Living with a budget deficit: Situation in Russia and in the USA

Victoria Pavlova 

The Russian government does not have enough money for all expenses.

Last year almost broke the record of the federal budget deficit in the history of modern Russia – 3.3 trillion rubles or 2.3% of GDP. It was worse only in 2020 due to pandemic lockdowns, the transformation of healthcare and measures to support the population. Then the deficit reached 4.1 trillion rubles. The sums are colossal! To patch up such "holes" you have to go into debt. And they are not treated well in Russia, even among the population: making purchases on credit is often considered shameful. Debts have to be paid, and with interest. At the state level, an increase in the state debt today means that tomorrow we will have to give up part of the necessary expenses for social services or infrastructure development. The government of the Russian Federation was proud that in 2017 it finally closed the debts of the USSR, and then new ones loom on the horizon.

Total public debt (internal denominated in rubles, external – in foreign currency) Russia reached 20.2 trillion rubles by December 1, 2022. This is three quarters of all federal budget revenues in 2023. For 20 trillion rubles, you can build 31 M12 Moscow-Kazan highway (there will still be almost half a trillion rubles), you can pay pensions to all pensioners in Russia for 2 years, you can triple the funding of cosmonautics and feed Roscosmos for 30 years, these are the salaries of all employed Russians for almost 3 years…

What is allowed to Jupiter is not allowed to Russia

But all these amounts pale against the background of the budget deficit and the US national debt.

The American authorities practically do not pay attention to how much they earn. They just spend as much as they see fit. According to the results of the 2022 fiscal year (ends September 30), the deficit amounted to $ 1.375 trillion. At the current exchange rate, this is 94.6 trillion rubles. Almost 30 times more than in Russia! And nothing, they live normally, allocate another $ 3.75 billion to Ukraine and its allies. In the previous few years, due to the coronavirus, the US budget deficit was even greater.

Last year, the US budget deficit amounted to 28% of all revenues, in 2020 – 92%! And the US budget has not seen a surplus since 2001. If Finance Minister Anton Siluanov could also safely dispose of funds in Russia, then in 2023 the federal authorities would spend not the planned 29.056 trillion rubles, but all 50 trillion rubles. Financing of science, education, import substitution programs, infrastructure, including utilities, public sector employees would reach a fundamentally new level. With such a budget, it would be possible to perform an economic miracle even with the current scale of corruption. But these are just dreams.

What is allowed to Jupiter is not allowed to the bull. The US Treasury may not pay attention to income, because it is sure that the authorities can always borrow as much money as they need. The indicator of the deficit and the national debt is now nothing more than numbers on paper, which are used only in the internecine war of Republicans and Democrats.

According to the US Treasury, the national debt has been steadily growing for 40 years, and by the end of 2022 set a new record – 30.93 trillion dollars. 100 times more than the state debt of the Russian Federation.

The principle of operation of the Central Bank of the Russian Federation: "No money, no problems"

The US government has no problems with loans.

The largest holder of the American national debt is... the American government. Through the Fed, which has the right to "print" money (and is actively engaged in this), the government pumped money into the economy so that loans were cheap and everyone in need could receive support, especially during the pandemic. Also, state funds, such as pension funds, invest their funds in state securities. So the government controls almost 40% of its own debt. Foreign investors, including states, account for less than 25% of the national debt.

That is, dollars are simply printed out of necessity. In Russia, it is impossible to imagine the scale of money injection into the economy at home, because the main task of the Central Bank headed by Elvira Nabiullina is to fight inflation. And the less free money there is in the economy, the lower the inflation. That is why large industrial projects (like the LNG plant in the Leningrad region), which focused on imported equipment, previously received state support. For the same reason, the final version of the bill on the regulation of cryptocurrencies prohibits the exchange of mining results for real money in Russia, and the Central Bank is not going to fight the outflow of capital. No money, no problem.

In the US, inflation is offset by stable economic growth. In 2019, US GDP grew by 2.3%, in 2020 the states sank by 2.8%, but in 2021 GDP added 5.9%, and by the end of 2022 it should be about 0.5%. Developing industry is much more difficult than limiting the money supply in circulation. The US can always burn surplus money in the bottomless furnace of a military machine (deterring Russia in Europe in 2023 will cost $ 6 billion, and defense deterrence in the Asia-Pacific region will cost $ 11.5 billion).

In addition, loans to the American government are quite inexpensive. The Fed's rates are so low, and the demand for debt securities is so high, that last year the average rate on government debt was 2.07%. Who would refuse such a cheap loan? But no one will offer such conditions to Russia. Due to the sanctions, there is no queue of those wishing to buy federal loan bonds and Eurobonds. At the beginning of March, foreigners held 34.9% of the Russian state debt, and now – only 17.9%. It could have been less, but it is no longer possible to withdraw these funds. In order to somehow attract investors, the Ministry of Finance at the auction on January 11 was forced to give a yield on OFZ of 10.39%.

So it turns out that an increase in the national debt in Russia is too expensive, it is an acceleration of inflation, and in general, no one will give so much money. We can only rely on our own capabilities, savings on social services, economic development and expensive oil. It was due to her that last year the regions of Russia increased tax deductions to the federal budget. A budget deficit of 2.9 trillion rubles is planned for 2023, and the price of oil included in the budget is $70 per barrel. If oil is cheaper, the deficit will increase with all the ensuing consequences.

Less oil, more taxes $70 per barrel is not bad.

Brent crude, which everyone is used to focusing on, is now trading at about $ 80 per barrel. But there is a nuance. Due to sanctions restrictions, there are few willing to buy Russian oil at market prices. The further you carry the raw materials, the more discount you have to give. On January 6, the most popular Urals export oil in the port of Primorsk, Leningrad Region, was shipped at $37.78 per barrel. And the sale of 10 thousand tons of oil at $42.19 per barrel was recorded on the St. Petersburg Commodity Exchange. Igor Nikolaev, the chief researcher at the Institute of Economics of the Russian Academy of Sciences, claims that focusing on calculated indicators is an unpromising occupation.

- Right now we need to focus on the price at which Russian oil can actually be sold. There are real figures, there are nominal and formal ones, as, for example, with the exchange rate. Budget revenues are generated from sales at the prices that actually exist on the market, at which, even if forced, this oil is sold. And the exchange price is the estimated price for budget projections. We have now turned out that one price was laid down when approving the budget for 2023, but there will really be another.

The G7 and EU countries have introduced a ceiling on oil prices, now they are preparing to introduce a ceiling on prices for petroleum products from February 5, 2023. Of the more or less stable partners that do not support sanctions, China and India remain. But Ilya Grashchenkov, president of the Regional Policy Development Center Foundation, believes that it is by no means impossible to fully rely on the PRC.

- Now is the moment when politics and geopolitics negate the established rules of the market. Therefore, if it continues, then there is no point in focusing on Brent. China will become a key consumer of raw materials, and it has shown that it is rather not a friend, but a fellow traveler. China also likes to make money from the troubles of other countries. Surely China will buy Russian oil at a discount. Or, instead of a discount, he will demand political and other services that are beneficial to him.Igor Nikolaev is also sure that it is worth forgetting about market prices.

- China, of course, will buy at a discount, both he and India. China is generally pragmatic. Relations with him are really good, but China's own benefits are more expensive, and he understands perfectly well that Russia is now very dependent on energy supplies. The PRC is already going to buy coal from Australia and not buy it from Russia, despite the fact that supplies were stopped a few years ago - there were also "geopolitical grates" there. But the question is the price.  The situation is stalemate: the budget deficit is likely to be more than the planned 2.9 trillion rubles, there is nowhere to cut spending particularly due to the conduct of the SVO and the rupture of international relations, and it is impossible to compensate for the financial hole with loans.

What to do? Igor Nikolaev gives a bleak forecast: the government will increase taxes. The MET for 2023 has already been increased.

- We have entered a period when the traditional sources for maintaining the old system are running out. But attempts to fill them with something not directly, but indirectly (through taxes – Ed.) are not able to do this. The problem of the shortage of funds can only get worse, because it is wrong to raise taxes in a crisis. However, we have now taken exactly this path. It's still 2023, and in 2024 there will be a lot more ideas in this area.The USA does not count money, they borrow and spend as much as they want, and in Russia they raise taxes, withdrawing leftovers from companies and people.

But this is not such a fate, not a cursed place, but the result of the work of the Russian government, which prefers the simplest ways that give results only in the short term. And then – at least the grass does not grow.