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Russian budget spends much, but expenditures prove ineffective

February 04, 2013, 11:40 UTC+3

It turns out that the whole growth of state spending has been eaten away by inflation, which proved higher in the state sector than in other sectors of economy

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Low efficiency of state spending and corruption decreased Russia’s economic growth rates by third, the Vedomosti business daily reported. In 2012 Russia’s economic growth slowed down to 3.4 percent as against 4.3 percent in 2011 turning out slightly lower expectations of experts (Reuters Consensus – 3.6 percent) and official forecast of 3.5 percent.

A zero growth rate of government consumption was the biggest disappointment, while state spending in real terms increased by 12 percent, said Dmitry Polevoy, analyst at ING in Moscow. It turns out that the whole growth of state spending has been eaten away by inflation, which proved higher in the state sector than in other sectors of economy.

Government consumption is the spending of budget-funded organizations providing services, the newspaper wrote. The government consumption deflator (or price index) comprised 16 percent, and expenditures for public administration, social security and defence – almost 33 percent, while the private consumption deflator reached 5.4 percent. If the private consumption deflator is applied to government consumption, then zero growth of government consumption would turn into 10 percent, adding up 1.9 percentage points to the GDP growth, Polevoy said. If to focus on 5 percent in 2012, thus ineffective losses cause a decline in the growth rates by third.

Even if such logic is not too correct, the need for raising efficiency of the state sector is evident anyway, Polevoy said. Any attempts to speed up the GDP growth through higher state expenditures can be effective only in case of tougher control, including the fight against corruption. This explains skeptical attitude of markets to any ambitions plans of the government and the choice of delegates to the World Economic Forum in the Swiss resort of Davos calling inefficiency of public administration as the brake pedal for Russia’s development.

The deflator includes an increase in wages of state employees. In 2012 the growth of wages in education, healthcare and military sector was higher the average, the head of the Economic Development Ministry’s department, Oleg Zasov, said. An increase in wages for state employees is a targeted policy that helps to support consumption, he said. Thus, if there were no growth in wages, there would be lesser growth in private demand and the GDP growth rates would be even lower.

Higher wages in the budget-funded sector does not result in the growth of the volume of services, therefore the deflator has been growing, since the beginning of the 2000s at a faster pace (wages in education and healthcare remain by 20-30 percent below the average). But wage rise is interconnected with structural reforms targeted at raising labour productivity, Zasov said. He agreed that there is connection between efficiency of state spending and the GDP growth. If there were less corruption and stealing, there would be a quite different business climate, which would contribute to higher economic growth rates. But it has no relation to the deflator, he said.



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