Russia : Fiscal Costs of Structural Reforms

Abstract

This Report discusses the challenge of budget financing of core structural reforms, within a broader framework of fiscal management reforms in Russia. It argues that explicit financing of structural reforms is fully justifiable because these are the investments in the institutional infrastructure with a high rate of return. Furthermore, Russia currently appears to have fiscal room for some incremental spending. However, the number of simultaneous reform initiatives, should be kept limited to ensure that the accumulation of new liabilities do not undermine fiscal sustainability. In addition, the Government's commitment to explicit reform financing should be accompanied by additional steps in strengthening the fiscal management system. The adoption of formal fiscal rules could strengthen the government's ability to manage external shocks, as well as provide budget support for the reform process in a predictable and affordable way. The Report develops estimates for fiscal costs of three key structural reforms (in civil service, housing, and the pension system), reviews the feasibility of different reform options, and provides recommendations related to their planning and sequencing. Key structural reforms are seen as medium-term projects/programs, thus suggesting that implementation of these and other structural reforms, can be put in the context of medium-term expenditure framework (MTEF) that evolve in Russia. A general framework is developed for costing-out the direct fiscal effects of various reforms in the area of public administration. It is suggested that broad reforms in the core government administration, and in the civilian public sector at large, may be implemented within five to seven years, but should be differentiated by the scope of pay adjustment in various sub-sectors of civilian employment, complemented by significant staffing adjustments in the civilian public sector, as well as by at least, some staff reductions in the core government administration.