Moscow will host the Moscow Financial Forum (MMF) on September 8. Vladymyr Kolychev, Deputy Finance Minister, told which of MMF subjects are of particular interest for the Ministry of Finance: budgetary expenditure patterns, income inequality, digitalization impact on the economy and the labor market, and tax benefits classification.

Kommersant, September 7, 2017

«We need more budget funds for priorities»

Vladimir Kolychev, Deputy Finance Minister, on the Moscow Financial Forum agenda

Moscow will host the Moscow Financial Forum (MMF) on September 8. Vladymyr Kolychev, Deputy Finance Minister, told which of MMF subjects are of particular interest for the Ministry of Finance: budgetary expenditure patterns, income inequality, digitalization impact on the economy and the labor market, and tax benefits classification.

—In your opinion what will be the key topics for the discussion at the MFF 2017 and will they coincide with the topics the Finance Ministry would prefer to discuss?

—The key points on the agenda are the risks and challenges to the economic growth, which economic policy shall address in the coming years. 2016 witnessed uncertainty as the principal threat for the economy, and it was the main topic for discussion during the previous Moscow Financial Forum. The external risks were not that obvious, they included oil prices fluctuation, inactive world economic growth. More specific risks were discussed concerning the European Union, the US, and China. Finally, Russian budget policy has just returned to a three-year planning period, though we had our doubts whether it would be stable or not last year.

As for the moment all these risks are more or less discussed, solutions for them have been found. Budgetary rules were adopted, we have come in terms with the basic budget parameters, it is all clear. Now we have the discussion on budgetary revenues and expenditures patterns rather than its main parameters, and it does not involve changing of the whole system.

—How would you describe the economy in September 2017 taking into account that there is no uncertainty anymore?

— The economy is definitely recovering. The growth of some developed countries is above expected, they are unlikely to have reached the late phase of the business cycle. The risk of a world growth significant reduction for a period of 12-18 months was not discussed. Our economy is growing faster than everyone expected in early 2017. Now the question is whether the growth is stable and what measures shall be taken for the growth not to slow down. But of course our purpose is to reach the targets set by the President.

Therefore, the main goal of MMF plenary sessions and discussion platforms is to find out challenges the economy faces, the way we respond to them and the means to have the dynamic growth rate. In particular, we plan to discuss digitalization impact on the global economy in general and the Russian economy as a part of it. Trends for industry automation, robotization appear affecting the labor market and its structure. For example, new technologies threat in the long run to liquidate some occupations with the corresponding consequences for the labor market. We also plan to discuss how to eliminate the income inequality, which new technologies can also strengthen.

—So, in your opinion, the coming structural unemployment represents more medium-term threats to the country's economy than lack of labor market offers, doesn’t it?

—It is not a problem for the next year or two. Until 2019, we are more likely to witness even more serious deficit of the labor market offers. The business cycles are on the rise, unemployment rate is already low, while salary growth rates are beginning to speed up. It is more like the labor market itself will be an indicator for us, whether we hit out ceiling or not yet. However, upon examining employment structure in Russia (in fact, it is not only a case in Russia, but basically in most countries) it is clear that there is a number of professions that are in danger of extinction, like drivers and accountants. We need to think how fast technologies, which make some occupations disappear, will be introduced. Now it is a little bit prematurely to worry about this issue, but the trend will not change anyway.

Another issue is demography. Both Russia and the whole world see population ageing. It is not only a threat, but also new opportunities. Of course, the population is getting older, but at the same time, older population groups are becoming more active. We need to discuss not only problems of disabled elderly people, but also setting of such an education system that will help older population groups to obtain the most required professional skills.

These issues concern not only Russia, we will have many international experts at the Moscow Financial Forum and, of course, we want to discuss with them the current world problems.

—Over recent years, the debates over budget social expenditures were quite popular during the forum, now they are disguised under the ideas of human capital development. Will the MMF participants continue discussing ways to increase the budget?

— These days the main discussions in the Government and, I think, in the MFF will revolve around budget patterns, how to find more budget funds for priority directions. Digitalization is also of great importance here. We see what is happening with the revenue administration of the Federal Tax Service, which implemented digitalization. Only for the last three years, those simple measures the Tax Service adopted have provided us with 0.6-0.7% of the GDP increase in tax levies, regardless of any external circumstances. If you just think of it, it is half a trillion rubles a year. And this is only an initial effect, and now the Federal Tax Service is already implementing really complicated procedures. We have not yet received the results of online cash registers introduction, no doubt we will have it soon. The Federal Tax Service has just started administering insurance premiums, and integrated tax databases and customs information flows.

The increase of tax levies driven by these innovations will provide more funds for financing priorities in the future. We invited Vitor Gaspar, Fiscal Affairs Department Director of the International Monetary Fund to the MFF, he was just exploring the ways digitalization affects the public finances the last six months. His address is one of the anticipated sessions of the forum.

—Changing of tax policy is the typical subject of the MMF. What kind of discussions to anticipate in the forum in this regard?

—The tax policy subject has slightly changed comparing to what we had six months ago, when the so-called “tax maneuver” was discussed: to reduce labor taxes and to compensate effect with VAT increase. Now we are discussing with the business community more structural measures to adjust the tax system. They may seem to be not that significant, but they are important for creating equal competitive conditions, especially for some markets. For example, we would like to discuss some incidents appearing due to non-standard tax regimes: there are loopholes that we will gradually eliminate. For example, the recognition of Single Agriculture Tax payers as VAT payers is aimed at stopping abuses in the agricultural market and unhampered incorporation of SAT payers into economic relations with VAT payers.

Another important topic we are going to discuss is the systematization of the assessment of tax benefits effectiveness. We have discussed it before, however the analysis was conducted only once in a while and was not reported for budget formation process, or during the public discussion concerning that budget formation process. Now we are implementing the concept of tax expenses. We identify tax incentives that, in economic terms, represent tax expenditures, and we analyze whether they are effective for achieving the goal for which they were introduced.

When they were introduced, neither the guidance, nor the systematic approach to the introduction of tax incentives was available. We did not stipulate the goals of this tax privilege. Therefore, we want to create a register of tax expenses, which will include, among other things, the initial goals of their introduction and we will monitor their achievement. The same approach is for budgetary expenditures: if we spend budget funds for some areas, it means we have already discussed the goals and funds volumes publicly, in a year we can check whether we have achieved these goals and think what to do with them further.

—The issue of VAT increasing and lowering labor taxes is not discussed anymore in the Government?

— As for the moment we have not reached the consensus with the business whether we need to change the tax burden system or not, although it is clear the current system is exposed to certain risks. Anyway by the end of the year we will decide what needs to be changed in 2018, so that will work from 2019.

—Surely among other topics the MMF will address the Otkrytie bank impact on the budget. Do you have a preliminary opinion on that matter?

— Otkrytie has already happened, the Central Bank announced a plan for the recovery of the bank group. Although the project is quite significant, we can judge by both market and investors reaction that there is confidence in the mechanism introduced by the Central Bank, despite the fact that it has not been worked out yet. Otkrytie doesn’t affect the budget expenses. But the way the market reactes to what is happening is another confirmation of its confidence in economic policy.

— Spring 2017: both the Ministry of Finance and the Ministry of Economics assumed that the ruble was overvalued, and predicted its smooth weakening by the end of the year. In your opinion, is the thesis of the ruble overvaluation still relevant?

—Our opinion is that ruble is a floating currency which depends on the market. For us, it is important that oil prices impact being minimal. For these purposes the MFF will held the discussion platform on the oil dependence of large natural resource exporters. We will discuss different approaches to protection mechanisms against oil volatility. For example, the representative of the Norwegian Ministry of Finance will present his country's approach to the problem. We, in our turn, will tell why we need a budget rule in Russia. We have already talked about this many times, but we consider it necessary to repeat it, as it concerns not only the budget, but the whole economy.

Our understanding of what was fair for the ruble six months ago and now, in September, has not changed much. Although we see investors have more confidence in macroeconomic policies, partially due to budget rule introduction. Economy risks of Russia were somewhat reassessed. Perhaps, it owes to the fact that the equilibrium levels for the ruble were shifted. There is more and more evidence that the equilibrium level of capital outflow for Russia is changing. If earlier we assumed the outflow was about 1.5-2% of GDP, now we see a steady capital influx with a changed structure. Earlier the capital influx covered mainly debt resources, now there are more direct investments.

The state debt market also sees some influx, in the first half of the year it was even higher than the norm. For these very reasons we believed heightened interest of non-residents in our debt market is owed to the ruble quotations at that time: the state debt market influx reached about $ 7.5 billion in the first half of the year. The last time this occurred in 2012, when foreigners had an easy access to the public debt market.

Finally, the dollar itself has changed a lot: it has weakened against all currencies, not just to the ruble, especially euro-dollar correlation proves it. As for the dollar-euro currencies, the ruble values comply with the forecasts.

In general, we do not observe any unusual deviation from the fundamental equilibrium values.

Interviewer: Dmitri Butrin