanism, however, in conditions of shock compression of demand, this will not lead to a surge in inflation. At the same time, it is extremely important to monitor the objectives of spending these funds. In the conservative scenario, the amount of mitigation should be 1.5 - 2% of GDP, a more decisive proposal - about 3%, and in the radical scenario - up to 6%.
All participants in the discussion absolutely agree that there are two main areas of support for the economy - this is support for the population, i.e. supporting solvent demand, and small and medium-sized businesses, including self-employed and individual entrepreneurs . We emphasize that these two areas of support have an important political aspect: restrictions on economic activity are mandatory, which means that the state must take responsibility for its costs, otherwise trust in the state, and so very limited, will be even more undermined. One cannot but note the fact that forced “vacations” are paid for budget employees from the budget, and extrabudgetary workers who also pay taxes to the budget until they receive any compensation from it for the forced downtime.
Regarding support for small and medium-sized businesses, many discussion participants agreed that today support measures mainly include deferrals and loans for mandatory payments, however, even six months later, when the deferral regime ends, most companies will be unable to pay for these obligations , taking into account 1 - 2 months of downtime and lack of revenue in this period (even if they are extended over the next six months). The budget should bear these costs if the company fulfills a number of conditions (it will retain employment and resume economic activity immediately after quarantine) . The logic here is that for many companies it simply does not make sense to try to save themselves, having in the future six months another financial shock associated with deferred payments.
More radical proposals come from the fact that a significant part of small and medium-sized businesses is simply not able to maintain employment in a situation of involuntary downtime, which means that the government will either have to subsidize these salaries (of course, not in full), or pay this money as “simplified” as possible "unemployment benefits (" temporary subsidies due to loss of income due to forced self-isolation "), or to resist the negative social and economic consequences of a different kind.
Finally, another fundamental issue of the strategy to combat the economic coronacrisis is the idea of direct support of the population and its solvency at the exit from the quarantine regime. To a large extent, it depends on whether the economy can recover quickly or the consequences of the “income injury” stretch out in a long train. And if such support is needed, then how and to whom should it be delivered? Some participants in our discussion propose paying supplements to pensioners and giving subsidies to all families to pay for housing and communal services . A more radical position implies total or limited according to some criteria, but "carpet" not application payments according to the model of temporary "unconditional income". In particular, such payments may be limited to those who do not receive wages from the budget and whose income did not exceed 1 - 1.5 million rubles last year.
The logic here, on the one hand, is that the peculiarities of the Russian labor market and social protection systems generally do not imply any effective mechanism to support those who have temporarily lost their jobs. And urgently to correct this shortcoming in the current circumstances of the shock of employment is not possible. Therefore, it is better to give out money even to those who could do without it, than to face (at least) double growth of those who really have no work, and even in a situation where the usual mechanisms of "mitigating" the problem (various kinds of informal break-ins) are also blocked. Finally, maintaining the solvency of the population at the time of quarantine exit is the most important factor for a quick economic rebound. However, the feasibility of the costs of such measures against the background of falling oil and gas and non-oil and gas budget revenues and the mechanisms for the "delivery" of such assistance remain the subject of discussion.
The panelists also spoke in favor of restraint in supporting large enterprises and recommended that credit mechanisms be used in this case . Focusing on their significant contribution to the economy and high employment, the government is inclined to provide them with broad support, however, in the logic of the current crisis, such a strategy will most likely be wrong. Such companies usually have certain reserves and the ability to service and restructure their debts, while providing them with too broad support will limit the ability of the government to support small and medium-sized businesses, self-employed and individual entrepreneurs. As one of the participants in the discussion writes, if at the end of quarantine it is possible to quickly restart small and medium-sized businesses, then demand for the products and services of large companies will recover, but the transmission of incentives in the opposite direction seems unlikely.
One way or another, the economic support program needs to be expanded, focused on supporting the sectors most affected by compulsory quarantine measures and urgently announced such an expansion. It is about whether a crisis arises between citizens and the government, or whether the behavior of the government is perceived by the population as yet another attempt to push problems to citizens, preserving at the expense of them their money "money." The second most important issue posed by the economic crisis caused by the pandemic is to determine the weight of the service sector in the economy, which is served by small and medium-sized companies, individual entrepreneurs and self-employed. Is it worth it to continue to perceive this sector as a kind of “makeshift” application to the budget sector, the world of large corporations and state-owned companies, or is it the circulatory system of the economy, and its crisis will drag it down like a stone tied to a leg? ”
Forecasts of the scale of the coronocrisis