The government is preparing to make budget cuts due to a drop in revenue.

The Russian government faces the challenge of balancing the budget amid falling revenues, Deputy Prime Minister Alexander Novak said in an interview with Vedomosti.

According to him, the authorities will have to prioritize expenditure items, as oil prices are low, the ruble is strong, and spending needs have increased, "including for defense and security." "The main task here is to prioritize expenditures and focus on the most effective areas," Novak said.

The change in the budget structure has become a "challenge" for the economy, he emphasized. According to the Gaidar Institute, the share of spending on security agencies in the treasury has reached 40%, up from 24% before the war. Meanwhile, the share of social spending has fallen from 38% to 25%, a 15-year low.

Novak's comments may indicate that the authorities are preparing for budget consolidation, Raiffeisenbank analysts write. The federal treasury deficit for January–April has already reached 5.8 trillion rubles, 1.5 times exceeding the full-year plan. At the same time, Novak announced a sharp reduction in the economic growth forecast—from 1.3% to 0.4%, the bank's analysts note. This could mean a shortfall in non-resource revenues.

The current year's budget deficit, even with rising oil prices, could be "significantly higher than planned" unless "fiscal policy becomes more conservative," Raiffeisenbank writes: currently, expenditures remain "noticeably higher" than previous years' levels.

The government has included a 3.2 trillion ruble increase in revenue in the current year's budget law, hoping to replenish the treasury by raising VAT and taxes on small businesses. But the result was the opposite of what was expected: instead of growing, fees collected from entrepreneurs plummeted by 22%, while overall budget revenues declined by 4.5% from January to April. Due to the economic slowdown, the Gaidar Institute estimates that the treasury could be short of planned revenues of 500 billion rubles in VAT and 100-200 billion rubles in profit tax.

Even taking geopolitics into account, the government will likely be forced to significantly reduce non-interest budget expenditures this year, writes economist Kirill Rodionov. The current deficit already exceeds the remaining liquid assets in the National Welfare Fund (3.63 trillion rubles) by more than 60%, he notes: "Given the shortfall in oil and gas revenues, the economic slowdown, and rising debt servicing costs, there is no other serious way to balance the budget."

source: The Moscow Times https://archive.is/NT7Jh